Members of Congress seeking to expand the State Children's
Health Insurance Program (SCHIP) to cover children from wealthier
families are exploring new ways to pay for it. The Senate Finance
Committee generally has agreed to reauthorize SCHIP for five years
with a $35 billion expansion funded by an increase in the federal
tobacco tax by 61 cents per pack.
While a tobacco tax is a politically popular funding source, it
has several significant shortcomings:
A tobacco tax disproportionately burdens low-income Americans,
lacks long-term stability, and ultimately results in significant
shifting of health care costs onto others.
With the number of smokers already declining, a tobacco tax
would further reduce the number of smokers, thereby eroding the
To produce the revenues that Congress needs to fund SCHIP
expansion through such a tax would require 22.4 million new smokers
Rather than making SCHIP dependent on increasing the number of
smokers, Congress should refrain from narrow government program
expansions and work on a broader strategy for improving access to
affordable, private health insurance for all Americans--including
Who Would Pay?
Increasing the tobacco tax is an inequitable way to fund SCHIP,
because a large portion of the burden would fall on poor and
low-income families and the relatively young. Around half of
smokers are in families earning less than 200 percent of the
federal poverty line (FPL), so increasing the tobacco tax would
burden the families in the income class that SCHIP and Medicaid are
trying to help. Furthermore, smokers are more likely to be
poor or low-income than wealthy. (See Chart 1.) With an
expanded tobacco tax, SCHIP expansion to higher income levels would
largely be funded by lower income persons, those who can least
Young adults are also disproportionately impacted by the tobacco
tax: Forty-three percent of smokers are ages 24 to 44. (See
Chart 2.) Placing the burden of expanding this program on the
shoulders of any small subset of the population is unfair. Neither
low-income families nor young adults should be held responsible for
funding an unnecessary expansion of SCHIP.
Congress Needs More Smokers
Not only are some policymakers considering imposing a large, new
burden on a small portion of the population, but they have chosen a
revenue source that is in decline and will decrease even faster if
the tax rate rises. Due to the sensitivity of consumers to
increases in the price of tobacco products (known as "price
elasticity"), the average consumer purchases fewer cigarettes when
the price increases. Consequently, the additional revenue generated
from increasing the tax will decline over time. (See Chart 3.)
Due to this price elasticity, policymakers will somehow need to
recruit new smokers if they insist on using the tobacco tax revenue
to support SCHIP at proposed funding levels over the long term. In
just five years, Congress will need over 9 million new smokers.
Reauthorizing the program for 2013 to 2017 would require almost
22.4 million new smokers by the end of that period. (See Chart 4.)
But funding problems will likely begin before the end of the
five-year horizon. Since the revenues from the tobacco tax are
declining while the amount of SCHIP funds needed to maintain a
level of purchasing power are increasing, Congress could face a
shortage of smokers in just two years. In this case, Congress will
need over 6.3 million new smokers between 2010 and 2012, which
grows to 9 million new smokers needed in 2013 to support the
government's health program.
Funding the expansion of a government health program through a
tax on a toxic product with a declining revenue stream is not only
paradoxical but also fiscally irresponsible. It is not a reliable
source of continued funding. Even with the tobacco tax hike,
additional revenues, most likely from other tax increases, will be
necessary to pay for SCHIP expansion.
Shifting Costs to Non-Smokers
Current projections of the number of smokers reveal that the
tobacco tax will be unable to support SCHIP expansion, leaving
Congress with two options: somehow recruit millions of new smokers
or, more realistically, find another funding source, either of
which would result in significant cost-shifting.
If Congress is serious about using tobacco taxes to fund SCHIP
expansion, Members should seriously consider the consequences of
depending on new and existing smokers to fund health care. This
funding source may appear to be cost-effective in the short run;
after all, young people generally do not experience significant
health problems due to smoking. The long-term cost-effectiveness
does not look as promising, however, once new health care
expenditures are included. The Centers for Disease Control and
Prevention estimates that each adult smoker costs approximately
$3,702 annually in medical costs and lost productivity. If
Congress is serious, the tens of millions of new smokers would be
needed to sustain SCHIP funding. But assuming that a new cohort of
smokers would somehow materialize, the privately insured, as well
as the taxpayers, would also carry a correspondingly heavier
burden, as most of the additional costs would be shifted to them
through higher insurance premiums.
As an alternative to the tobacco tax, Congress might look to
raise income taxes to avert a SCHIP funding shortfall. Taxpayers
would then face annual costs of approximately $7 billion in 2010 to
$9.4 billion in 2017.
A Better Alternative
A tobacco tax is an unreliable and inequitable way to finance
SCHIP. More importantly, SCHIP should not be expanded beyond its
original mission. Congress has better options at its disposal to
improve the availability of health care for children and the poor.
Focus SCHIP on Low-Income Children. One way to avoid
increasing taxes on smokers and taxpayers in general is to focus
SCHIP on children in families earning between 100 and 200 percent
of the FPL. Expansions further up the income ladder only cause
families to drop private coverage in favor of government plans,
which leads to the erosion of the private market. Under the
President's proposal, which appropriately focuses on "children most
in need" no additional sources of revenue are necessary.
Give Families Control. Rather than lead SCHIP recipients
to depend on tobacco revenue, policymakers should enable families
to gain greater control over their health care by helping them move
into private coverage. Premium assistance, which allows SCHIP funds
to be used to purchase private insurance for eligible children, is
an obvious solution, but one that is underutilized because it is
hampered by bureaucracy and red tape. Policymakers should encourage
states' use of premium assistance by removing these administrative
Get the Big Picture. With the reauthorization of SCHIP,
Congress has the opportunity to reform health care for all
Americans. The current tax code causes inequities, since only those
with employer-sponsored insurance receive tax breaks. By contrast,
the President's plan to reform the tax code supports giving all
families a tax incentive to purchase private insurance.
Integrating that broad reform with a focused SCHIP that offers
premium support would direct resources to those truly in need while
correcting many existing inequities, thus improving access to
health care coverage for all Americans.
Current plans to fund SCHIP expansions with an increase in the
tobacco tax would move more Americans further away from stable,
affordable coverage. Fortunately, alternatives exist that focus on
low-income children, empower families to own their health
insurance, and make affordable private coverage a reality for all.
Congress should recognize the long-term advantages to these
alternatives and the detriments of the proposed SCHIP
Michelle C. Bucci is Health Policy
Fellow in the Center for Health Policy Studies, and William W. Beach is
Director of the Center for Data Analysis, at The Heritage
Foundation. The authors gratefully acknowledge the assistance of
Andrew Nowobilski, Marcus Newland, and Jade Doyle, interns in the
Center for Data Analysis at The Heritage Foundation.
U.S. Census Bureau, "Annual Demographic Survey."
Estimates are based on the assumption of constant purchasing
President George W. Bush, "President Bush Discusses Health