There are some differences in detail between the Senate and House bills authorizing massive expansion of the State Children’s Health Insurance Program, yet the competing plans have this much in common: Some states will be winners, others will be losers, but they’re all going to have to recruit millions of new smokers. This is because both plans depend on an increase in the federal tax on cigarettes, with the House version upping the levy 45 cents and the Senateversion 61 cents. Unfortunately, economic reality makes clear just how imprudent it is to take such a course.
There are two ways in which this is true. First, raising the federal tax on smokes will decrease sales. Even members of Congress know that a higher price for a commodity reduces the number of consumers able to purchase it. The hitch here for SCHIP and the states is that the latter also tax cigarettes, which means they will lose revenue as a result of the federal increase.
A study by the conservative Heritage Foundation found that every state would lose at least $1 million in annual revenues under the House bill, with 17 losing more than $10 million. Under the Senate bill, every state would lose at least $1.4 million, and half would lose more than $10 million. Losses for three states — California, Ohio and Pennsylvania — would exceed $50 million.
The second way in which economic reality intrudes is that when something is taxed more, less of it is produced or purchased. That means tobacco is an extremely unreliable source of revenue. The number of smokers in this country is declining sharply as a result of improved public understanding of the health risks and the free market’s response to the demand for more and better ways to quit.
Add a higher federal tax to those factors, and it is impossible to envision sufficient revenues to finance SCHIP as Congress intends. So Congress will need millions of new tobacco customers to replace those who quit, die or reduce consumption. At least 9 million new smokers will be needed during the next five years to ensure sufficient revenues to pay for the expanded SCHIP program. And that illustrates yet another law of economic reality — government actions almost always have unintended consequences, and they are usually bad.