Good news and bad news on SCHIP

One of Obama’s first acts in office is likely to be approving an expansion of the State Children’s Health Insurance Program. Since SCHIP is “for the children” and will be funded by taxing unpopular smokers, passage in Congress is a sure bet, as is Obama’s signature.

Full details of the House bill won’t be available until tomorrow (Tuesday), but according to George Edmonson at Stogie Guys a potentially devastating blow to small businesses has probably been dodged: the floor tax that might have applied to current stocks of cigars held by tobacco shop owners. Additionally, there’s speculation that the cap on taxing individual cigars will drop from the $3 per stick that was vetoed by George Bush last year, which was itself down from an original $10 proposed cap. Read George’s post for details.

That’s the good news. The bad news is that taxes on tobacco are still going to rise, making cigars more expensive and significantly increasing the price of cigarettes. The latter is a consumption tax that will fall disproportionately on the poor, marking a painfully regressive start for the incoming administration. See Jacob Sullum on this point here.

Regardless of SCHIP’s merits, it shouldn’t be funded by additional taxes on tobacco. As Tom Firey and I wrote for the Cato Institute last year:

Smoking in the United States is already declining significantly — largely as a result of public awareness of its dangers, not higher taxes. The declining number of smokers makes cigarette tax revenue unstable. Congress’s Joint Committee on Taxation projects that if the new tax rate is implemented next year, tobacco revenues will fall nearly 10 percent over the next decade…

SCHIP’s advocates believe the program is critical to providing healthcare to children. That’s debatable. But if Congress and the president decide to expand the program, they should cover its new costs with general tax revenues, not taxes on smokers alone. Higher tobacco taxes are unfair, unadvisable, and unlikely to bring in enough money.

I don’t have any special insight into SCHIP as health policy. For a critique and some alternative approaches, see Michael Cannon.

Comments

  1. Kevin says:

    I know it’s a crazy idea, but what about funding necessary programs for kids by taxes on things that the parents of those kids use? Taxing cigars to pay for schoolkids’ insurance makes about as much sense as taxing disposable diapers to pay for adult lung cancer costs.

  2. Jacob Grier says:

    Kevin,

    I’m not sure what point you’re going for there. If you mean we should tax parents for the costs of SCHIP, taxing cigars would be a bad way to do it. Taxing diapers or baby food, or even just a straight up tax on having children, would be the way to go.

    But I don’t think that’s what you mean. And I think most people who support SCHIP think that it would be worth funding from general tax revenues. Smokers just make a convenient target.

  3. Julian says:

    Jacob,

    You say that “smoking in the United States is already declining significantly — largely as a result of public awareness of its dangers, not higher taxes”. Do you have a particular study in mind for that conclusion? I would have thought taxes and smoking bans are the main reasons for the decline in smoking. (“Public awareness” may cause bans and taxes, but that’s not how I interpreted your sentence.) Either way, disentangling these effects would be tough since they often go hand in hand.

    Julian

  4. Matt says:

    Hmm. If Kevin really did mean taxing parents, I think that’s a really bad idea (and, btw, going from the general revenues is a really good idea). The idea that we should only tax parents for services children need is simply ludicrious. After all, children are pretty much a necessity. And, if we want to shift the tax to people who are responsible for the services children use, we shouldn’t shift it to the parents, we should shift it to the children themselves. Obviously, they can’t pay taxes now, but how about we wait until they start earning money and tax them over the span of their lives? And, since we were all at one point children…

  5. Jacob Grier says:

    Julian, I think that was a reference to earlier declines, say 1960s-80s. 1990 to present I expect that bans and taxes have had a lot to do with it too.

    I’m curious how large an effect the new tax will have on smoking rates. People will certainly smoke fewer cigarettes, but I don’t know how many will quit entirely. The remaining 20% of smokers seem pretty resistant to giving it up.

    Matt, you’re too soft. Make the babies pay now.

  6. Kevin says:

    Matt got my point, I think (elliptical as it was) – if SCHIP, or health insurance as a whole, is truly a national priority, it makes no sense to single out one funding source over another; it should be a general tax revenue.

    Taxing only parents for services children need makes no sense, but neither does tying their health-care cost into taxes on cigars, Big Macs, or other “unhealthful” products.

  7. Jacob Grier says:

    Oh, I see it now. Glad we’re on the same page.

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