Don't Smoke That Tobacco Tax For Too Long, You Might Run Out Money

At the beginning of the week, Pennsylvania Governor Ed Rendell urged action on "PA ABC." He stated:

The budget office did a thorough analysis that shows program costs and demonstrates to the taxpayers of Pennsylvania and their elected leaders that this is a financially responsible plan. With the additional revenues from the proposed 10-cents-per-pack increase in the cigarette tax and the first-time-ever tax on smokeless and other tobacco products, we will be able to fully fund this program. This analysis answers the argument from critics that the bill does not have adequate funding. We do. Now all we need is the political will to get this done.

"PA ABC" stands for Pennsylvania Access to Basic Care program which aims at covering those without health insurance in Pennsylvania. The actual insurance delivered from PA ABC would come from a private provider and be targeted at small businesses. Since many uninsured Pennsylvanians have a full time job, getting the small businesses and employees on board would be a step towards insuring the estimated 767,000 uninsured.

Budget Secretary Michael Masch recently confirmed that PA ABC was sustainable over a 10 year window. The House bill that was already passed directed $120 million in additional revenue to be placed into an account specifically for PA ABC. The Budget Office estimated that outlays for PA ABC would increase from $501 million in its first year to $1.1 billion in its fifth year. In that time, an additional 272,000 individuals would be covered.

There are three primary sources of revenue:

• $.10 per-pack increase on cigarettes
• $.36 per-unit increase on chewing tobacco and cigars
• Redirection of a portion of the state's current Uncompensated Care payments for hospitals
  

The Governor has stated that the first two sources (both of the tobacco taxes) would be sufficient in providing the initial $120 million a year. However, the whole system seems like a big bait-and-switch.

Primarily, the cigarette tax in Pennsylvania has been a declining source of revenue. If you look at the final monthly revenue statements from the previous five fiscal years, the revenue contributed from the cigarette tax to the general fund has nominally declined.

2006-2007	$778,000
2005-2006	$769,900
2004-2005	$844,700
2003-2004	$837,400
2002-2003	$830,900

No one, including Secretary Masch, expects the cigarette tax to grow over time as a source of revenue, but they haven't been upfront about the reliability problems associated with the tobacco tax. Even at the federal level, tobacco tax revenue is acknowledged to be declining, yet Congress continues to try and hitch SCHIP and other new expenditures to its proverbial wagon. As these taxes at the federal and state level continue to get tacked on (both acting independent of each other), cigarette prices will increase and more smokers will quit. This will only cause the revenue to dry up in a shorter time period. A tobacco tax is a popular target, and pretending this revenue is reliable isn't an accurate assessment.

It's very deceptive to tackle this large new initiative (which is scheduled to expand drastically even during its first five years) with a "false" source of revenue . During the last four decades, per capita health care spending has grown much more rapidly than per capita GDP. In fact, health care costs present the single largest factor in our the nation's fiscal future. Therefore, sounding the financially stable bell on something like this seems premature.

There is one optimistic way to look at this approach. If more smokers quit because of the levied tax, that inherently means less state expenditures for health problems related to smoking. However, in the aggregate, it's pretty obvious: health care costs are going to rise while two of the dedicated revenue sources for PA ABC decline.

This is an extremely large commitment for Pennsylvania that will be realized down the road. While the state is running a surplus and the cigarette tax is still capable of being milked, a program like this is quite appetizing. Of any health care proposal, focusing on cost saving measures is imperative. Cost saving measures not only translate into reduced outlays for the state, but if you drive down the market price in the process, there will be more of an individual incentive to purchase insurance as it requires proportionately less disposable income. Not only does PA ABC in its current design fail to implement cost savings, it's initially dependent on a regressive and diminishing tax source.

When close to 1 million people--all representing future financial obligations for the state of Pennsylvania--are proposed being added to a new government program, one would hope it'd receive more honesty and attention than the half-hearted truths that behoove it's current status.