Presentation by James Baumgardner, Ph.D., Deputy Assistant Director Health, Retirement, and Long-Term Analysis Division, CBO, to the 30th International Congress of Actuaries on April 4, 2014 This presentation provides information published in Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget (June 2012), www.cbo.gov/publication/43319

1. Congressional Budget Office
Presentation on Raising the Excise Tax on Cigarettes:
Effects on Health and the Federal Budget
to the 30th International Congress of Actuaries
April 4, 2014
This presentation provides information published in Raising the Excise Tax on Cigarettes:
Effects on Health and the Federal Budget (June 2012), www.cbo.gov/publication/43319.
James Baumgardner, Ph.D.
Deputy Assistant Director
Health, Retirement, and Long-Term Analysis Division

2. C O N G R E S S I O N A L B U D G E T O F F I C E
Goal of This Project
Assess the effect on the federal budget of a policy to improve
health through changes in behavior
– Consider a 50-cent increase in the federal excise tax on cigarettes,
indexed for inflation and growth in income
– Focus on changes in outlays and revenues resulting from changes in
health because of the policy
– Estimate effects for the usual 10-year “budget window” and the
longer term

3. C O N G R E S S I O N A L B U D G E T O F F I C E
Caveats
■ Policymakers’ decisions depend on considerations other than
the budget.
■ Other policies to improve health would be likely to have
different effects on the budget.

4. C O N G R E S S I O N A L B U D G E T O F F I C E
Federal Outlays, 2013
Social Security (OASDI)
(23%)
Net Medicare
(14%)
Medicaid
(8%)
Other Mandatory
Spending
(14%)
Defense
Discretionary Spending
(18%)
Nondefense
Discretionary Spending
(17%)
Net Interest
(6%)

5. C O N G R E S S I O N A L B U D G E T O F F I C E
Spending and Revenues Projected in CBO’s Baseline
(February 2014) and Extended Baseline (September 2013)
(Percentage of gross domestic product)
Social
Security
Major Health Care
Programs
Total Revenues Deficit
Net Interest
Other Noninterest
Spending
Total Outlays
17.7
17.5
18.4
19.7
- 0.4
- 3.0
- 4.0
- 6.42038
2024
2014
1974 18.1
20.5
22.4
26.2
2038
2024
2014
1974 3.7
4.9
5.6
6.2
1.0
4.8
6.1
8.0
12.0
9.4
7.4
7.1
1.4
1.3
3.3
4.9

6. C O N G R E S S I O N A L B U D G E T O F F I C E
Federal Spending on Major Health Care Programs, by
Category, Under CBO’s Extended Baseline (September 2013)
(Percentage of gross domestic product)

7. C O N G R E S S I O N A L B U D G E T O F F I C E
Percentage of U.S. Adults Who Smoke Cigarettes
1992 1999 2005 2011 2017 2023 2029 2035
0
5
10
15
20
25
30
Actual Projected

8. C O N G R E S S I O N A L B U D G E T O F F I C E
General Analytic Approach
Policy
Intervention
Reduction
in Smoking
Improvements
in Health
Utilization of
Medical Care
Federal Health Care
Programs
Changes in
Mortality
Labor Market
Effects
Federal Retirement
Programs, Disability
Insurance, and
Revenues

9. C O N G R E S S I O N A L B U D G E T O F F I C E
Cumulative Reduction in the Number of Smokers
Because of the Illustrative Increase in the Cigarette Tax
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
-2,000,000
-1,800,000
-1,600,000
-1,400,000
-1,200,000
-1,000,000
-800,000
-600,000
-400,000
-200,000
0
All Adults
18 to 64 Years Old
65 or Older

10. C O N G R E S S I O N A L B U D G E T O F F I C E
Annual Spending on Health Care for Smokers, Nonsmokers, and
Nonsmokers Who Otherwise Resemble Smokers, by Age Group
(2008 dollars)
18–24 25–44 45–64 65–74 75 or Older
0
2,000
4,000
6,000
8,000
10,000
12,000
Current or Former Smokers
People Who Have Never Smoked
People Who Have Never Smoked but
Have the Other Characteristics of Smokers

11. C O N G R E S S I O N A L B U D G E T O F F I C E
Probabilityof Dyingin the NextYear for Smokers,Nonsmokers,and
NonsmokersWho OtherwiseResembleSmokers, byAgeGroup
(Percent)
18–24 25–44 45–64 65–74 75 or Older
0
1
2
3
4
5
6
7
8
Current or Former Smokers
People Who Have Never Smoked
People Who Have Never Smoked but
Have the Other Characteristics of Smokers

12. C O N G R E S S I O N A L B U D G E T O F F I C E
Smoking and Earnings
■ Possible effects of reduced smoking
– Reduced working-age mortality (yes)
– Higher working-age labor force participation (yes)
– Later retirement (yes)
– Increased work hours when employed (no)
– Reduced absenteeism (inferred from earnings)
– Improved productivity (inferred from earnings)
■ CBO concluded that smoking reduces earnings by 4 percent to
7 percent, depending on people’s age

13. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s Simulation Model
■ Projects smoking rates under current law
■ Identifies people affected by the policy (smokers and
would-be smokers)
■ Projects health care spending, longevity, and earnings
– Under current law (taking into account that some people would quit
even without the policy change)
– With the illustrative tax increase

14. C O N G R E S S I O N A L B U D G E T O F F I C E
Projecting Health Care Spending per Capita
■ Analysis focuses on people who, under current law, either
smoke or will take up smoking—considered in two categories:
– People who smoke until death, or
– People who will quit regardless of whether there is a tax increase
(spontaneous quitters)
■ Of those, it addresses the effects on spending for people who,
because of the tax increase, would either stop or never start
smoking:
– For smokers who would stop, projected spending transitions from
current-law spending to spending for people who’ve never smoked
– For people who never smoke because of the policy, projected spending
is the same as spending under current law for people who’ve never
smoked
■ Longevity and earnings are projected in a similar way

15. C O N G R E S S I O N A L B U D G E T O F F I C E
Rate at Which Former Smokers’ Longevity and Health Care
Spending Approach Those of People Who Have Never Smoked
(Percentage recovery)
0 6 12 18 24 30 36 42 48 54 60 66 72
0
10
20
30
40
50
60
70
80
90
100
Years After Smoking Cessation

16. C O N G R E S S I O N A L B U D G E T O F F I C E
Population Increase Resulting from the
Illustrative Increase in the Cigarette Tax
(Number of additional people)
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
All Adults
18 to 64 Years Old
65 or Older

17. C O N G R E S S I O N A L B U D G E T O F F I C E
Average Changes in Health Care Spending and Earnings for
People Affected by the Illustrative Increase in the Cigarette Tax
(Percent)
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
-12
-10
-8
-6
-4
-2
0
All Adults
18 to 64 Years Old
65 or Older
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
0
1
2
3
4
Change in Annual per Capita Spending on Health Care
Change in Earnings
18 to 64 Years Old
All Adults
65 or Older

18. C O N G R E S S I O N A L B U D G E T O F F I C E
Effects of the Policy on the Budget
■ Outlays are reduced because of better health.
■ Outlays are increased because of greater longevity.
■ Revenues are increased because of better health.
■ Revenues are increased because of additional excise tax
collections.

19. C O N G R E S S I O N A L B U D G E T O F F I C E
Effects on Outlays of the Illustrative Increase in the
Cigarette Tax
(Percentage of gross domestic product)
2013 2019 2025 2031 2037 2043 2049 2055 2061 2067 2073 2079 2085
-0.015
-0.010
-0.005
0
0.005
0.010
0.015
0.020
0.025
Total Effects on Outlays
Effects of
Increased Longevity
Effects of
Lower per Capita
Health Care Spending

20. C O N G R E S S I O N A L B U D G E T O F F I C E
Effects on Outlays of the Illustrative Increase in the
Cigarette Tax, by Program
(Percentage of gross domestic product)
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
-0.0010
-0.0005
0
0.0005
0.0010
0.0015
0.0020
0.0025
Social Security
Medicare
Medicaid and Subsidies
Through Health
Insurance Exchanges
Other
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
-0.0010
-0.0005
0
0.0005
0.0010
0.0015
0.0020
0.0025
Social Security
Medicare
Medicaid and Subsidies
Through Health
Insurance Exchanges
Total
Other

21. C O N G R E S S I O N A L B U D G E T O F F I C E
Health-Related Effects on Revenues of the
Illustrative Increase in the Cigarette Tax
2013 2019 2025 2031 2037 2043 2049 2055 2061 2067 2073 2079 2085
-0.002
0
0.002
0.004
0.006
0.008
0.010
0.012
Effects of Increased Longevity
Effects of Lower Health Insurance
Premiums and Related Factors
Total Effects on Revenues from
Improvements in Health
Effects of Changes in Labor
Earnings per Capita
(Percentage of gross domestic product)

22. C O N G R E S S I O N A L B U D G E T O F F I C E
Health-Related Effects on Revenues, Outlays, and the
Deficit of the Illustrative Increase in the Cigarette Tax
(Percentage of gross domestic product)
2013 2019 2025 2031 2037 2043 2049 2055 2061 2067 2073 2079 2085
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
0.008
0.010
0.012
0.014
Total Effects on Revenues
from Improvements in Health
Total Effects on Outlays
Net Effects on the Deficit from
Improvements in Health

23. C O N G R E S S I O N A L B U D G E T O F F I C E
Total Budgetary Effects of the Illustrative Increase in the
Cigarette Tax
(Percentage of gross domestic product)
2013 2019 2025 2031 2037 2043 2049 2055 2061 2067 2073 2079 2085
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
Total Effects on Outlays
Total Effects on Revenues
Net Effects on the Deficit

24. C O N G R E S S I O N A L B U D G E T O F F I C E
Conclusions
■ Changes in federal spending from improved health would be
quite small relative to the size of the programs affected.
■ Federal spending would be reduced throughout the first
decade but would increase in the second or third decade.
■ Improved health would cause increases in revenues on an
ongoing basis.

25. C O N G R E S S I O N A L B U D G E T O F F I C E
Conclusions (Continued)
■ The health effects as a whole would produce very small net
declines in the deficit for roughly five decades; the declines
would peak about 20 years into the policy.
■ The increased excise tax receipts from the policy would exceed
the policy’s health-related effects on both revenues and
outlays for at least 75 years, with an overall result of a net
decrease in the deficit.