Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget
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Presentation to the AcademyHealth 2012 Annual Research Meeting
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Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget
- 1. Congressional Budget Office June 26, 2012 Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget Presentation to the AcademyHealth 2012 Annual Research Meeting James Baumgardner, Noelia Duchovny, Ellen Werble Health, Retirement, and Long-Term Analysis Division and Budget Analysis Division
- 2. Goals of This Project â Trace out the full consequences for the federal budget of a policy to improve health through changes in behavior â Consider a 50-cent increase in the federal excise tax on cigarettes (indexed for inflation and growth in income) â Focus primarily on changes in outlays and revenues resulting from changes in health because of the policy â Estimate effects for the usual 10-year âbudget windowâ and the longer term â Caveats â Policymakersâ decisions depend on other considerations besides the budget â Other policies to improve health would be likely to have different budgetary effects CONGRESSIONAL BUDGET OFFICE
- 3. Federal Outlays, 2011 6% 20% 18% Social Security (OASDI) Net Medicare Medicaid Other Net Mandatory 13% Defense Discretionary Nondefense Discretionary Net Interest 20% 8% 15% CONGRESSIONAL BUDGET OFFICE
- 4. Noninterest Spending and Revenues Under CBOâs Extended Alternative Fiscal Scenario Percentage of GDP 30 25 Noninterest Spending 20 Revenues 15 10 5 Difference Between Revenues and Noninterest Spending 0 -5 -10 2000 2005 2010 2015 2020 2025 2030 2035 Note: The extended alternative fiscal scenario incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified. Thus, it maintains what some analysts might consider âcurrent policies,â as opposed to current laws. CONGRESSIONAL BUDGET OFFICE
- 5. Federal Spending on Major Health Care Programs, by Category, Under CBOâs Extended Alternative Fiscal Scenario Percentage of GDP 12 Actual Projected 10 8 Medicaid, CHIP, and 6 Exchange Subsidies 4 Medicare 2 0 2000 2005 2010 2015 2020 2025 2030 2035 Note: The extended alternative fiscal scenario incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified. Thus, it maintains what some analysts might consider âcurrent policies,â as opposed to current laws. CONGRESSIONAL BUDGET OFFICE
- 6. Prevalence of Smoking Under Current Law Percentage of U.S. Adults Who Smoke Cigarettes 30% Actual Projected 25% 20% 15% 10% 5% 0% 1992 1997 2002 2007 2012 2017 2022 2027 2032 CONGRESSIONAL BUDGET OFFICE
- 7. General Analytic Approach Utilization of Federal Health Care Medical Care Programs Policy Reduction Improvements Mortality Intervention in Smoking in Health Retirement Programs Labor Market Disability Insurance Effects Revenues CONGRESSIONAL BUDGET OFFICE
- 8. Cumulative Reduction in the Number of Smokers Because of the Policy Number of Smokers 2013 2016 2019 2022 2025 2028 2031 2034 0 65 or Older -250,000 -500,000 -750,000 -1,000,000 -1,250,000 18 to 64 Years Old -1,500,000 All Adults -1,750,000 -2,000,000 CONGRESSIONAL BUDGET OFFICE
- 9. Smoking and Health Care Spending Health Care Spending per Capita (2008 dollars) $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $- 18-24 25-44 45-64 65-74 75 andOlder 75 or older Age Group Former Smokers Current or former smokers People Who have never smoked who Have Never Smoked People Who Have Never Smoked but Have the OtherCharacteristics of Smokers Who Have Smoked But Who Have the Characteristics of Smokers CONGRESSIONAL BUDGET OFFICE
- 10. Smoking and Mortality Probability of Dying in the Next Year (Percent) 8 7 6 5 4 3 2 1 0 - 18-24 25-44 45-64 65-74 75 or Older Age Group Current or Former Smokers People Who Have Never Smoked People Who Have Never Smoked But Have the Other Characteristics of Smokers People Who Have Never Smoked but Have the Other Characteristics of Smokers CONGRESSIONAL BUDGET OFFICE
- 11. Smoking and Earnings â Possible channels: â Reduced working-age mortalityâyes â Higher working-age labor force participationâyes â Later retirementâyes â Increased work hours when employedâno â Reduced absenteeism inferred from earnings â Improved productivity â CBO concluded that smoking reduces earnings by 4 percent to 7 percent, depending on peopleâs age CONGRESSIONAL BUDGET OFFICE
- 12. CBOâs Simulation Model â Project smoking rates under current law â Identify people affected by the policy (smokers and would-be smokers) â Determine health care spending, longevity, and earnings: â Under current law (taking into account that some people would quit even without the policy change) â With the illustrative tax increase CONGRESSIONAL BUDGET OFFICE
- 13. Projecting Health Care Spending per Capita â Spending under current law is given by a weighted average of spending for: â People who smoke until death â Spontaneous quitters (people who would quit anyway, regardless of the tax increase) â Spending under the tax increase is given by a weighted average of spending for: â People who never start smoking â People who smoke until death under current law â Spontaneous quitters under current law â Longevity and earnings are projected in a similar way CONGRESSIONAL BUDGET OFFICE
- 14. How Former Smokersâ Outcomes Approach Those of People Who Have Never Smoked but Have the Other Characteristics of Smokers Percentage Recovery 100 80 60 40 20 0 0 5 10 15 20 25 30 35 40 45 50 Years After Smoking Cessation CONGRESSIONAL BUDGET OFFICE
- 15. Increase in the Population Because of the Policy Number of Additional People 70,000 60,000 All Adults 50,000 40,000 65 or Older 30,000 20,000 18 to 64 Years Old 10,000 - 0 2013 2016 2019 2022 2025 2028 2031 2034 CONGRESSIONAL BUDGET OFFICE
- 16. Average Changes in Health Care Spending and Earnings for Adults Percentage Change in Health Care Spending per Capita 2013 2016 2019 2022 2025 2028 2031 2034 0 -2 -4 -6 -8 -10 -12 Percentage Change in Earnings per Capita 4 3 2 1 - 0 2013 2016 2019 2022 2025 2028 2031 2034 CONGRESSIONAL BUDGET OFFICE
- 17. Effects of the Policy on the Budget â Outlays reduced because of better health â Outlays increased because of greater longevity â Revenues increased because of better health â Revenues increased because of additional excise tax collections CONGRESSIONAL BUDGET OFFICE
- 18. Effects on Outlays of Increased Longevity and Lower per Capita Health Care Spending Percentage of GDP 0.025% 0.020% 0.015% Effects of Greater Longevity 0.010% Total Effects on Outlays 0.005% 0.000% 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083 -0.005% Effects of Lower per Capita Health Care Spending -0.010% -0.015% CONGRESSIONAL BUDGET OFFICE
- 19. Effects on Outlays, by Program Percentage of GDP 0.0025% 0.0020% Total 0.0015% 0.0010% Medicare Social Security 0.0005% Other 0.0000% 2013 2016 2019 2022 2025 2028 2031 2034 -0.0005% Medicaid and Exchange Subsidies -0.0010% -0.0015% CONGRESSIONAL BUDGET OFFICE
- 20. Health-Related Effects on Revenues Percentage of GDP 0.012% 0.010% Total Effects on Revenues from Improvements in Health 0.008% Effects of Changes in Labor Earnings per Capita 0.006% 0.004% Effects of Greater Longevity 0.002% Effects of Lower Health Insurance Premiums and Related Factors 0.000% 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083 -0.002% CONGRESSIONAL BUDGET OFFICE
- 21. Health-Related Effects on Revenues, Outlays, and the Deficit Percentage of GDP 0.014% Total Effects on Outlays 0.012% Total Effects on Revenues from 0.010% Improvements in Health 0.008% 0.006% Net Effects on the Deficit from 0.004% Improvements in Health 0.002% 0.000% 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083 -0.002% -0.004% -0.006% -0.008% CONGRESSIONAL BUDGET OFFICE
- 22. Overall Budgetary Effects of the Policy Percentage of GDP 0.04% 0.03% Total Effects on Revenues 0.02% 0.01% Total Effects on Outlays 0.00% 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083 -0.01% Net Effects on the Deficit -0.02% -0.03% -0.04% CONGRESSIONAL BUDGET OFFICE
- 23. Main Conclusions â Changes in federal spending from improved health would be quite small relative to the size of the programs affected â Federal spending would be reduced throughout the first decade, but would be increased beginning in the second or third decade â The effects of improved health would increase revenues on an ongoing basis CONGRESSIONAL BUDGET OFFICE
- 24. Main Conclusions (Continued) â Together, the health effects would produce very small net declines in the deficit for roughly five decades. Those net declines would peak about 20 years into the policy â The increased excise tax receipts from the policy would exceed the policyâs health-related effects on both revenues and outlays for at least 75 years, with the overall result being a net decrease in the deficit CONGRESSIONAL BUDGET OFFICE
- 25. The Report Online This presentation provides information published in Congressional Budget Office, Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget (June 2012), www.cbo.gov/publication/43319 CONGRESSIONAL BUDGET OFFICE