Congressional Budget Office

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

June 26, 2012

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

Goals of This Project

■ Trace out the full consequences for 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 primarily 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

■ Caveats – Policymakers’ decisions depend on other considerations besides the

budget – Other policies to improve health would be likely to have different

budgetary effects

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, 2011

20%

13%

8%

15%

20%

18%

6%

Social Security (OASDI)

Net Medicare

Medicaid

Other Net Mandatory

Defense Discretionary

Nondefense Discretionary

Net Interest

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

Noninterest Spending and Revenues Under CBO’s Extended Alternative Fiscal Scenario

-10

-5

0

5

10

15

20

25

30

2000 2005 2010 2015 2020 2025 2030 2035

Percentage of GDP

Noninterest Spending

Revenues

Difference Between Revenues and Noninterest Spending

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 “current policies,” as opposed to current laws.

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

0

2

4

6

8

10

12

2000 2005 2010 2015 2020 2025 2030 2035

Federal Spending on Major Health Care Programs, by Category, Under CBO’s Extended Alternative Fiscal Scenario

Percentage of GDP

Actual Projected

Medicaid, CHIP, and Exchange Subsidies

Medicare

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 “current policies,” as opposed to current laws.

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

0%

5%

10%

15%

20%

25%

30%

1992 1997 2002 2007 2012 2017 2022 2027 2032

Prevalence of Smoking Under Current Law

Actual Projected

Percentage of U.S. Adults Who Smoke Cigarettes

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

Mortality

Labor Market Effects

Retirement Programs Disability Insurance

Revenues

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 Policy

-2,000,000

-1,750,000

-1,500,000

-1,250,000

-1,000,000

-750,000

-500,000

-250,000

02013 2016 2019 2022 2025 2028 2031 2034

Number of Smokers

All Adults

65 or Older

18 to 64 Years Old

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 Health Care Spending

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

18-24 25-44 45-64 65-74 75 and olderAge Group

Current or former smokers

People who have never smoked

People Who Have Never Smoked But Who Have the Characteristics of Smokers

Health Care Spending per Capita (2008 dollars)

75 or Older

Current or Former Smokers

People Who Have Never Smoked

People Who Have Never Smoked but Have the Other Characteristics of Smokers

$0

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 Mortality

-

1

2

3

4

5

6

7

8

18-24 25-44 45-64 65-74 75 or OlderAge Group

Current or Former Smokers

People Who Have Never Smoked

People Who Have Never Smoked But Have the Other Characteristics of Smokers

Probability of Dying in the Next Year (Percent)

0

People Who Have Never Smoked but Have the Other Characteristics of Smokers

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 channels: – Reduced working-age mortality—yes – Higher working-age labor force participation—yes – Later retirement—yes – Increased work hours when employed—no – Reduced absenteeism – Improved productivity

■ CBO concluded that smoking reduces earnings by 4 percent to 7 percent, depending on people’s age

inferred from earnings

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

■ Project smoking rates under current law

■ Identify people affected by the policy (smokers and would-be smokers)

■ Determine 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

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

■ Spending under current law is given by a weighted average of spending for: – People who smoke until death – Spontaneous quitters (people who would quit anyway, regardless of

the tax increase)

■ Spending under the tax increase is given by a weighted average of spending for: – People who never start smoking – People who smoke until death under current law – Spontaneous quitters under current law

■ Longevity and earnings are projected in a similar way

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

How Former Smokers’ Outcomes Approach Those of People Who Have Never Smoked but Have the Other Characteristics of Smokers

0

20

40

60

80

100

0 5 10 15 20 25 30 35 40 45 50

Years After Smoking Cessation

Percentage Recovery

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

Increase in the Population Because of the Policy

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2013 2016 2019 2022 2025 2028 2031 2034

65 or Older

18 to 64 Years Old

Number of Additional People

All Adults

0

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 Adults

-

1

2

3

4

2013 2016 2019 2022 2025 2028 2031 2034

-12

-10

-8

-6

-4

-2

02013 2016 2019 2022 2025 2028 2031 2034

Percentage Change in Health Care Spending per Capita

Percentage Change in Earnings per Capita

0

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 reduced because of better health

■ Outlays increased because of greater longevity

■ Revenues increased because of better health

■ Revenues increased because of additional excise tax collections

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 Increased Longevity and Lower per Capita Health Care Spending

-0.015%

-0.010%

-0.005%

0.000%

0.005%

0.010%

0.015%

0.020%

0.025%

2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083

Effects of Greater Longevity

Effects of Lower per Capita Health Care Spending

Total Effects on Outlays

Percentage of GDP

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

-0.0015%

-0.0010%

-0.0005%

0.0000%

0.0005%

0.0010%

0.0015%

0.0020%

0.0025%

2013 2016 2019 2022 2025 2028 2031 2034

Total

Social Security Medicare

Other

Medicaid and Exchange Subsidies

Effects on Outlays, by Program

Percentage of GDP

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

-0.002%

0.000%

0.002%

0.004%

0.006%

0.008%

0.010%

0.012%

2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083

Total Effects on Revenues from Improvements in Health

Effects of Changes in Labor Earnings per Capita

Effects of Greater Longevity

Effects of Lower Health Insurance Premiums and Related Factors

Health-Related Effects on Revenues

Percentage of GDP

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

-0.008%

-0.006%

-0.004%

-0.002%

0.000%

0.002%

0.004%

0.006%

0.008%

0.010%

0.012%

0.014%

2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083

Total Effects on Outlays

Total Effects on Revenues from Improvements in Health

Net Effects on the Deficit from Improvements in Health

Percentage of GDP

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

-0.04%

-0.03%

-0.02%

-0.01%

0.00%

0.01%

0.02%

0.03%

0.04%

2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 2073 2078 2083

Total Effects on Revenues

Net Effects on the Deficit

Total Effects on Outlays

Overall Budgetary Effects of the Policy

Percentage of GDP

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

Main 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 be increased beginning in the second or third decade

■ The effects of improved health would increase revenues on an ongoing basis

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

Main Conclusions (Continued)

■ 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

■ 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 the overall result being a net decrease in the deficit

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

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