Cigarette tax report misleads on fiscal conclusions

In making decisions about Louisiana’s rickety budget this approaching legislative session, policy-makers need accurate information about their policy options. Unfortunately, a recent report about one of these issued by a leftist interest group does more to mislead than to inform.

As lawmakers ponder the utility of an increase in tobacco taxes to infuse revenue into the state’s upcoming spending plan, the Louisiana Budget Project circulated information about a dramatic increase in cigarette taxation. The organization estimated that a $1.25 increase per pack in that would generate $230 million in new revenues and encourage tens of thousands not to smoke, presumably saving many lives.

But it also goes on to allege that the state’s Medicaid program would save $523 million, its uncompensated care costs would go down by $88 million, and state health plans for its employees would rack up $85 million fewer in costs, for a total of $696 million a year in savings, from the impact of reduced smoking incidence. In order to come up with these figures, it extrapolates from a Centers for Disease Control 2009 report about the costs to state Medicaid systems of smoking-related illnesses.

However, inexplicably the LBP report whiffed on incorporating well-known and recent research that shows reduced incidence of smoking actually increases overall health care costs. The seminal research this area, confirmed repeatedly across different cultures, shows that reduced smoking in the short run would lower health care costs generally, but in the long term these increased because by living longer lives people encounter other health care ailments, often greater in cost than those incurred from ailments associated with smoking.

Using metrics from these studies, meaning that health care costs would be 5.5 percent higher in an entirely non-smoking public, 23.5 percent of all Louisiana adults smoke but that Medicaid recipients’ incidence nationally is 53 percent higher, that the non-disabled adult recipients of Louisiana Medicaid currently total 453,597 of the state’s 3,529,104 adults, suggests that 163,295 adult Medicaid recipients smoke. In fiscal year 2013, taking the total Medicaid expenditures on adults minus those for the disabled in waiver programs of $3.687 billion, this implies that if the entire Medicaid population stopped smoking immediately and any ill effects from the previous activity never manifested in the future, it would have cost the state an extra $203 million.

That’s a rough estimate for it does not include less quantifiable costs, such as the effects of second- or third-hand smoke on children on Medicaid (the majority of those in the program, whose parents then qualify). Nor does this include an estimate of higher costs under state health care employee plans or for uncompensated care. And, looking at the other side of the equation, the revenue figure in the LBP report probably is inflated, for that is endemic in studies about changes in tobacco taxing policy as these consistently underestimate the leakage effects that higher taxes bring about, such as surreptitiously crossing borders to bring in packs from another state for individual use, smuggling, and rival sellers who legally do not have these taxes (such as Indian tribes). Indeed, because Louisiana is a low-tax state on this account, it likely has benefitted in tax revenue from transportation across its state lines to elsewhere that would dry up with higher taxes, again pushing revenue estimates down.

In other words, as far as a financial fix goes, in the long run by increasing cigarette taxes dramatically, it’s almost certain to cost Louisiana more than by not doing so. Obviously, a healthier, longer-living public is desirable, which seems a given by increasing cigarette taxes, so if that’s the goal, higher costs as a result are irrelevant. But deciding as a main goal to raise these taxes on the basis of faith that this will cause a net revenue increase over the long term for the state is mistaken, and the LBP, which has a habit of selective use of data to make its political points on varied issues such as Medicaid expansion, education choice, state government right-sizing, and fiscal policy, with this report's inaccurate fiscal conclusions it does a disservice by encouraging this false impression.