NCPA - National Center for Policy Analysis


August 17, 2007

The House and Senate recently passed bills to reauthorize the State Children's Health Insurance Program (SCHIP) that will soon be reconciled in conference.  Members of Congress should consider the negative consequences SCHIP expansion will have on their states, says the Heritage Foundation.

Both bills rely on increasing the federal tobacco tax to fund SCHIP expansions, which could cause states to lose revenue:

  • When consumers purchase a pack of cigarettes, they pay both a state and a federal tax.
  • An increase in the federal tobacco tax would cause the price of a pack of cigarettes to increase.
  • Due to sensitivity to increases in the prices of tobacco products, the average consumer purchases fewer packs when the price increases.
  • The federal government would still gain revenue because of the tax increase, but state governments would lose out, taxing fewer packs of cigarettes at the same state tax rate.

Consider the losses:

  • Under the House bill, every state would suffer a budget loss of at least $1 million per year and 17 states would have losses greater than $10 million per year.
  • Under the Senate bill, every state would lose more than $1.4 million per year and half of the states would have budget losses of over $10 million per year.
  • California, Ohio and Pennsylvania would lose over $50 million each under the Senate bill.

With these enormous hits to their budgets, states would need to reduce funding for other programs such as education or transportation, or even eliminate some programs altogether.  The Members of Congress who advocate raising the tobacco tax for the SCHIP expansion should be mindful of the consequences this tax increase would have on the fiscal stability of their home states, says Heritage.

Source: Greg D'Angelo, Michelle C. Bucci, and Marcus Newland, "Expanding SCHIP Will Challenge State Finances: A State-by-State Analysis," WebMemo #1586, Heritage Foundation, August 14, 2007.


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