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

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

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.

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%)

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

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)

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 20350

5

10

15

20

25

30Actual Projected

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

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

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 Older0

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

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

Probability of Dying in the Next Year for Smokers, Nonsmokers, and Nonsmokers Who Otherwise Resemble Smokers, by Age Group

(Percent)

18–24 25–44 45–64 65–74 75 or Older0

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

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

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

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

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 66 720

10

20

30

40

50

60

70

80

90

100

Years After Smoking Cessation

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 20350

10,000

20,000

30,000

40,000

50,000

60,000

70,000

All Adults

18 to 64 Years Old

65 or Older

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 20350

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

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.

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

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 SecurityMedicare

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 SecurityMedicare

Medicaid and Subsidies

Through Health

Insurance Exchanges

Total

Other

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)

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

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

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.

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.