Presentation to the AcademyHealth 2012 Annual Research Meeting

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
■ 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
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 CBO’s
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 “current policies,” as opposed to current laws.
CONGRESSIONAL BUDGET OFFICE

5. Federal Spending on Major Health Care Programs, by Category,
Under CBO’s 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 “current policies,” 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
■ 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
inferred from earnings
– Improved productivity
■ CBO concluded that smoking reduces earnings by 4 percent to
7 percent, depending on people’s age
CONGRESSIONAL BUDGET OFFICE

12. 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
CONGRESSIONAL BUDGET OFFICE

13. 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
CONGRESSIONAL BUDGET OFFICE

14. How Former Smokers’ 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
■ 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
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
■ 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
CONGRESSIONAL BUDGET OFFICE

24. 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
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