CBO: A cigarette tax indexed to inflation would reduce the federal deficit every year through 2085

The Congressional Budget Office just published an important article, “Cigarette Taxes and the Federal Budget — Report from the CBO,”  in the New England Journal of Medicine on the health and economic effects of a 50 cent increase in the cigarette tax (which is indexed to increase with inflation).  The full report is available from the Congressional Budget Office here.  It is the most comprehensive and careful analysis of the long-term fiscal implications of a tobacco control policy I have ever seen.

The CBO prepared a sophisticated demographic analysis that includes people aging into and out of the years that people smoke as well as the effects of quitting smoking on not only health care costs but also time in the workforce when people would be paying taxes as well as effects on living longer.

Key conclusions include:

  • By 2021, almost 1.4 million adults would be nonsmokers, including about 10,000 adults who would not have otherwise have survived to that year.
  • By 2035, 63,000 additional adults would be alive because of the higher cigarette tax.
  • By 2085 more than 3 million adults would be nonsmokers because of the policy, including 200,000 who would otherwise have died earlier.
  • Between 2013 and 2021, the tobacco tax would save federal taxpayers nearly a billion dollars ($730 million) because of lower health care expenditures (primarily Medicare and Medicaid).
  • Improvements in health would led to higher income tax and payroll tax receipts from people who worked longer or were more productive at work, increasing revenues by about $700 million in 2021.
  • Between 2013 and 2021 the net effect of a 50 cent cigarette tax increase (lower health costs, increased tax collections, increased retirement costs, increases in cigarette tax revenues) would be to reduce the federal deficit by $41 billion while saving tens of thousands of lives.
  • As people live longer there would be higher health costs in old age, but these would be offset by taxes on their increased earnings until about 2060.
  • Adding the additional revenues from the cigarette tax to these savings would more than cover the increased health costs even after 2060, meaning that for every year net smoking-induced costs to federal taxpayers would be lower.
  • The benefits would be even larger because these estimates do not include the fact that there would be less interest to pay on the national debit.

As policy makers debate strategies to reduce the deficit, both in the short and long run, a tobacco tax, indexed to inflation, could contribute both to better health and lower federal expenses.

Another important contribution of this report is that it uses an increased cigarette tax as an example of a tobacco control policy to illustrate the larger methodology.  The same model could be used to assess the effects on the federal government for any tobacco control policy.  It also provides a strong framework for similar analyses at the state level.

No report is perfect. The effects of reduced secondhand smoke exposure are probably substantially underestimated because the CBO only considered effects of reduced exposure at home.  There would also be lower exposure at work and in public places.  In addition, newer research (reviewed by the Institute of Medicine and updated in our 2012 meta-analysis) shows that the reductions in risk for heart attacks and other outcomes occurs very quickly.  It would be nice to include this and other refinements in future models.

Postscript:  I have received several emails from people expressing concern about this article because its summary says “By discouraging people from smoking, the higher excise tax would improve the average health status of the population … [L]ower health care spending per capita would push down fderal spending, but increased longevity would have the opposite effect …” [my emphasis]  As noted above, however, this does not mean that the cigarette tax would have a net effect of raising the federal deficit.  The actual conclusion of the paper is just the opposite:  In every year the federal deficit would be smaller.  It is just that in the out years – after about 2050 -- the net benefit would be less.  But there would still be a benefit.

The full citation for the paper is: Cigarette Taxes and the Federal Budget — Report from the CBO.  James R. Baumgardner, Ph.D., Linda T. Bilheimer, Ph.D., Mark B. Booth, M.A., William J. Carrington, Ph.D., Noelia J. Duchovny, Ph.D., and Ellen C. Werble, M.S.  N Engl J Med 2012; 367:2068-2070November 29, 2012 DOI: 10.1056/NEJMp1210319

The full CBO report is available at http://www.cbo.gov/sites/tobacco.ucsf.edu/files/cbofiles/attachments/06-13-Smoking_Reduction.pdf