CBO Releases Study on the Budgetary and Health Effects of Raising the Excise Tax on Cigarettes

Posted on
June 13, 2012

The federal government spends roughly $1 trillion on health care programs each year, so it is easy to imagine that policies that promote a healthier population could have a significant impact on the federal budget.

In a study released today, CBO uses a policy to discourage smoking—specifically, a 50 cent per pack increase in the federal excise tax on cigarettes—as an example for estimating the overall impact on the federal budget of a policy intervention to improve health. Of course, if lawmakers were to weigh raising that federal excise tax, or adopting other policies that would promote a healthier population, their decisions would depend on various considerations besides the effects on the federal budget.

CBO finds that an increase in the excise tax on cigarettes would have the following budgetary effects relative to current law:

  • Average annual health care spending per capita would decline because of improvements in health. As a result, outlays for the major federal health care programs would be lower for a number of years than they would be otherwise.
  • Over the long term, however, federal spending would be higher (on net) for federal retirement and health care programs as increases in the number of beneficiaries because of greater longevity outweighed the decline in average annual health care spending per capita.
  • Improvements in health would boost revenues by increasing earnings, in part because people might work longer than they would otherwise.
  • Taken together, the health effects of the increase in the federal excise tax on cigarettes would produce very small net reductions in the deficit for about five decades and very small increases in the deficit thereafter.
  • The increased excise tax receipts would exceed the health-related effects of the policy on both revenues and outlays for at least 75 years, with the overall result being a net decrease in the deficit.

Noelia Duchovny and Ellen Werble played the lead roles in the analysis. James Baumgardner wrote the summary. Ellen Werble wrote Chapter 1; coordinated the writing of Chapter 6, with contributions from numerous CBO analysts; and produced the estimates related to Medicaid and secondhand smoke. Mark Booth and Elias Leight (formerly of CBO) wrote Chapter 2. Noelia Duchovny wrote Chapters 3 and 5 and developed the modeling capability for health care spending and longevity described in those chapters. William Carrington wrote Chapter 4 and produced the estimates for labor earnings described in that chapter. In addition, numerous CBO analysts contributed during the past few years to various aspects of the estimates presented in the report.