Children's health care bill looks to new tax on cigarettes

WASHINGTON - The debate over children's health insurance is shifting into a new phase: It's about people who smoke.

Sometimes overlooked in the first override battle between the White House and Congress, a proposed 61-cent-a-pack tobacco tax has ignited new divisions over the $35 billion expansion of the State Children's Health Insurance Program, known as SCHIP.

The increase would come on top of Minnesota's new 75-cent-a-pack health impact fee, which was imposed after a similar debate in the state Legislature.

The state's so-called health impact fee now brings in more than $206 million a year. That is expected to drop by $24 million as a result of declining cigarette sales from the proposed new federal tax.

Gov. Tim Pawlenty, who pushed the state cigarette fee and has supported a "reasonable expansion" of the SCHIP program, has taken no position on the proposed federal tobacco tax.

But Pawlenty spokesman Brian McClung said the governor believes a $24 million reduction in state tobacco revenues would be "manageable."

Meanwhile, the tax would cost the average one-pack-a-day smoker about $220 a year.

President Bush, readying to veto a revised version of the bill, let it be known on Tuesday that he would not sign any legislation expanding children's health insurance if it includes a higher tobacco tax.

Bush's remarks rekindled a glowing ember that until now had received scant attention in the highly charged debate over which children deserve subsidized health care, and at what cost.

Lawmakers who oppose the program's expansion have long criticized the tobacco tax, which they see as a shaky funding mechanism that hits poor people hardest and depresses sales of the very product on which added revenues are supposed to depend.

Backers of expanded SCHIP coverage argue that higher tobacco taxes more than pay for themselves in overall public health savings.

Doubts about revenues

In Minnesota, the health savings from the proposed 61-cent federal tax hike are estimated at $689 million over the next few decades, according to the Campaign for Tobacco Free Kids, which supports the SCHIP legislation.

Until now, those arguments had been held in reserve, clouded by the haze of ideological objections to government-sponsored health care.

"They never emphasized it until this week -- who knows why," said Sen. Amy Klobuchar, D-Minn., who, along with her Republican counterpart, Sen. Norm Coleman, has voted twice for the SCHIP expansion.

Some Republican lawmakers have acknowledged the public relations hit their party has taken for opposing a popular children's health program, and have urged their leaders to compromise. Some have also pressed quietly to put the focus on the irony of tying a health initiative to tobacco taxation, which depends on smoking.

A video lampooning the tax has so far been limited to a viral Internet campaign, which hardly compares to the $1.5 million liberal activists have spent on TV advertising criticizing lawmakers who oppose the new bill, including Rep. Michele Bachmann, R-Minn.

Minnesota, with $1.49 in total state fees and taxes on cigarettes -- one of the highest rates in the nation -- serves as something of a laboratory for what the rest of the nation might expect to hear in the coming weeks.

Since Minnesota's 75-cent a pack fee went into effect in 2005, statewide cigarette sales have dropped from about 325 million packs a year to about 278 million packs.

"It's just basic economics," said Minnesota Revenue Department spokesman Mike Teegardin. "You increase the cost of a product, and fewer people consume it."

The Heritage Foundation, a conservative think tank, has published a study concluding that declining cigarette sales from the proposed 61-cent tobacco tax would eventually bankrupt the SCHIP program -- unless the nation finds 22 million new smokers by 2017.

Republican John Kline, the only other Minnesotan in the U.S. House to oppose the SCHIP bill, cited the study in saying that "the proposal is reliant on a dramatic increase in the smoking population."

'Robin Hood in reverse'

But, in fact, nobody on either side of the debate expects an increase in smoking. Backers of the SCHIP legislation acknowledge that the proposed tobacco tax is designed to fully fund the expanded program only through the five-year life of the bill, until 2012. A Congressional Budget Office study shows that, even assuming a 2- or 3-percent decline in tobacco sales, the new tax more than covers the program's $35 billion cost during that period.

The assumption is that a new Congress will have to find a new source of revenue after that -- perhaps a further tobacco tax increase.

SCHIP backers and anti-smoking activists say revenue declines from less smoking is a problem they welcome. "It's not a bad thing if less people smoke," said Marc Kimball of the Children's Defense Fund in Minnesota.

In the meantime, questions of tax fairness and long-term fiscal responsibility remain.

"We continue to believe that funding and expanding a federal program with a declining revenue source does not make sense," said Bill Phelps, a spokesman for Philip Morris USA, one of the nation's leading cigarette makers.

State and federal taxes on tobacco have grown from $13 billion in 1999 to $21 billion last year. "We think the trend is unfair to adults who smoke and retailers who sell tobacco," Phelps said.

Critics say the tobacco taxes are particularly onerous on the poor, who smoke at higher rates than people who are better off. Devon Herrick, writing for the National Center for Policy Analysis, a think tank that promotes free-market social policies, called it "Robin Hood in Reverse."

Anti-tobacco scholars counter that in total numbers, the majority of people who smoke are not poor. They also contend that the people most likely to give up smoking because of price increases are the poor.

"So the benefits of the tobacco tax are going to be focused on low-income households," said Eric Lindblom, director for policy research at the Campaign for Tobacco Free Kids.

But with the tobacco debate hardening stances on both sides, analysts say it remains unclear whether ongoing negotiations on the bill are more or less likely to produce any expansion of SCHIP at all.

Kevin Diaz • 202-408-2753

Kevin Diaz • kdiaz@startribune.com