Cigarette Tax Increase Would Create $40 Million Shortfall, Eliminate State Jobs
Cigarette Tax Increase Would Create $40 Million Shortfall, Eliminate State Jobs
The Senate bill that expands Medicaid eligibility through a 50-cent cigarette tax increase would cause a $40
million budget shortfall by 2014 and eliminate 4,100 private-sector jobs, according to an economic analysis
completed by the South Carolina Policy Council.
Higher cigarette taxes would drain money from the economy, resulting in fewer jobs. It also would correspond with a decline in cigarette sales that would cause tax revenue to drop 1.1 percent annually. Assuming Medicaid costs continue to rise at the same rate as they have over the past decade, South Carolina would need:
• $113 million by FY 2014 to sustain Medicaid at the expanded level
• Just $73 million in cigarette tax revenue would be collected
• Taxpayers would have to cover this $40 million shortfall out of the state general fund.
Other states that have used cigarette tax increases to fund state programs have often found actual revenue
collections fall short of the predicted amount. For example,
• Georgia projected $180 million in new revenue after a 25 cent cigarette tax increase in 2003, but actual
revenue was $117 million — 35 percent less than the projected amount
• Virginia projected $62 million in new revenue after a 10 cent tax cigarette increase in 2005, but actual
revenue was $52 million — 16 percent less than the projected amount.
Rather than expanding Medicaid eligibility, lawmakers could improve health care for all citizens by focusing on market-based solutions. Multiple private-sector plans competing for Medicaid business would drive down costs while improving performance and choice.
The non-partisan Congressional Budget Office states Medicaid expansion increases healthcare costs and forces one person to drop private insurance for every two people added to Medicaid. Market-based solutions can be designed to offer more flexibility and choice that would benefit all South Carolinians. Several proposals include:
• Remove state-specific coverage mandates and allow nationwide competition.
• Offer multiple health plans at differing costs; giving customers a variety of plans at difference price ranges
• Create a small business pool that gives employers leverage to negotiate insurance rates
• Create Health Savings Accounts that give individuals choice and responsibility for care
State lawmakers should understand expanding Medicaid via the cigarette tax is unsustainable. It would indebt taxpayers for millions as benefits exceed revenues. The real solution is market-based reform that reduces costs, improves accountability and gives consumers real choice.
Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.
Copyright 2008. South Carolina Policy Council
Education Foundation, 1323 Pendleton Street, Columbia, South Carolina 29201. Visit the Policy Council online at www.scpolicycouncil.com.
