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Medicaid and
higher absolute level of taxes than do
study by economists Jonathan Gruber (MIT)
the wealthy. In 1990, people who made
and Kosali Simon (Cornell University) esti-
SCHIP cover
under $10,000 per year paid almost
mates that as a result of crowd-out, "the
4 uninsured
twice as much in cigarette taxes as
number of privately insured falls by about 60
those who made $50,000 and above.36
people for the
percent as much as the number of publicly
insured rises."32
price of 10.
To illustrate, suppose that Congress and
An increase in the cigarette tax would force
the states were to enroll 10 million addition-
the poorest Americans to subsidize health
al people in Medicaid or SCHIP. As a result,
insurance for families earning up to $82,000
the number of people with private health
per year.
insurance would decline by about 6 million.
Moreover, a higher federal cigarette tax
Though taxpayers would be financing health
would lead to more violent crime. Tax
care for an additional 10 million people, the
Foundation chief economist Patrick Fleenor
number of uninsured would fall only by 4
has documented that high cigarette taxes
million. In other words, Medicaid and SCHIP
fuel black market activity, including truck
cover four uninsured people for the price of
hijackings and other armed robberies. In
10. Crowd-out is more likely to occur when
2003, Fleenor wrote:
lawmakers open these programs to higher-
income families, because those families are
Today, 200 cases of cigarettes in a mod-
more likely to have private health insurance
est-sized transport truck would have a
already.33
retail value in New York City of around
$1 million and would be [a] tempting
Expanding SCHIP also makes poor fiscal
target for thieves.37
sense because spending on Medicaid and
SCHIP is already on an unsustainable path.
Cato Institute senior fellow Jagadeesh Gokhale
Increasing the federal cigarette tax would cre-
estimates that maintaining existing Medicaid
ate an even greater incentive for armed
growth rates would require implausibly high
thieves to rob retailers and hijack cigarette
trucks.
tax rates in the future. According to Gokhale,
"Limiting Medicaid spending growth is . . . an
essential component of putting the federal
Why Do Medicaid and
budget on a sustainable course without impos-
SCHIP Cover Non-Needy
ing crushing tax burdens on younger and
future generations."34
Families?
Nevertheless, lawmakers appear ready to
Medicaid and SCHIP cover many non-
let the poorest Americans carry the burden of
needy families as a result of the incentives that
a SCHIP expansion. Congress is considering
financing a SCHIP expansion with a 156-per-
the federal government creates for state gov-
cent increase in the federal cigarette tax, from
ernments. Overall, 57 percent of Medicaid
39 cents to $1 per pack.35 According to
spending comes from the federal treasury,
with 43 percent coming from states.38 Much
Harvard economist Kip Viscusi:
as it did under the old Aid to Families with
Cigarette taxes fall predominantly on
Dependent Children cash assistance program,
the very poor. The usual concerns
the federal government "matches" every dollar
about regressive taxes involve those
a state puts toward its Medicaid program with
that are regressive in percentage terms,
at least one dollar from the federal treasury.
that is, the poor pay a higher percent-
The federal Medicaid "match" is completely
age of their income in taxes than do
open-ended. States can therefore double their
the wealthy. Cigarette taxes are actually
money without limit by increasing Medicaid
enrollment and benefits.39 Poorer states such
so regressive that the poor pay a much
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