Great New Health Care Program-- Funded by a Puff of Smoke

The good news: low-income Indiana families will have better access to health insurance as a result of new legislation signed into law by Governor Mitch Daniels.
The bad news: it's being paid for with a cigarette tax increase.

Why is this bad news? A history lesson may help explain.
Back in 1987, Indiana lawmakers increased the cigarette tax from 10.5 cents to 15.5 cents per pack. In the first full year after implementing the higher rate, the cigarette tax brought in $116 million. Fourteen years later, in fiscal year 2002, the tax was still being collected at the same 15.5 cent rate-- and tax collections had increased only a tiny bit, to $123 million. That works out to a growth rate of about half of one percent each year.

To put this in context, a good indicator for the cost of any public service is inflation. The cost of most things that government (or any private firm, for that matter) produces tends to go up at least with inflation each year. If the Indiana cigarette tax had grown just at the rate of inflation during this same period, cig tax collections would have been $176 million in 2002, far above the $123 million actually collected.

Put another way, whatever public services the cig tax was paying for in 1987, it was paying for about 2/3 of those services in 2002.

The lesson for today? It's great that Indiana is demonstrating a commitment to funding low-income health insurance. But to the extent the cigarette tax is where the money is supposed to come from, they've tapped a dry(ing) well. As if to drive this point home, here's a quote from a Courier Press article on the cig tax hike:

During a speech Thursday in Evansville, Rep. Suzanne Crouch emphasized the cigarette-tax health care plan is not an entitlement program.
"The number of individuals who can participate (in the plan) is dependent upon the amount of funds that are available," said Crouch, R-Evansville.

D'oh! And here's Gov. Mitch Daniels on what needs to happen next:

Now we must go about the difficult business — harder than you may think — of reaching those who would like to stop smoking with help...

In other words, now that we've hiked the cigarette tax to pay for health care, we're going to use the cigarette tax to get people to stop smoking- -which means less health care.

The funding picture is more complicated than this, of course. There are federal matching dollars involved, which will presumably help the state to adequately fund this important health policy goal:

Increasing the cigarette tax is expected to bring in $206 million more revenue annually. If the federal government approves the plan, money from the tax increase could leverage more federal dollars and generate a combined $750 million to $800 million a year, officials said.

But it's important to remember that the state's own contribution to this pot is going to be a shrinking share of the total-- and that low-income families will bear the brunt of it. Wouldn't it be nice if Indiana could signal its commitment to funding low-income health care by coming up with a reliable funding source?