Big Tobacco and Health Care Reform

This New York Times story details how Massachusetts is the latest in a long line of states hoping to fund health care initiatives by raising tobacco taxes. The report notes that “bills to raise tobacco taxes have been active in 22 state legislatures in 2008, according to the Tobacco Merchants Association, a trade group. That follows a year in which 11 states enacted increases, according to the National Conference of State Legislatures.” In other words, taxing cigarettes to fund health care reform is an increasingly popular strategy amongst policymakers across the nation.

Big Tobacco is not happy about this. The industry is putting a lot of time, effort, and money into snuffing out health care reform proposals—at both the state and national level—that rely on tobacco tax hikes for funding. In doing so, tobacco companies are torpedoing one of the few politically feasible strategies for raising funds needed to pay for reform.

Consider California. The Times notes that the state’s recent bipartisan plan for instituting universal health care, endorsed by Republican Gov. Arnold Schwarzenegger and Democratic Assembly Speaker Fabian Núñez, “died in the State Senate in January partly because of opposition to the $1.50-a-pack increase it included.”

This wasn’t the first time cigarette taxes have been an issue in California. In 2006, California voters turned back a ballot initiative, Proposition 86, that proposed to increase the cost of a cigarette pack by $2.60. Supporters of the proposition estimated proceeds from the tax at $2 billion—which would have been used to help fund health care reforms—and forecasted a $16.5 billion long-term decline in health care costs thanks to reductions in smoking. Good stuff.

But the proposition failed by a narrow margin: 48 percent of voters approved the measure while 52 percent said no. Observers are quick to note that this close call came about despite the fact that Big Tobacco spent a whopping $65 million to fight Proposition 86, pouring that money into lobbying and advertising.

These efforts often get ugly. The industry's anti-tax campaign listed non-existent groups like the “Chamber of Commerce of Los Angeles County” as being  opposed to the proposition. It also sent out mailers that attributed anti-86 stances to politicians—wrongly—without their approval, and issued statements suggesting that terrorists would somehow benefit from a higher tobacco tax.

In retrospect, it’s unsurprising that tobacco companies got down and dirty—after all, the tobacco industry has a lot invested in California. A 2006 Business Week article breaks down the numbers:

“California is home to 9 percent of all U.S. smokers, and a successful Prop 86 would certainly dent tobacco companies' bottom lines. An analysis by the Tobacco Control Section of the California Health Services Dept. expects that it could cut cigarette sales by 312 million packs a year. Let's estimate, conservatively, that Philip Morris makes a profit of 20 cents per pack. Given its 51 percent market share, that's a $32 million hit. Plus, the Tobacco Control Section predicts the smoking rate among high school students will drop from 13.2 percent in 2004 to 7.6 percent [after the passage of Proposition 86].”

Clearly, tobacco companies had a lot to lose. $65 million and lots of lies later, however, it seemed they were safe. That is, until  Governor Schwarzenegger’s 2007-2008 health care plan began to garner public support. In a February analysis, Daniel Weintraub of The Sacramento Bee noted that “the basic outline of the governor's plan – a requirement that every Californian have insurance, with the costs shared by employers, health care providers and individuals themselves – attracted the support of 60 percent to 70 percent of those surveyed by the Public Policy Institute of California in several polls taken during 2007.” Here, it seemed, was a plan that could pass.

Of course, health care reform is never cheap because if you are going to mandate that everyone have insurance, you must provide subsidies for the many families who cannot afford to pay for it on their own. California’s plan was estimated to cost $14 billion, to be funded partly by an increase in cigarette taxes.

Enter Big Tobacco. The industry had been digging its heels into the Golden State’s political scene for years. According to an October report from the Center for Tobacco Control Research and Education at the University of California San Francisco School of Medicine, the tobacco industry had already made major inroads into the CA State legislature by the time Schwarzenegger’s proposal surfaced.

The report notes that “the [tobacco] industry steadily increased monies spent on state level political activities in the period 2003-2007, from $4,086,553 in 2003-2004 ($1,083,448 to candidates) to $4,359,205 in 2005-2006 ($1,895,584 to candidates).” In the 2005-2006 election cycle, almost one quarter of the state legislators on committees relevant to health care—the Health, Budget, and Appropriation committees in the State Assembly and the Health, Human Services and Budget and Fiscal committees in the State Senate—received contributions from the tobacco industry.

It’s thus unsurprising that the tobacco tax became a sticking point for California’s health care plan, and that the proposal sunk. But it’s not just California that’s in Big Tobacco’s crosshairs—the shoot-out between health care reformers and Big Tobacco extends across the nation.

Last fall, Oregon saw its own ambitious health care reform plan undermined by the tobacco industry.  In November the state voted on Measure 50, which would have increased cigarette taxes by 84.5 cents in order to expand health coverage to 117,000 children in the state.

Calculations from supporters of the initiative estimated that the tax hike would prevent more than 29,000 Oregon kids from becoming smokers, spur more than 15,000 current adult smokers to quit for good, save more than 13,000 Oregonians from premature, smoking-caused deaths, produce more than $662 million in long-term health care savings, and raise more than $94 million a year to expand health care coverage to kids. In other words, the measure had a lot of upsides.   

But Measure 50 didn’t pass—because good intentions can’t match the deep pockets of Big Tobacco. According to The Oregonian, the tobacco industry set a new record for spending on a ballot initiative campaign last year in order to block the measure. By October 2007, a month before the initiative was going to vote, “cigarette companies ha[d] poured a record $6.6 million into defeating a proposed tobacco tax increase, making the ballot measure campaign the most expensive in Oregon history…R.J. Reynolds, the maker of Camel cigarettes…put in $3.3 million…Philip Morris USA, the maker of Marlboros, and its parent company…also put in $3.3 million…”

In contrast to these big bucks, by this point “supporters of [Measure 50]…raised $1.5 million, less than a quarter of the tobacco kitty.” Most of this money came from hospitals, health care companies, and unions. In the end, the tobacco industry wound up spending “$12 million, almost four times the $3.2 million that proponents of” Measure 50 finally shelled out. Unsurprisingly, the initiative failed.

A November editorial in the New York Times lamented this outcome, calling it “a testament, more than anything else, to the shamelessness of the nation’s big tobacco companies.” And indeed, Big Tobacco’s lobbying was shameless: the industry hid behind a front group called Oregonians Against the Blank Check, which framed Measure 50 as a “blank check” for the government because it raised too much money and fueled panic over the fact that the measure represented “the first time the Oregon Constitution would be amended for a single tax on a single product.”

The dynamics of the Oregon case are reminiscent of another instance where childrens’ health care was sacrificed to appease tobacco companies: last year’s controversy over SCHIP. This time, the expansion of coverage was national in scope and the increase in cigarette tax was to be 61 cents—but the results were the same. President Bush famously vetoed the $35 billion expansion of SCHIP, in part due to his opposition to taxes of any kind. In October, he said that his opponents “haven't seen a bill they could not solve without shoving a tax hike in it. In other words, they believe in raising taxes, and we don't.”

Congress famously failed to overturn Bush’s veto. Big Tobacco was happy: “At this moment, it appears that we have dodged a bullet,” said Andy Zausner, a lobbyist for Lorillard Tobacco Co., told Politico.com in October. No doubt the $12 million in lobbying that the tobacco industry spent to fight SCHIP—in the first six months of 2007 alone—helped cigarette companies to get in the clear.   

How’d Big Tobacco work its magic? “The nation’s biggest tobacco companies were fairly tight-lipped about their tactics,” reported Politico. “Bill Phelps, a Philip Morris USA spokesman, said the company has reached out to other groups — including wholesalers, retailers and tobacco growers — who would be hit by the proposed tax hike.”

Another tactic used by Big Tobacco in the SCHIP battle—and, in fact, in every instance where discussions over tobacco taxes arise—is the argument that a cigarette tax is regressive. And it is: about 33 percent of U.S. adults living below the poverty level are smokers, as compared to 23.5 percent of those above the poverty level. That means a greater share of poor people would get hit by the tax. Further, any sales tax is inherently regressive, because poor people spend a greater share of their income—so if you tax them more on what they buy, they lose more of their total funds.

For these people, the tax would be costly. Under the proposal that the Congress offered last year, Leonard Burman, Senior Fellow at the Urban Institute, reported in Health Affairs that a “pack-a-day smoker would pay $164 in additional taxes over the course of a year…or $223 under the Senate plan. That amounts to 1 percent of income for a family earning $20,000, compared with 0.2 percent or less for a family earning $100,000.”

This sounds terribly unfair--until you think about other consequences of the tax. First, as Burman notes, SCHIP “also disproportionately benefits lower-income households since it is targeted at children with incomes below 200 percent of the Federal Poverty Level (FPL).” So yes, poor smokers would pay more—but they’d also get better coverage for their children. “The annual cost of providing [SCHIP] coverage per child is about $1,700,” continues Burman. And so, under an expanded SCHIP, low-income families would have essentially paid $164 to get $1,700 worth of coverage. Not a bad deal.

The second important realization is that higher tobacco taxes reduce smoking, especially among children. Burman notes that research has shown “that a 10 percent increase in the price of cigarettes would reduce youth smoking by more than 10 percent.” Not having a lot of disposable income, children are very sensitive to price fluctuations: so more expensive cigarettes means less smoking. Adults, while less sensitive to these changes than children—because they have more money—also become less likely to smoke as prices go up.

Ultimately, increasing tobacco taxes is a good thing, even for poor families.

Finally, a hike in tobacco taxes may be necessary if we want universal health care. No matter how you slice it, health care reform is an expensive endeavor. We're going to need money.

Despite the fact that pollsters love reporting that the American public is willing to pay more in taxes for better health care, the truth is that many citizens—particularly wealthy ones—don’t list universal coverage as a top priority. As Maggie has noted, a March poll from the Kaiser Family Foundation found that only 27 percent of households earning over $75,000 rated universal coverage as one of the two most important issues in the coming election. By contrast, 50 percent of those in households where joint income equals less than $49,999 named health care as one of their two top concerns.

The point is this: when looking for ways to fund health care reform, tax hikes will almost inevitably be part of the mix, and in all likelihood some will be focused on the wealthy. (For one, Congress is very likely to let the Bush tax cuts expire.) But how much can we bank on cooperation from affluent, well-insured taxpayers?  Common sense—and experience—tell us that when you tell people that their taxes are going up, you’re going to have some pushback. This could be a stumbling block to reform.

But cigarette taxes are another issue all together. The harmful effects of smoking are well known and beyond doubt. And fewer people are smoking today than ever: currently the nation’s per capita consumption of tobacco is at levels not seen since the 1930s. Last but not least, more and more states and cities are imposing smoking bands in public places.

In other words, smoking is falling out of favor with the public—we know it’s dangerous and it’s no longer the fact of life that it once was. And so people are willing to tax it. In Oregon, polls showed that 59 percent of registered voters said they would support the Measure 50 tax increase, compared with 35 percent who opposed it. With regards to SCHIP, last year the American Medical Association reported that “by a more than two-and-one-half to one ratio (70 percent versus 27 percent), support exists for a 30-cent increase in per-pack cigarette taxes to pay for ‘health care coverage to uninsured children.’ Significantly, that support is nearly identical (67-28 percent) for a 75-cent per-pack increase dedicated to the same purpose.” In other words, people don’t care how much tobacco is taxed. This is a strong sign that tobacco taxes could be a useful short-term cash cow as health care reform struggles to get off the ground.

Of course, Big Tobacco continues to fight back—and it’s fighting hard. In February, the tobacco industry took on Kansas, where state leaders were considering a 50-cent tax increase on cigarette packs to help fund health care reform. R.J. Reynolds Tobacco Company, which makes one out of every three cigarettes sold in the U.S., rolled out a lobbying campaign to oppose the measure. Included in this campaign were e-mails to smokers encouraging them to attend anti-cigarette tax rallies at the Statehouse. According to ABC’s Kansas City affiliate, one such e-mail read: “It seems they still want more of your hard-earned money. It’s time to tell Governor [Kathleen] Sebelius and other politicians that enough is enough!” In March, the tax hike died in the state legislature.

Big Tobacco is right: enough is enough. That an industry that manufactures poison has been able to block health care reform is not just ironic, it's tragic. Going forward, reformers need to push back by reminding voters that if all Americans stopped smoking—beginning with this generation of teens—that would do more to improve the health of the nation that any other reform.

This post originally appeared on Health Beat, The Century Foundation's health care blog.