Expanding SCHIP Will Challenge State Finances

Heritage Foundation looks at the effect of the proposed Congressional SCHIP expansion, and offers A State-by-State Analysis of the effect on finances.

The SCHIP expansion under consideration would increase the federal tobacco tax, but as Heritage notes, this would result in a loss of state tobacco tax revenue. The calculate that Pennsylvania would lose $40-$50 million annually in state tax revenue.

Heritage also looks at the redistribution effect of the tobacco tax – i.e. states that pay more vs. states that get more. They find that PA residents would pay $204 million more in taxes than the state would get in grants.

The most troubling finding in my view, is that to provide the funding level required from the tobacco tax increase, we would need 9 million new smokers in five years (at a time when the number of smokers is declining) and 20 million more in 10 years – including 1 million more in PA. Of course, we know we won’t get more smokers, we will simply increase taxes once again to pay for all this proposed spending.

While President Bush says he will veto this expansion of SCHIP (as he supports a smaller expansion), Heritage recommends:

Congress should consider the unintended effects of SCHIP expansion. Worse than its impact on state budgets, SCHIP expansion would increase dependence on government health care, displace private insurance coverage, and increase government spending. Rather than expand SCHIP, Congress should reauthorize SCHIP so that it:

  • Focuses on low-income children. The current bills in Congress allow states to expand eligibility beyond low-income families, the vast majority of whom already have private coverage. Expanding eligibility to children in families with higher income only causes those families to drop private insurance in favor of government-run, taxpayer-funded health care. A more efficient use of SCHIP funds would be to focus only on children in low-income families, prioritizing those most in need.
  • Augments private coverage. Instead of expanding a government program, Congress should make private coverage a more affordable option for low-income families. One way to do this within the original scope of SCHIP is through premium assistance, which essentially allows eligible families to use SCHIP funds to subsidize the purchase of health care for their children. Congress should facilitate states’ use of premium assistance
    by removing burdensome administrative procedures.
  • Is fiscally sustainable. Current bills in Congress carelessly use the tobacco tax—a declining source of revenue—as the basis for their SCHIP expansion. Moreover, the House bill does not place a cap on SCHIP allotments, thereby creating another open-ended
    entitlement. Instead, Congress should follow a fiscally responsible approach, focusing only on low-income children and obligating states to operate their programs within their SCHIP budgets.