LTC Bullet--Could "Sin Taxes" Fund Long-Term Care?

Wednesday, September 18, 2002


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LTC E-Alert #221--Older Drivers and LTC
LTC E-Alert #222--Seniors and Suicide
LTC E-Alert #223--Vets Health Care Cut Further
LTC E-Alert #224--Woe, Canada and Whoa, Single-Payer Health Care
LTC E-Alert #225--Indy Star Articles Illustrate LTC Problem and Prove Need for LTCI

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LTC Comment: The following article was prepared by the Center for Long-Term Care Financing on May 9, 2002 as a consulting report. Families USA recently published an update on South Carolina's tobacco tax proposal. We'll quote from that update following this article and then provide some further comment.

"On 'Sin Taxes' as a Funding Source for Long-Term Care," by Stephen A. Moses

The South Carolina Department of Health and Human Services has indicated that it needs $185 million to prevent service cuts for Medicaid beneficiaries next year. Governor Jim Hodges recently withdrew a proposal to raise $83 million per year for the program by adding 22 cents per pack to the state's cigarette tax. The state reports that health care advocates were "livid" with Governor Hodges, saying the tax increase would have provided "consistent, long-term" funding for Medicaid. Opponents of the cigarette tax hike said if implemented it would merely drive South Carolina smokers to buy cigarettes in other, lower-taxed states, thus reducing tax revenue to the state of South Carolina. Meanwhile, a long-term care task force in Oregon has distributed the South Carolina cigarette tax hike proposal for consideration.

For the first time in almost a decade, Medicaid expenditures are shooting up again at double-digit rates across the United States. Every state in the country is struggling to meet these increased expenses despite lower tax revenue caused by America's current economic slump. It is not surprising, therefore, that many states are considering "sin taxes" as a means to generate extra revenue while simultaneously discouraging unhealthy behavior. Sin taxes are levies imposed by governments on cigarettes, alcoholic beverages, fatty foods, or any other product or service deemed (1) to cause poor health and (2) to increase program expenditures for social insurance programs like Medicare and welfare programs like Medicaid.

Research indicates that sin taxes do indeed discourage consumption of the substances on which they are imposed. In compliance with the economic law of supply and demand, people buy fewer packs of cigarettes and consume less alcohol, for example, when the prices of these items increase. Other factors being equal, e.g., if consumers do not purchase these products elsewhere to avoid the tax, revenue to the tax-imposing government may increase despite the consequent reduction in consumption. Research also indicates, however, that reduced consumption of sin-taxed products improves health and extends life expectancy. Consequently, when unhealthful substances are taxed heavily, fewer people buy and consume them and therefore more people remain healthy and live longer. Or viewed differently, such people die slower, often with Alzheimer's Disease or Parkinson's, in nursing homes at great expense, instead of more quickly, from heart attacks or cancer, at lower cost.

Thus, the bitter irony of using sin taxes to generate revenue to help fund Medicaid programs is that, in the long run, expenses for nursing home and home care will have to increase to accommodate a larger aging population. Arguably, sin taxes increase total, lifetime health care costs and therefore do not save money in the end. When governments impose taxes to discourage undesirable behaviors and to generate short-term revenue increases, they should also take into account the likely long-term fiscal effects of such policies. In other words, they should not expect to save money. They may well decide that the extra expense is warranted, but this decision should be made consciously and under the appropriate scrutiny of consumers, tax payers, and voters.

Bottom line: in the long run, sin taxes will not increase net funding available for long-term care. To find the added funding for long-term care that America so desperately needs, we must attract new sources of private financing such as long-term care insurance and home equity conversion. Given the worsening fiscal strains on Medicaid and Medicare, new sources of private financing are the country's only hope to pay for universal access to quality long-term care in the future. One way to relieve the financial burden on public programs and encourage creative private financing of long-term care is the Center for Long-Term Care Financing's "LTC Choice" proposal. You can read "LTC Choice: A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle" at .

Update from Families USA, "Preserving Medicaid in Tough Times: South Carolina Advocates Avert a Crisis," Health Action, September 2002.

"The effort to increase the tobacco tax was ultimately unsuccessful--the bill was defeated by five votes in the House and never made it out of committee in the Senate. However, after a concerted effort on the part of the coalition, the Medicaid program was fully funded by replacing the shortfall of $128 million with tobacco settlement funds and money that had been allocated to other state agencies. . . . 'We didn't get the tobacco tax this year, but we are only five votes away from revolutionizing how Medicaid is funded in South Carolina. We expect to win the tobacco tax next year.'"

LTC Comment: Thus, although efforts to fund Medicaid in South Carolina with sin taxes failed this year, advocates are hopeful for next year. Ironically, if they succeed, costs for long-term care carried by an already overburdened Medicaid program will continue to rise even as tobacco-tax revenues gradually decline. South Carolina's and America's welfare-financed, nursing home based LTC system will become even worse off financially than they were before. The only hope is to attract more private financing into long-term care. To do that, South Carolina and other states must target Medicaid to the needy and encourage everyone else to save, invest or insure for long-term care. With such a policy in place, people able to pay privately will have access to a full range of quality services. And those who must rely on Medicaid will have access to the same services, because the program will be able to pay for more and better services for a smaller number of dependents.