From my days as a general policy wonk instead of a health policy wonk, there were two common sayings on optimal taxation policy:
“Lower rates, broader base”
“Tax the bads, subsidize the goods”
Yes, policy wonks are not wordsmiths, but I want to focus on the intersection of tax policy and healthcare policy that is implicit in the second shibboleth.
Taxing the bads usually means declining long term revenue as over the long term, fewer people consume the bad thing. A classic recent example is the use of high levels of cigarette and other smoking tobacco taxes to fund the Childrens Health Insurance Program (CHIP). In 2009, CHIP was reauthorized and expanded. The federal share of the program was to be paid for with a $0.61 per pack increase in the federal cigarette tax. There is a long term problem with using a tobacco tax to fund CHIP — tobacco usage is going down and has been going down for over a generation now as we as a society are starting to approach the point of having smokers fully internalize the costs of smoking. This trend will continue as cigarettes and other tobacco products are more heavily taxed.
The basic mechanism is higher cash prices for cigarettes keeps non-smokers from becoming addicted smokers because they never try or they never quickly get to a pack a day. Long term smokers will brand shift downwards or less likely quit if they are cash constrained, but cash constrained non-smoking 17 years olds will grow up to be non-cash constrained 51 year old non-smokers. We’ve decided as a society that tobacco usage is a bad that we really want to significantly reduce or eliminate over the long term. So we’ve been taxing a “bad” to subsidize a “good”, health insurance for kids.