Stay Positive - The Externalities of Smoking

With Democrats' S-Chip legislation proposing to fund increased child health insurance subsidies with higher tobacco taxes, now is an opportune time to discuss the externalities from smoking.

Traditionally we think of smoking as imposing costs on third-parties not fully borne by the smoker - health care costs of nonsmokers associated with secondhand smoke, medical costs paid by the government to care for ill smokers, and fires caused by cigarettes. These third party costs are the negative externalities; to the extent that they reduce tobacco consumption, we generally applaud policies that raise the price of tobacco (e.g. taxes) for forcing smokers to take these third-party costs into account.

Yet here come Stock and Watson relaying a fascinating observation about positive externalities from smoking (p. 446):

The biggest economic benefit of smoking is that smokers tend to pay much more in Social Security (public pension) taxes than they ever get back. There are also large savings in nursing home expenditures on the very old - smokers tend not to live that long... All the studies agree that, by tending to die in late middle age, smokers pay far more in taxes than they ever back in their brief retirement.

Here that, Platzer? With every puff you're subsidizing my twilight year leisure!

Seriously though, Stock and Watson note that the beneficial impact of smokers' early death on public finances could significantly reduce cigarette's per pack external cost (hence appropriate level of tax). Maybe. Without getting into this technically and morally thorny issue too deeply, I simply interpret this research as a reminder that to the extent our public programs succeed in reducing smoking - and the propriety of such programs is to me beyond question - they may increase public health expenditures later on. Rather than treating cigarette taxes as solely win-win (either people smoke less, or they smoke the same amount and government raises needed revenue), we should recognize that such taxes could be both a boon to public finances in the short-term and a drain in the long-term. Ideal would be a way to protect a portion of cigarette tax revenue to cover future increases in health expenditures; given our government's difficulties respecting such "lock-boxes", however, maybe we had better not go there.