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TESTIMONY OF JEFFREY E. HARRIS, M.D., PH.D REGARDING FINANCING PROVISIONS OF THE ADMINISTRATION'S HEALTH SECURITY ACT BEFORE THE COMMITTEE ON WAYS AND MEANS THURSDAY, NOVEMBER 18, 1993 ADDRESS: Professor Of Economics Massachusetts Institute of Technology 52 Hedge Road Brookline, MA 02146-7551 PHONE: 617-277-1024 or 617-253-2677 FAX: 617-253-6915 TO CONTACT DR. HARRIS IN WASHINGTON, D.C.: Call John Bloom, Cliff Douglas or Phil Wilbur PHONE: 546-4011 FAX: 546-1682 Dr. Harris appears on his own behalf. MAIN POINTS: As a practicing physician, I know from firsthand experience that smoking is, first and foremost, a health issue. The primary rationale for raising tobacco taxis is to reduce the enormous toll of death and disease that smoking imposes on our nation. As a economist I can address several questions regarding the costs tobacco use imposes on our economy. Some earlier estimates of the direct health care costs of smoking significantly understate the magnitude of the costs involved. My estimate, based on a survey of existing data and works in progress, and using 1995 as an appropriate benchmark year, show that: * Direct health care costs of smoking will be approximaXely $88 billion per year, or $3.71 per pack of cigarettes sold in 1995. * People who have never smoked will shoulder approximately $55 billion per year of the excess health care costs caused by smoking in 1995. * These estimates do not assign any economic value to the enormous pain, suffering and grief associated with the addiction, disease and death caused by tobacco * These estimates do not include the significant costs borne by all Americans due to the lost productivity and lessened international competitiveness imposed on the economy by tobacco use. * Some tobacco tax opponents count premature deaths as a"benefrt" to nonsmokers because, by dying, smokers collect less from Social Security and private pension plans. There is a double standard at work here. Premature deaths are not counted as a "benefit" in decisions to fund research to cure diseases such as breast cancer or prostate cancer, or in decisions to stop the spread of AIDS or violence. This is not the kind of calculation in which a civilized society engages. In light of this data, and to prevent hundreds of thousands of needless deaths, Congress should enact a tobacco tax much higher than the 75-cent proposal now under consideration. This is not a matter of cold economic calculation, but a matter of health.

Testimony of JEFFREY E. HARR1"S, M. D. , Ph. D. Before the Committee on Ways and Means, U.S. H.Duse of Representatives, In Public Hearings on the Financing Provisions Of the Administration's Health Security Act, 1100 Longworth House Office Building, Washington, D.C., Thursday, November 18, 1993 I am a practicing primary-care internist at the Massachusetts General Hospital in Boston and an economics professor at the Massachusetts Institute of Technology. I last addressed the Committee on Ways and Means in Savannah, Georgia, in Aoril, 19B9, when I served as invited faculty to the Committee's Annual Issues Seminar on deficit reduction. My biography is attached. I am here to testify on the Administration's proposed 75-cent-per-pack increase in the Federal excise tax on cigarettes. I am solely responsible for the contents of my testimony, including any errors or omissions. THE HEALTH-CARE COSTS OF CIGARETTE SMOKING Cigarette smoking is now responsible for twenty percent of all deaths in the United States annually [1]. As a physician, I have personally witnessed the tragedy of disability and death wrought by smoking. While I shall address the Committee concerning questions of economic cost, I emphasize that smoking is first and foremost a health issue. When we talk about disease in dollar terms, we should take care not to trivialize the human lives at stake. From my review of past and ongoing research, I-estimate that cigarette smoking accounts for 8 percent of all health- care spending in the United States. The range of uncertainty in my estimate is from 4.2 percent to 11.5 percent [2,3,4]. If the Administration's Health Security Act were enacted by the end of the 103rd Congress, then the States would most likely begin to establish health alliances in 1995. Accordingly, I have chosen 1995 as the benchmark year for my economic calculations below. By 1995, national health expenditures are projected to reach S1.1 trillion, or 15.5 percent of GDP [5]. Accordingly, in 1995, by my estimate, the adverse health effects of cigarette smoking will be responsible for S88 billion in health-care spending, with an uncertainty range

t Jeffrey E. Harris Page 2 of S46 to S127 billion [6]. Cigarette smokers represent 18 percent of the entire U.S. population rincluding infants and children.i Former smokers make up another 19 percenrL of the population. Sixty-three percent of the population has never smoked [;]. Accordingly, under universal health coverage, I estimate that in 1995, people-'*aho never smoked will contribute S55 billion toward the health-care costs of cigarette smokinq. iThe uncertainty range is from S30 to 580-billioni. Current and former smokers will pay the remaining S33 billion. (The uncertainty range is -S17 to $47 billion.) With no intervening increase in Federal cigarette taxes, I expect U.S. cigarette consumption in 1995 to be 23.7 billion packs [8]. At that level of cigarette consumption, the health-care financing burden imposed upon people who never smoked would amount to $2.32 per pack (with an uncertainty range_-from S1.27 to $3.38 per pack). The full health-care costs of smoking, including those costs borne by current and former smokers, would amount to S3.-1 per pack iwith an uncertainty range from S1.94 to S5.36 per packJ. EXTERNAL COSTS: WARM ECONOMICS VERSUS COLD ECONOMICS I have estimated the health-care costs of smoking that are subsidized by persons who never smoked. These costs vastly understate the total burden of smoking imposed on our society. Many of these "external" or "social" costs are easy to describe but difficult to quantify. Some economists focus only on the easy-to-measure costs; they assume that all unquantifiable costs somehow cancel each other out. I call this the "cold approach." As a physician, I know that the cold, hard numbers don't tell the whole story, that one cannot dismiss injury and suffering merely because it cannot be simply calibrated. I prefer the alternative "warm approach." The death and disease caused by smoking results in a loss of American productivity. According to the Cenzers for Disease Control, in 1990, the death toll from smoking caused an annual loss of 1.1 million person years of life before the age of 65 [9j. This loss of productivity has numerous macro-economic consequences-- for example, reduced international competitiveness-- that are real but difficult to auantify. In a May 1993 report, the Office of Technology Assessment estimated that premature deaths from smoking (along with lost work-days and productivityt caused a -loss of S47.2 billion in personal income in 1990 [101. At current inflation rates, that amounts to S56 billion in 1995. At a 25 percent marginal tax rate, OTA's estimated

Jeffrey E. Harris Page 3 productivity loss would mean foregone income taxes of S14 billion, which might otherwise help to pay for national defense, environmental protection, drug enforcement, crime control, and other needed Federal services. As a"warm" economist, I cannot brush aside these hard-to-cuantify external costs [11]. "Cold" economists assume that smokers and their _ families privately, rationally, and voluntarily bear the costs from smoking-related disease and death. This is a fiction that ignores the dual reality of teenage initiation into cigarettes and adult addiction to cigarettes. The average American smoker now starts regular cigarette use at age fifteen, and many Americans start before age ten. Teens and pre-teens typically believe that they can stop at will. Yet each year, at least 17 million adult smokers try to quit but fail. On any single attempt to quit, the smoker's long-term success rate may be as low as 3 percent [12]. Adult cigarette smokers have cumulatively paid billions of dollars for all sorts of over- the-counter and prescription smoking cessation aids, and most market analysts believe that the pent-up demand for such products is enormous [13]. A "warm" economist recognizes that current cigarette smokers would collectively be willing to pay billions of dollars to have their addiction taken away from them. This external cost is hard to quantify, but again, it is genuine. "Cold" economists say that a person who dies upon retirement saves the Federal purse and private pension plans the costs of Social Security benefits and retirement annuities. Warm economists say that this is not the kind of calculation that a civilized society engages in. Two members of this Committee (Reps. Archer and Rostenkowski) turned 65 this past year. Three other members (Reps. Houghton, Gibbons, and Pickle) have past the standard retirement age. According to the "cold" approach, society incurs additional external costs tor each and every extra day that they survive_ and serve our country. When Congress considers the merits of increasing Federal funding for breast cancer prevention, diagnosis and treatment, it does not remind itself that most women who die from breast cancer have already passed their sixty-fifth birthdays. It does not consider whether an improvement in breast-cancer survival would impose a burden on Social Security or private pensions. Congress considers the funding of breast cancer research primarily a matter of health. The same standard should apply to the taxation of cigarettes. Senator Moynihan has proposed a tax on ammunition to help finance the Administration's Health Security Act. When Congress considers this proposal, I hope that it does not

Jeffrey E. Harris Page 4 consider the age distribution of the victims of fatal shootings, or the savings in external costs that might accrue if septagenarians were murdered. We should apply the same standard when we consider measures to reduce the death toll from smoking. No double standard for cigarette smoking should be applied [14]. During the fiscal year ending June 30, 1993, total governmental taxes on cigarettes-- including Federal, state and local excise taxes as well as applicable state sales taxes-- amounted to S0.58 per pack (151. Of this amount $0.24 per pack represented the current Federal excise tax. Accordingly, even with an additional Federal tax of S0.;5 per pack, I believe that the total tax burden on cigarettes would fall far short of its true social cost. OTHER ECONOMIC IMPACTS OF CIGARETTE TAXATION The Administration has proposed a-5-cent-per-pack increase in the Federal excise tax. If that tax were fully reflected in the retail_price of cigarettes, then I estimate that U.S. cigarette consumption would decline about 12 percent [16]., f-lost of the resulting drop in smoking rates would represent adults quitting smoking and teenagers never starting. Altogether, there could be as many as 4 million fewer cigarette smokers. The adult quitters will experience immediate heal'th benefits in terms of reduced rates of cardiovascular disease, and more long-term benefits in terms of reduced rates of'cancer and chronic lung disease [171. The teenagers who never started will add years to their life expectancy. Some opponents of the Administration's proposal have argued that an increase in the Federal excise tax will cost the U.S. economy millions of jobs. These claims are markedly exaggerated. -For a full discussion, I refer the Committee to a recent report by Arthur andersen Economic Consulting [18]. I attach a one-page summary of the Arthur Andersen analysis that was prepared by the Coalition on Smoking OR Health, an organization'representing the American Cancer Society, the American Heart Association, and the American Lung Association. The Committee needs to understand that the primary, direct negative impact_an increase in the Federal excise tax will be on American cigarette manufacturers and their shareholders-- not retailers or farmers. The adverse impact on cigarette manufacturers will be greater if the 75-cent tax is not fully passed on to consumers. Cigarette manufacturers have known for months zhat the Federal tax on cigarettes would rise from its current level of 50.24 per pack to nearly S1.00 per pack. Temporary price reductions, announced last spring by Philip Plorris and other

. . Jeffrey E. Harris Page 5 companies, were intended partly to alleviate the impact of higher future taxes. During the first part of 1993, manufacturers' wholesale prices for king-size cigarettes were cut by 37 cents per pack [19]. The increasing market shares of discount and generic cigarettes will also blunt the price effect of a Federal tax increase. The Treasury Department estimates that a;5-cent-per- pack tax would net S11-billion in additional Federal dollars in the first year alone. If the 75-cent tax increase were fully passed on to consumers, then I estimate the first-year impact to be closer to S12 billion. Still, the Treasury's estimate is within the margin of uncertainty of my own calculations. CONCLUDING REMARKS Some members of the Committee may ask: If we tax cigarettes because they are detrimental to health, then why don't we also tax the saturated fat in tenderloin beef-cuts, or extra salt in salted peanuts? But tobacco products are a unique and special case. As the First Lady has testified, they cause serious harm when used exactly as intended. What is more, cigarettes are toxic to all smokers at every dose. By contrast, beef contains important nutrients including protein and essential amino acids. Peanuts contain Vitamin E, for one, and as some researchers note, eating nuts may'help prevent heart disease. For many people, eating saturated fats does not raise blood cholesterol. For others, eating salt does not cause hypertension [20]. In short, I do not see the taxation of tobacco for health reasons as pushing our society down an inevitably slippery slope. I have estimated that in 1995, under universal health insurance, people who never smoked •htill pay S55 billion toward the health-care costs of smoking. This is one of many important, but less quantifiable external costs of cigarette use. The S1]1 to $12 billion increase in net revenues in 1995-- to be derived from the Administration's proposed cigarette tax hike-- will not come close to covering these external costs. Still, I must again emphasize as a physician that smoking is foremost a health problem, not a matter of cold economic calculation. Health-care reform is about saving lives. When I tell one patient that she has inoperable lung cancer, when I urge another to auit before he has a fatal heart attack, I don't ask myself whether their illnesses are raising or lowering the Federal deficit. I just think about getting them better.

Jeffrey E. Harris Page 6 iIOTES 1. "Cigarette Smoking-Httributable Mortality and Years of Potential Life Lost=- United States, 1990." 2. On average, an adult cigarette smoker (current or former) spends 20 percent more on health care than an adult who has never smoked. This excess rate of spending varies from 10 to 30 percent;-depending on the source of data and the methods used by re5earchers to comnare smokers and nonsmokers, but in some studies it runs as high as 100 percent. See, for example: J. Paul Leigh and James F. Fries, "Health Habits, Health Care Use and Costs in a Sample of Retirees," Inquiry 29 (Spring 1992): 44-54; Thomas A. Hodgson, "Cigarette Smoking and Lifetime Medical Expenditures," Milbank Quarterly 70 t19921: 81-125; Willard G. Manning, Emmett B. Keeler, Joseph P. Newhouse, et al., The Costs of Poor Health Habits tCambridge, Mass.: Harvard University Press, 1991-); Dorothy P. Rice, Thomas A. Hodgson, et al., "The Economic Costs of the Health Effects of Smoking," Milbank Quarterly 64 i1986i: 489-547; Gerald Oster, Graham A. Colditz, and N.L. Kelly, The Economic Costs of Smoking and Benefits of Quitting tLexington; Mass.: Lexington Books, 1984). 3. Current and former cigarette smokers together represent half of all adults. (,See: "Cigarette Smoking Among Adults-- United States, 1991," Morbidity and Mortality Weekly Report 42 t Apr. 2, 19931 : 230-33. ) If the average adult smoker spends 20 percent more than the average nonsmoker tas explained in note 2), then overall smoking will be responsible for one-eleventh tor 9.1 percent) of all health-care spending by adults. Put differently, each smoker incurs six dollars in health-care costs for every five dollars spent by a nonsmoker. With equal numbers of smokers and nonsmokers, the extra dollar spent by the smoker thus constitutes one out of eleven dollars spent on health care. The same logic_-can be used to estimate an uncertainty range for the proporti.on of health-care dollars contributed by smoking. If the average smoker spent just 10 percent more than a nonsmoker, then smoking would account for 4.3 percent of all health-care spending among adults; and if the average smoker spent 30 percent more than a nonsmoker, then smoking would account for 13.0 percent of all health-care spending among adults. " 4. Health-care spending among persons aged 19 years or more accounts for an estimated 38.-I percent of all personal health care spending. tSee: Daniel R. :aldo, Sally T. Sonnefeld, David R. McKusick, and Ross H. Arnett, II, "Health Expenditures by Age Group, 1977 and 1987-," Health :.are Financing Review 10 tSummer 19891: 111-120, Table 2.1 Accordingly, if smoking accounts for 9.1' percent of health care costs in adults (as explained in note 3), then it

Jeffrey E. Harris Page 7 accounts for 3.0 _nercent of health-care costs in the entire population. This estimate ianores the costs imposed on the unborn and on infants and children by mothers who smoke, and therefore understates the total costs attributable to smoking. 5. Sally T. Burner, Daniel R. Waldo, and David R. McKusick, "National Health Expenditures Projections Through 2030," Health Care Financing Review 14 iFall 1992): 1-29. 6. The Office of Technology Assessment estimated that cigarette smoking was responsible for S20.8 billion in health-care costs in 1990. (See: "Statement of Roger Herdman, Maria Hewitt,-and Mary Laschober on Smoking-Related Deaths and Financial Costs: Off ice of Technology Assessment Estimates for 1990, Before the Senate Special Committee on Aging, Hearing on Preventive Health" (Washington, D.C.: Office of Technology Assessment, U.S. Congress, May 6, 1993): page 4.1 My extrapolation of OTA's estimates to 1995 would give a value of_S34.4 billion. I believe that OTA's estimates are too low, and are inconsistent with other studies on excess health-care spending by smokers. 7. According to the 1991 National Health Interview Survey, 26 percent of Americans aged 18 years or older are current smokers, while another 24 percent formerly smoked. iSee: "Cigarette Smoking Among Adults-- United States, 1991," Morbidity and Mortality Weekly Report 42 (Apr. 2, 19931: 230-33.i In 1995, there are expected to be 194.1 million Americans aged 13 or more, out of a total population of 262.-5 million. iSee: U.S. Bureau of the Census, "Population Projections of the United States by Age, Sex, Race, and Hispanic Origin: 1992 to 2050," Current Population Reoorts, Series P-25 1092 (1992): Table 2.) If 1991 smoking orevalence rates remained unchanged, then in 1995 there will be 50.5 million current smokers and 46.6 million former smokers. If half of adults smoke, and if -3.9$ of Americans are aged 18 or more, then 37 percent of Americans will be past or present smokers. 3. In 1993, U.S. consumption is expected to be.23.6 billion packs. cSee: U.S. Department of Agriculture, Economic Research Service, Tobacco Situation and Outlook Report TS-224 cSep. 19931: Table 1.i I assume a continuing annual rate of decline of 1.8 percent. 9. "Cigarette Smoking-Attributable Mortality and Years of Potential Life Lost," cited in note 1 above. 10. See: "Statement of Roger Herdman, Maria Hewitt, and Mary Laschober on Smoking-Related Deaths and Financial zosts," cited in note 6 above. 11. The following quotation (from page 41 of Manning et al., "The Costs of Poor Health Habits," cited in note 2

, i Jeffrey E. Harris Page 8 above) typifies "coid" a-conomic analysis: "For any given =evei cf nationai defense, the earlier mortality of smokers raises the tax burden ro nonsmokers. :e assumed that these effects were offset by nonsmokers' enjoyment of y ess ooilution and less-crowcTed roacis. " !2. Jeffrey E. Harris, Deadly Choices: Coping with Eealth Risks in Everydav Life lIleor York: Basic Books, _993:: -hapter 6, "Smoking and-]othingness." 13. Eben Shapiro, "After Nicotine Patches: Sprays, ?ills, ?nhalers?" Wall Street Journal, 8 Nov. 1993, page B1. 14. Surveys consistently show that the nonsmoking public would prefer not to be exposed to environmental tobacco smoke (ETS). Their preferences are reflected, at least in part, by statutes restricting smoking in public places. It is difficult to place a dollar value on 3,000 annual deaths caused bv-FTS, or on the respiratory irritation experienced _by many nonsmokers. But a"°aarm" economist knows that they are not zero. 15. Computed _`rom :obacco Situation and Outlook Report, as cited in note 8. 16. My estimate _s based upon a price elasticity of demand that equals -0..I. Such a price elasticity is consistent with the recent experience of Canada, in which cigarette consumption fell in conjunction with increases in federal and provincial excise taxes. See: Jeffrey E. Harris, "Two Bucks 7:i11 Finance Health Care for 10 Million," Idew York Times, 4 June 1993, Op-Ed page. 1;. Jeffrey E. Harris, Deadly Choices: Coping with Health Risks in Everyaay Life, cited in note 12 above. 18. Arthur Andersen Economic Jonsulting, "Tobacco _ndustry Employment: A Review of The ?rice :aterhouse Economic Impact Report-and Tobacco I:istitute Estimates of Economic Losses from =ncreasing the Federal Excise T_ax'," ,Los Angeles: Arthur yndersen, Oct. 5, 1993). 19. Calculated from Tobacco Situation and Outlook :ceport, as cited in note S above. 20. Jeffrey E. Harris, Deacily Choices: Coping with Health Risks in Everyciay Life, cited _n note 12 above.