Funding preschool with a cigarette tax is unsustainable

April 11, 2013

In its 2014 budget, the White House is proposing to spend $66 billion over the next ten years on universal preschool. This would be paid for by increasing the federal tax on cigarettes to $1.95 a pack, which will raise $78 billion over ten years.

That sounds politically appealing, but it's also not sustainable in the long run. A quick glance at the table on p. 202 of the White House's budget will reveal why:

tobacco preschool
(Click to enlarge)

Notice that the costs for "preschool for all" and home visits start rising over time. In 2014, the federal government is spending just $130 million on grants for states. By 2022, it's spending $10.3 billion. And those numbers will almost certainly keep going up in the future, as the population grows and teacher pay rises. (Let's leave out the possibility of robot educators for now.)

Meanwhile, the revenues from the cigarette tax steadily shrink as the years pass by, even though it's indexed for inflation. In 2015, the tax raises $9.8 billion. But that's the peak. It starts dwindling every year thereafter. By 2023, the tax raises just $6 billion.


Cute kids, yes, but should they be funded by an unsustainable Pigovian tax? (Jahi Chikwendiu/The Washington Post)

There's a reason for that. As Sarah Kliff explained earlier, tobacco taxes are very, very effective at dissuading people from smoking. That's a boon for public health. The flip side of this, however, is that the cigarette tax raises steadily less revenue over time. This problem is masked by the fact that the White House budget outlook only extends 10 years into the future. But 15 years out or 20 years out, the picture would start to look different.

That's hardly an argument against universal preschool. As Dylan Matthews has explained here, there's plenty of evidence to suggest that early-childhood education can be hugely beneficial. If the program is worth doing, then Congress can always come up with other ways to fund it. But it's a reminder that revenue from taxes designed to discourage certain behaviors — like cigarette taxes or even carbon taxes — will eventually shrink over time if they actually work.

Update: Timothy Bartik, an economist with the Upjohn Institute, writes a thoughtful reply to this post. His argument comes down to the idea that expanding preschool would have all sorts of secondary benefits that could help reduce the deficit — from reducing incarceration rates and special-education spending to boosting tax revenues down the road. There aren't hard numbers on how this all shakes out, but it suggests that preschool could be more fiscally sustainable than a conventional budgetary analysis would suggest.

Comments
Show Comments
Most Read Business
Next Story
Brad Plumer · April 11, 2013