# Obamacare's Not-So-Hidden Tax: Thank You for Smoking [Listen to or watch the recording](../media/media-2015-08-14-steve-gruber/recording.mp3) **The Steve Gruber Show · August 14, 2015** Aaron Yelowitz discussed variation across states in ACA marketplace tobacco surcharges, the relationship between premiums and risk, and incentives to report smoking status accurately. ## Participants - **Steve Gruber:** Host - **Aaron Yelowitz:** Adjunct scholar, Cato Institute; Associate Professor of Economics, University of Kentucky ## Related commentary [Aaron Yelowitz, “Obamacare's Not-So-Hidden Tax: Thank You for Smoking,” Cato Institute, July 17, 2015.](https://www.cato.org/blog/obamacares-not-so-hidden-tax-thank-you-smoking) ## Transcript > **Transcript note:** This transcript was generated from the recording and may be imperfect. The recording is the authoritative source. **00:00:00 — Steve Gruber:** The confusion of Obamacare is why so many people don’t know what to expect anymore. Rates are going up. Rates are going up this year, and they’re going up next year by all projections, and really going to jump in 2017. And all of these taxes and fees and confusion. Well, we decided to get Dr. Aaron Yelowitz on the program. He’s an adjunct scholar with the Cato Institute, and he says there are some hidden taxes out there. He says, “Thank you for smoking.” Doctor, welcome to the program. **00:00:28 — Aaron Yelowitz:** Good morning. How are you? **00:00:29 — Steve Gruber:** I’m doing great. I’m in the middle of a lake right now, and it’s a beautiful sunrise, to be honest with you. Tell me about this hidden tax. *Thank You for Smoking* was an interesting film that I saw a few years ago. But you say there are some hidden taxes out there. What are you referring to? **00:00:45 — Aaron Yelowitz:** What I’m referring to is this, Steve. In Obamacare, you don’t adjust health-insurance premiums for much at all. But one of the ways in which people are penalized for life decisions is through smoking. In principle, you could raise premiums by up to 50 percent over those who don’t smoke. What I did was look at 35 states and the premiums for smokers and nonsmokers in those states. What I found was quite interesting. In some states, the states hardly increase the premiums for smokers at all. For example, in Michigan, smokers pay about 5 percent or so more than nonsmokers, which one might argue represents increased health risk. We know that smokers are unhealthier on average, and so one would expect slightly higher premiums. On the other hand, in other states—for example, Wyoming—the premiums were gigantically higher, about 25 percent higher. What I computed is that in some states they’re sneaking through what you might call a smokers’ tax, where it’s not related to their true health risks but just punishing them for their choices. In a place like Wyoming, the number is something like two dollars per pack. **00:01:59 — Steve Gruber:** Would you consider that appropriate, or what are you thinking? **00:02:05 — Aaron Yelowitz:** Here’s what I’m thinking. Imagine that you or I make a choice. Should we penalize you for that choice? The answer, as an economist, basically is that we should let people make the choices they make, even if they’re not what I personally would make. For example, if you want to jaywalk or eat pizza instead of broccoli, then that’s your choice. The argument for why perhaps Wyoming should additionally penalize smokers relative to other states would have to be an argument about something like secondhand smoke—which is that my action harms you. The evidence suggests that kind of harm is already embedded in the excise taxes for cigarette smoking. So, basically, we’re just penalizing people for something because we don’t like what they’re doing, not because they’re causing harm for which they aren’t compensating others. **00:02:59 — Steve Gruber:** Financially speaking, though, Doctor, I think it’s fair to say—and I’ll play devil’s advocate here—we’re on the line with Dr. Aaron Yelowitz with the Cato Institute. Five hundred thousand people in America this year will die from smoking-related illnesses. Five hundred thousand will die next year, and the year after that. It costs this country billions of dollars in lost work productivity, and it costs taxpayers billions of dollars. Certainly, with Obamacare now taking care of people who have smoked, we’re going to foot the bill for that in heart attacks, lung cancer, emphysema, and the list goes on and on. So, wouldn’t it be fair to say it would be appropriate for smokers to pay more? **00:03:36 — Aaron Yelowitz:** They do pay more. So, I guess the question is this: should premiums reflect the extra cost of smoking, or should they reflect both the extra cost of smoking and some kind of punishment for making a choice that we don’t like? **00:03:53 — Steve Gruber:** I understand your point. If you’re going to tax smokers, why would you single out only that group? You mentioned eating pizza over broccoli. Wouldn’t it also be appropriate, then, if you’re 20 percent over the ideal weight, 50 percent over your ideal weight, or twice what you should weigh? That also has health ramifications. If you continue to drink and have a problem with drinking, should you also be penalized financially or tax-wise for that? Why just smokers? I think that’s a more valid point from where I’m looking at it. **00:04:26 — Aaron Yelowitz:** That’s an interesting point. I would speculate that the reason we punish smokers and not those who are overweight or obese is that about two-thirds of Americans are overweight or obese. You can imagine that politicians don’t want to tackle that, given the ire of so many voters, whereas smokers are about, I think, 18 percent of the adult population. So, what we’re doing is punishing a politically weak group. **00:04:53 — Steve Gruber:** I have a note here from a smoker who chimed in: “The problem with socialism is that now you’re mad at me for doing something I was already doing on my own. Don’t make me pay for diabetes treatment, and I won’t complain about people who are overweight.” **00:05:11 — Aaron Yelowitz:** I think the insurance market to look at to help shed light on this is life insurance. Life insurance, although government-regulated, is far less regulated, obviously, than health insurance, which has undergone seismic changes. In life insurance, insurance companies look at all your health factors that would matter for mortality, and they price based on that. You and I, as men, would pay higher prices than a woman would at the same age because of the higher risk of dying at any given age for a man. What an economist would typically say is: let insurance markets work. They look at characteristics that are often choices and price based on that kind of risk, and then competition drives down premiums so that you’re paying appropriate prices based on that risk. **00:06:01 — Steve Gruber:** Which is fair, Doctor. But, in honesty, you’ve got insurance companies lining up to take tax dollars to make sure they make their proper amount of profit based on Obamacare, and the system is rigged to begin with. **00:06:13 — Aaron Yelowitz:** I’ll give you the last thought. The one thing I’ll do to play devil’s advocate on my own work is this: how could you and I actually verify whether we’re a smoker? You have every incentive in these sorts of Obamacare schemes to lie and say that you’re a nonsmoker, because the worst that could happen is that we come back and charge you the premiums we should have charged you in the first place. So, the entire system seems really problematic with respect to smokers. What we’re actually doing is punishing honest smokers. **00:06:45 — Steve Gruber:** Well, there you go, Doctor. I greatly appreciate your time. Great conversation—one we should continue sometime soon. **00:06:52 — Aaron Yelowitz:** Thank you very much. I appreciate it. **00:06:53 — Steve Gruber:** There you have it: Dr. Aaron Yelowitz, adjunct scholar at the Cato Institute. [Clip ends.]