I am here today to talk about a new law – Public Law 629 – that helps to control health care costs in Maine by creating a new funding mechanism for the Dirigo Health Program, while at the same time reducing the assessment on paid health claims and providing rate relief for the 40,000 Mainers who currently pay for their health insurance in the individual market. That is the law the national beverage companies want repealed. More specifically, I am here to refute the claims of a new study produced on behalf of and paid for by the national beverage industry that suggests there will be large fiscal and economic impacts resulting from the alcohol and soda taxes contained in Public Law 629. As the fiscal policy analyst for the Maine Center for Economic Policy, I want Maine’s voting public to know that the conclusions of this study are simply not credible.
The fact is, this study is a deeply flawed piece of work. It gets the underlying economic theory wrong, and this in turn leads to vastly overstated estimates for the fiscal and economic impacts of the new law. In addition, this study wholly ignores the many economic benefits all Mainers derive from the Dirigo Health Program that the beer, wine and soda taxes will help fund. In short, this study is not credible and its conclusions are just plain wrong. But let me take each of these criticisms in turn.
First, let’s look at the economic impacts: this study asserts that some $26 million in economic activity and 400 jobs will be lost in Maine due to the new and increased taxes that will be levied on distributors of alcohol and sugared drinks. This is simply not true. The reality is that net job losses in Maine’s economy are very unlikely as is any meaningful decrease in total sales revenue. The reason for this is simple. The money no longer spent on wine, beer and sugared drinks instead will be spent on healthcare and cost controls here in the state of Maine. If people reduce their beer, wine and soda purchases due to a cost increase of several pennies per drink passed on by the distributors, the money they no longer spend on these beverages will be fueling growth elsewhere in the economy. If the beverage distribution industry sees a small decline in demand for its products, healthcare providers and related industries will see a corresponding rise in demand. These providers and other industries will be able to hire more workers for their growing business. The idea that the taxes would produce net job losses or a measurable decline in total economic activity flies in the face of Economic Theory 101. Let me underscore this: the idea that Public Law 629 would lead to a net loss of economic activity or jobs for the state of Maine is just not true.
Let’s look now at fiscal impacts, ie., the amount of revenue likely to be collected under Public Law 629. The national beverage industry’s new study asserts that “Public Law 629 would lead to an estimated $40.7 million in additional beverage taxes per year.” Again, this estimate is very far off the mark.
Every estimate is based on a set of underlying assumptions, and this figure – $40.7 million in annual tax revenue – is derived from a questionable set of assumptions. Maine’s non-partisan Office of Fiscal and Program Review (OFPR), by contrast, estimates that revenues of less than $17 million will be collected under Public Law 629. Why are these two estimates so different? Basically, it comes down to how much soda and sugared drinks you believe Mainers consume.
The beverage industry study – using beverage industry produced estimates of soda and sugared drink consumption – assumes statewide consumption of 72 million gallons a year. That means every man, woman, and child in Maine – from new born babies to retirees in their 80s and 90s – has to drink close to 2 cans of soda or sugared drinks every single day, without fail, 365 days a year. By contrast, the Office of Fiscal and Program review assumes that Mainers drink about 1/3 as much. This lower estimate is based on national and regional consumption patterns and takes into account several variables that heavily impact soda sales: relative to the rest of the country, Maine is both colder and older. Using these lower consumption estimates, and working with the micro-simulation computer models of Maine Revenue Services, Maine’s Office of Fiscal and Program review estimates annual revenues of under $17 million, or about two-and-half times less than the beverage industry study projects. This is a far more credible figure, produced by state researchers who spend much of their time working with complex computer models to create accurate revenue projections.
Finally, let’s take a brief look at the benefits that accrue to the people of Maine from the Dirigo Health program – the program that Public Law 629 seeks to fund – benefits that this new industry study completely ignores. It is not the case, after all, that the $17 million in revenues will simply disappear. Contrary to the insistence of those who see all government spending as wasteful – insisting that they are “Fed Up With Taxes” – our government and the tax dollars that support our government help us work together to solve problems that the private markets have failed to solve. In the case of Public Law 629, these tax dollars will help Maine address the crisis of ballooning health care costs.
Among its many benefits, the Dirigo Health program currently allows about 700 small businesses in Maine to provide health coverage to those businesses’ owners and employees, helping to drive the Maine economy. Dirigo also reduces hospital bad debt and charity care costs, and directly controls costs for the 40,000 Mainers purchasing private insurance in the individual market. Dirigo controls cost growth throughout the health care system, directly and indirectly reduces premium rates throughout the private market particularly for older people, and it promotes the health and wellbeing of thousands of Mainers. After conducting exhaustive reviews of available records and extensive expert testimony, in August the Board of Directors of the Dirigo Health Agency determined that Dirigo had generated one-year, aggregate measurable costs savings of more than $190 million throughout Maine’s healthcare system. In September, Maine’s Superintendent of Insurance certified almost $50 million of those annual savings. Clearly, these are the kinds of benefits that must be included in any responsible discussion of Public Law 629, and these are among the benefits that the new industry study completely ignores.
Before concluding, I want to take just a moment to dispel one of the common misunderstandings about Public Law 629. Yes, it increases taxes on the distributors of beer, wine and sugared drinks by a few pennies per drink. It also, however, reduces the payments required from health insurance providers. The 1.8% charge that Public Law 629 will assess on paid insurance claims is a substitute for the old Savings Offset Payment, a charge that also was assessed on paid claims and typically ran to 2.1% annually, and this year will be about 2.8% if the beverage taxes are repealed. In fact, the old law, to which the beverage industry wants us to return, allowed for the assessment to go as high as 4%, while the new law will cap it at 1.8%. As noted, the Superintendent of Insurance has certified this 2.8% assessment for an annual total of about $50 million. The Office of Program and Fiscal Review estimates that Public Law 629 will raise about $50 million annually. The one is a replacement for the other. In summary then, the new law would change the way that revenues are collected. It does not, however, add a whole new set of taxes and charges on top of those being collected under the old system.
Public Law 629 – by raising a few added pennies per drink from taxes on beer, wine, and sugared drink distributors – will help the Dirigo Health program contain healthcare costs for all Mainers. This new industry study, presenting itself as an objective economic analysis, completely ignores these substantial benefits. Just as problematically, the estimated economic and fiscal impacts of this study are based on a fundamentally flawed application of economic theory and questionable assumptions about soft drink consumption levels. If opponents of Public Law 629 want to mislead the public about the costs and benefits of the new law – by vastly overstating the costs and ignoring outright any and all of the benefits – this study is an excellent vehicle to achieve that end. We at the Maine Center for Economic Policy, however, still hope the public discussion will be driven instead by an honest appraisal of the true costs and the clear benefits to the people of Maine.
Kurt Wise, Policy Analyst, Maine Center for Economic Policy