President Obama wants to lure states into his Preschool for All initiative (“universal” pre-K for moderate-income and middle class 4 year-olds) with the promise of $75 billion in federal tax dollars over 10 years. But while educating the next generation is a worthy cause, the President’s plan is chock-full of problems for taxpayers.
The President has suggested a 94-cent-per-pack cigarette tax hike to pay for the program – a regressive tax that would generate an unreliable revenue stream, to be sure. If the President has his way with cigarette taxes, he’ll have increased the federal cigarette tax rate by an unbelievable 500 percent. You read that right. Back when the President assumed office, the federal rate was 39 cents per pack. That all changed in 2009 when the Children’s Health Insurance Program Reauthorization Act was signed, upping the rate to $1.01. Tack on an extra 94 cents, and smokers would be forced to shell out nearly $2 per pack on top of their state and local rates. This is bad news for smokers and non-smokers alike, because smoking rates in the U.S. have been declining over the past 50 years, meaning that cigarette taxes should not be relied on for long-term funding.
There simply wouldn’t be enough cigarette tax revenue to keep the universal pre-K program up and running, and additional tax hikes would be necessitated. The historical precedent for this outcome is strong: as a recent report from our research affiliate determined, in roughly 7 out of every 10 cases, state-level tobacco tax hikes enacted between Fiscal Years 2001 and 2011 subsequently fell short of their initial revenue estimates. Not surprisingly, 66 out of 96 state actions to raise tobacco levies during that same period were followed by increases in other kinds of taxes within a two-year period after each instance.
The proposed cigarette tax hike isn’t the only major problem with Obama’s pre-K plan. The Preschool for All initiative also bears a striking resemblance to another troubled federal-state venture that is currently being touted by the Administration—Medicaid expansion under the Affordable Care Act or “Obamacare.” In both instances, the federal government has offered up attractive funding match rates. While half of states have resisted Medicaid expansion so far, many lawmakers and governors have bought into the idea of “free” federal money, since the federal government is offering to cover 90 percent of the costs in the long term. With Preschool for All, states would chip in 10 percent of the costs in the first two years, 50 percent by year six, and eventually 75 percent in year ten. But what’s to stop the feds from reneging on their funding commitments? For Medicaid expansion, the President has already floated the idea of lowering match federal match rates, which would leave states with a greater burden than originally anticipated. It’s not difficult to imagine a similar bait-and-switch with Preschool for All, especially once its major revenue stream—cigarette taxes—falls short of projections.
Also like Medicaid expansion, the Administration is keeping mum on the topic of long-term cost for universal pre-K. At the state level, all we’ve heard about so far is the magical first year. Minnesota, for example, would receive close to $39 million from Uncle Sam in year one and only have to kick in $4 million in state funds. In year ten, Minnesota’s share will be 75 percent, or $32.25 million, if the match rates go as planned. But many unprincipled lawmakers simply can’t resist another hit of federal cash and are willing to ignore these future state costs in order to get the program started.
For the federal government, we’re told that the program should cost around $75 billion in the first 10 years, but beyond that, who’s to say? Is this another “camel’s nose under the tent” proposal? Some in Congress have called for an even larger federal role in pre-K and so has the President. Medicaid was not originally intended to cover folks living up to 133 percent of the poverty line, but that’s exactly what the current expansion push is all about. Once pre-K for 4 year-olds is in place, there will be increased efforts to expand the program and its budget. Are taxpayers prepared for more tax hikes to underwrite it?
All indicators point to the Preschool for All initiative being a bad deal for taxpayers. Its prime target for tax hikes is smokers, and once that revenue fails to materialize, all Americans will be made to pay. Education and health care are both important domestic issues and not without their share of challenges. But taxpayers shouldn’t be fooled into thinking universal preschool and Medicaid expansion are the answers. As our economy struggles to get back on track, Americans need tax relief, and that can only happen if Washington and the states control their reckless spending habits and avoid costly programs like Preschool for All.