Hawaii's Congressional delegation is committed to a massive reorganization of health insurance by the federal government. This mission is about to collide with state budgets, causing much collateral damage.

Most people remain unaware that health-insurance premiums contribute to states' tax revenues. On average, states tax private health insurance 2 percent of premiums. If a policy for a family costs $13,000, for example, the state rakes in $260 off the top. The looming federal takeover threatens these revenues in Hawaii.

Revenue from premium taxes on health insurance can be a measurable factor in states' budgets — about $6.5 billion in 2008, generated from just under half a trillion dollars of premiums for state-regulated health insurance.

These estimates result from the new study "Taxing Health Insurance: How Much do States Earn?" The study compares estimated premium-tax revenue from health insurers to state spending on Medicaid and SCHIP, the State Children's Health Insurance Program.

According to this measurement, Hawaii is in the second-riskiest position of all 50 states, after Nevada. "Taxing Health Insurance" estimates that Hawaii collected about $107 million in premium tax from health insurers in 2008. The state's own Medicaid and SCHIP funding added up to $505 million. So these tax revenues accounted for one-fifth of the state's spending on these huge government programs.

Premium tax revenue is about 13 times greater than necessary to fund a state's insurance department. A full 92 cents of every premium dollar flows straight into the general fund, so state residents should be aware of how their revenues could be reduced by what purports to be insurance reform. The federal health takeover would increase the number of people dependent on government programs. It would also drive many businesses and individuals into "exchanges," still poorly defined.

Combining these two effects, the Congressional Budget Office estimates that the federal takeover would cause 15 million more people to fall into dependency on Medicaid or SCHIP by 2019, and drive 21 million to 26 million people to buy health insurance through "exchanges."

While the Senate bill leaves the initiative to establish exchanges with the states, the federal government can establish one in a state if it is dissatisfied with the state's efforts.

Premium taxes generally go into the state general fund, but it is conceptually useful to consider them as funding sources for Medicaid and SCHIP, health programs for low-income residents. Federal health "reform" will increase Medicaid costs while potentially shrinking premium-tax revenues.

Even without "reform," health insurers' unpopularity, as well as budget crises, have recently led legislators in Rhode Island, Tennessee, and New York to increase their statutory premium-tax rates. These tax hikes are unlikely to raise the revenues their sponsors anticipate. Because premium taxes are passed on to buyers of health insurance, hikes in premium taxes can have one or more of three consequences: reduced wages, fewer jobs or more uninsured residents.

States need to report accurately their revenues from premium taxes on health insurers and seek greater clarification about the relationship between states' powers of taxation and the federal takeover of regulation of health insurance. Hawaii needs to be a leader in this effort.

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John R. Graham is the director of health care studies at the San Francisco-based Pacific Research Institute.