Last week, Congress approved legislation that would reauthorize the State Children's Health Insurance Plan (SCHIP). Under the bill, the federal government would provide between $5 billion and $12 billion each year for the next five years.

President Bush has promised to veto the bill. While there may be enough votes in the Senate, supporters of the bill in the House appear to be short of the two-thirds vote necessary to override the veto.

While President Bush and congressional leaders on both sides have dominated discussion of the issue, one group that needs to take notice is state leaders whose budgets may be threatened if the current proposal becomes law. In West Virginia, a recent study suggests the state could lose $25 million to $35 million during the next five years if it decides to participate in the SCHIP program.

SCHIP is a federal-state partnership that originally was intended to subsidize health coverage for low-income families but is now available in some states for families with annual incomes up to $83,000 per year. On average, approximately 70 percent of the costs are paid out of the federal treasury. States can require participants to pay some of the costs.

Most of the debate on the issue has centered on the cost of the program and the potential for expanded coverage -- up to 400 percent of the federal poverty level in some states -- to "crowd out" private insurance, i.e., drive families that can afford health insurance to drop their coverage and opt for the government subsidized program.

Regardless of the merits of these arguments, one effect of the current proposal that has received scant attention -- but could have a considerable impact -- is the budgetary impact on the states that could result from the proposed manner of paying for the program.

The current proposal relies upon increases in the federal tobacco tax to pay for the program -- the House bill imposes a 45-cent-per-pack increase, while the Senate bill increases the tax by 61 cents. An increase in the federal tobacco tax -- by either 45 or 61 cents -- will result in a significant increase the price of a pack of cigarettes. Studies have determined that the demand for tobacco products is extremely sensitive to price increases. In other words, a significant increase in cigarette prices will result in the average consumer purchasing fewer cigarettes. Moreover, increase in cigarette prices also produces an increase in "bootlegging," where cigarettes are sold through the underground market. In both cases, fewer cigarette purchases will be subject to both federal and state taxes.

A recent study from the Heritage Foundation has quantified these losses. Under the Senate bill passed last week, every state would lose at least $1.4 million per year and half the states will lose in excess of $10 million per year. California and two of our neighboring states, Ohio and Pennsylvania, will lose in excess of $50 million per year.

West Virginia will lose more than $7 million per year under the Senate proposal.

Both the 45-cent and 61-cent tobacco tax increase probably would produce more revenue for the federal government because the large increases would offset the losses from the decline in cigarette sales. The states would not be as fortunate.

True, the SCHIP program provides states with a match of funds generated from state sources. Despite these matching funds, many states will give up more in state revenues as a result in decreased tobacco tax revenues and monies paid for the matching funds than it will receive back from the federal government. However, under the Senate plan, 29 states -- including West Virginia -- ultimately would be losers while 16 states would be winners, and five states would experience little gain or loss from the program. The study includes West Virginia in a group of states that would experience a net outflow of revenues between $10 million and $200 million.

There is one demographic shift that could stave off a revenue loss -- an increase in the number of smokers! Under both the House and the Senate plan, West Virginia could provide the SCHIP program without a loss in state revenues by adding 250,000 new smokers in the next 10 years. Not likely.

Far too often, policy measures at the federal level fail to take into account the effect on the states, and local leaders lack the information necessary to raise and support their concerns. The use of the federal tobacco tax to fund the SCHIP program may not sway congressional leaders, but it should at least be a part of the discussion.

Rob Capehart is a senior fellow at the Government Policy Research Center and President of West Liberty State College.