California Cigarette Tax Hike to Take Effect in April

Published December 3, 2016

A new cigarette tax approved by California voters in November 2016 will take effect on April 1, 2017, increasing the state’s excise tax on tobacco cigarettes from 87 cents to $2.87 and adding new tobacco-related taxes to non-tobacco products, such as e-cigarettes.

Up to 82 percent of the new tax’s revenue will be diverted to payouts for health insurance companies participating in the state’s Medi-Cal entitlement program. Only about 13 percent of the estimated $1.6 billion in tax money is expected go to tobacco cessation and prevention programs offsetting the negative effects of smoking on public health.

‘Easy Revenue Grab’

Lindsey Stroud, government relations coordinator for The Heartland Institute, which publishes Budget & Tax News, says the new tax is more about increasing revenue than promoting public health.

“Essentially, it’s an easy revenue grab, and it is estimated to generate $1.4 billion in revenue in one year,” Stroud said. “California just recently passed legislation to move the legal age of smoking from 18 to 21 years, following Hawaii. That legislation also extended to vaping products and e-cigarettes.”

Stroud says cigarette taxes have major flaws.

“Tobacco taxes are bad fiscal policy,” Stroud said. “They are excise taxes, which, more often than not, are unfair, unreliable, and regressive. Excise taxes disproportionately affect lower-income individuals and tend to lead to black markets. Thus, states lose even more revenue while adding more to the costs of prevention.”

Border Hopping

William Shughart II, an economics professor at Utah State University and senior fellow with the Independent Institute, says the new tax will encourage California smokers to buy cigarettes in other states.

Adding $2 to the tax, most of which is going to be passed on to smokers, is an incentive for them to search across the border for cigarettes that are taxed at a lower rate,” Shughart said. “People who are located near the border will go across the border and shop for their cigarettes somewhere else, and it will be a stronger incentive for people who smuggle cigarettes from lower-tax jurisdictions to California.”

Burden on Low-Income Households

Shughart says cigarette taxes have a disparate impact on low-income individuals.

“The main thing about tobacco taxes is that they’re regressive taxes,” Shughart said. “The burden of those taxes falls most heavily on low-income households. The $2.87 tax per pack is going to be much more of a burden on low-income people than it would be on high-income people, and that’s another reason these taxes are much more popular with high-income people.

“It’s a way for high-income people to shift the burden of taxes onto low-income people,” Shughart said. “Whatever revenue they raise will be raised on the backs of the poor people, who are, by far, the people who still smoke.”