California Tobacco Tax Hike Would Do Little to Improve Health

Published September 13, 2016

Californians will vote on a proposition in November that would increase the state’s tax on cigarettes by $2 per pack and add a new tax on e-cigarette products. The current state tax on a pack of cigarettes is 87 cents, and federal taxes on tobacco products add an extra $1.10 per pack. The proposed tax hike would give California the nation’s ninth-highest state tobacco tax, and of the state’s neighbors, only Washington State’s tax ($3.02) would be higher.

Although reducing smoking rates may be a noble goal, raising tobacco taxes rarely works as intended and frequently has many negative effects, including driving residents to buy untaxed or lower-taxed tobacco elsewhere and thus harming retailers in the state. Cigarette taxes are highly regressive, unduly burdening moderate- and low-income individuals.

In a Cato Journal article, Kevin Callison and Robert Kaestner found from 2010 to 2011, “smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”

Michi Iljazi, the communications and policy manager at the Taxpayer Protection Alliance (TPA), argued in a recent article the proposed tax increase would only benefit health care companies and government bureaucrats. Iljazi also says the tax revenues under the proposal would ultimately be wasted.

One controversial part of the proposition is it bypasses California’s constitutional requirement mandating schools receive 43 percent of the funds provided by new tax increases. No tax dollars generated by this proposal would go to schools. Instead, the proposal would funnel more money into California’s failing Medicaid program, Medi-Cal. The initiative requires the state to use the new tax funds to provide “improved payments” to health care providers to the tune of approximately $1 billion each year. The funds wouldn’t actually help people enrolled in Medi-Cal; it would instead give more money to the health care industry by increasing reimbursement rates. Additionally, nearly 10 percent of the tax revenues would be used to pay for administrative costs.

Proponents of the tax hike estimate it will provide between $1 billion and $1.6 billion in additional tax revenue in its first year. The majority of the funds, about 82 percent, would be used to help fund health services for Medi-Cal patients. The remainder would be used to fund state research into smoking-related diseases and to help enforce current tobacco laws.

Tobacco taxes are unreliable and depend on a narrow and shrinking tax base. As tobacco tax revenues that are used to prop up expensive government programs fall, they create revenue gaps taxpayers must later fill by paying additional taxes. According to the most recent data from the U.S. Census Bureau, state revenue from tobacco product taxes fell in 2013 by 0.9 percent, to $17 billion. That decrease followed a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.

Expanding the tax on tobacco cigarettes to non-tobacco e-cigarettes is even more problematic. Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit through traditional methods of smoking cessation, such as nicotine gum, the nicotine patch, and medication. The American Association of Public Health Physicians has concluded e-cigarettes “could save the lives of 4 million of the 8 million current adult American smokers who will otherwise die of a tobacco-related illness over the next 20 years.”

Imposing these burdensome excise taxes on vapor products cannot be justified using the argument they would improve public health. Steven Greenhut and Cameron Smith of the R Street Institute say the proposed tax would make buying e-cigarettes more expensive, disincentivizing smokers who may be considering a relatively safe non-tobacco alternative. “The initiative’s backers want to use taxation to drive down cigarette use, but by applying equivalent taxes to e-cigarettes, they likewise are simultaneously going to drive down use of a product that overwhelmingly is used to help people reduce or quit their smoking,” wrote Greenhut and Smith. “Moreover, effectively all of the disease burden from tobacco comes from combustible products.”

Targeted taxes on products such as tobacco disproportionately harm low-income taxpayers while punishing local businesses. California’s proposed tax hike would only further contract the market over time and create budget deficits taxpayers will eventually have to fill with additional tax increases. This disaster can and should be opposed by voters in November.