Lawmakers in California are proposing increasing the sin tax on cigarettes by $2 per pack to fund proposed increases in entitlement spending.
The proposed tax hike would also affect sales of e-cigarettes. Lawmakers project the tax hike will bring in $1.5 billion in additional revenue.
Michael LaFaive, director of the Mackinac Center for Public Policy’s Morey Fiscal Policy Initiative, says the tax hike may reduce cigarette sales in the state, but not for the reasons lawmakers think.
‘Evasion and Avoidance’
“There is no question in my mind that legal sales will drop,” LaFaive said. “So the question is, by what degree will it drop as a result of people quitting, which is a positive, and [by] what percent will it drop because of illicit activities: the evasion and avoidance?
“From what we’ve seen earlier, … up to 85 percent of the change in legal paid sales after an excise tax increase [is] the result of tax avoidance and not of quitting,” LaFaive said.
William Shughart II, a research director at the Independent Institute, says the tax hike is bad news for California taxpayers.
“The type of revenue that is raised will be raised on the backs of the lowest-income households in California,” Shughart said. “It’s worth emphasizing that in this particular case the typical taxpayer is going to be from a low-income household.”
Politics, Not Public Health
Shughart says sin tax revenues are often used for purposes other than promoting public health.
“[People] might think, falsely, that money is going to be used for a good purpose,” Shughart said. “But it turns out that all these taxes and kinds of excise taxes on cigarettes and lots of earmarked tax revenues, just like the highway trust fund, … public politicians raid them all the time. Because they won’t want to spend the money on something else, so they pull the money out of trust funds, put in a bond or take a federal bond, and then transfer the money to something that buys them more votes than the original purpose for which the tax was created.”
Andrea Dillon ([email protected]) writes from Holly Springs, North Carolina.
Jerry G. Thursby and Marie C. Thursby, “Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Government Intervention,” National Bureau of Economic Research: https://heartland.org/policy-documents/interstate-cigarette-bootlegging-extent-revenue-losses-and-effects-government-inter/