The ‘Sin’ in California is Overspending, Tax Critics Say

Published September 1, 2006

Californians this November will have the opportunity to vote on two new “sin” tax proposals devised by various interests who say the state needs more money. Taxpayer groups say the problem is too much spending.

“The idea that California needs more taxpayer money is ludicrous,” said John Berthoud, president of the National Taxpayers Union. “State revenues have skyrocketed in recent years. From Fiscal Year 2003 to 2004, revenue increased by 17 percent (more than $34 billion), and from 2002 to 2005, revenue increased by more than 16 percent. Sacramento needs to address its spending priorities and unfunded liabilities before the state even thinks of tapping taxpayers’ wallets.”

Proposition 86 would triple California’s tobacco tax, giving the state the highest state-level cigarette tax in the nation. The other sin tax proposal is Proposition 87, which would tax oil production off the California coast.

$2.1 Billion Tax Hike

Proposition 86 would increase the tax on cigarettes by $2.60, from 87 cents to $3.47 a pack. Rhode Island currently has the highest state-level cigarette tax, at $2.46 per pack.

“We are certainly sensing a lot of voter cynicism, frustration, and residual anger,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, said of the proposed cigarette tax hike measure.

Supporters of Proposition 86 say the cigarette tax hike would raise $2.1 billion in new revenue, which they say will be used to increase Californians’ access to health care. Californians for Healthy Kids, an advocacy coalition whose members include the American Heart Association, American Lung Association, American Cancer Society, and California Hospital Association, states on its Web site the following reasons to back Proposition 86:

  • Prevent nearly 180,000 tobacco-related deaths among California kids.
  • Prevent approximately 120,000 tobacco-related deaths among current California smokers.
  • Prevent more than 700,000 kids from becoming adult smokers.
  • Reduce smoking in California by 312 million packs of cigarettes each year.
  • Save Californians $16.5 billion in long-term health care costs.

Experts note these goals create a dilemma–because if consumers reduce their consumption of tobacco or quit smoking, Proposition 86 will not generate the revenues promised. Moreover, interstate travel and e-commerce make cigarette taxes and other excise taxes undependable sources of revenue, many economists say.

Consumer Alternatives

Several states have already witnessed declines in excise tax receipts. Tobacco industry analyst Bill Phelps noted, “Cigarette taxes are an unstable source of revenue.” He said rather than severely cut back on purchases, most smokers will take advantage of lower-priced online retailers or mail-order products, and some will cross state lines to purchase cheaper products.

“People are always going to seek out low-cost cigarettes,” said Patrick Fleenor of the Tax Foundation. He noted that Nevada–already home to thousands of former Golden State residents–has one of the lowest cigarette taxes in the West (80 cents per pack). Many Californians probably would buy cigarettes in Nevada and bring them back home, Fleenor said.

Funding for Alternative Energy

A little farther down the ballot this November, California voters will confront Proposition 87, which would raise taxes on oil producers to create a $4 billion fund for alternative energy research and consumer incentives. The tax on oil producers would range from 1.5 percent to 6 percent, depending on the per-barrel price of oil.

Katie Levinson, a spokesperson for Gov. Arnold Schwarzenegger (R), said, “The governor is opposed to new taxes. Personally, he opposes the initiative, but he strongly supports the goals of the initiative: increased investment in renewable … energy sources.”

High Gas Prices

Californians are already paying dearly for renewable energy when they gas up their automobiles. Ethanol mandates and the high cost of transporting this alternative energy source add 10 cents to the retail price of gasoline, according to industry analysts.

Venture capitalists with alternative energy investments have joined environmentalists to finance the Proposition 87 campaign. The Yes on 87 campaign states on its Web site, “Prop 87 will reduce gasoline and diesel usage by 25 percent over 10 years. It does this by providing cash rebates to consumers who buy cleaner, alternative fuel vehicles and incentives for renewable energy technology development. It expands the use of solar and wind power and other renewable fuels and renewable technologies.”

However, oil industry spokesmen say the tax will shift oil production to other areas of the country. And as with declining cigarette sales, declining demand for gasoline and diesel fuels would result in less tax revenue.

The solution to California’s budget challenges is spending restraint, not more tax dollars, according to Berthoud.

“If California had enacted reasonable spending limits tied to inflation and population growth in the last decade, taxpayers could have saved close to $50 billion, or $1,400 per capita,” Berthoud said. “Once these revenue-raising proposals are defeated, voters just might implement an effective, broad-based budget restraint proposal next November.”

Sam Batkins ([email protected]) is a policy analyst and deputy press secretary for the National Taxpayers Union.