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Jeff Flint

August 13, 2009

[Publisher's Note:  As part of an ongoing effort to bring original, thoughtful commentary to you here at the FlashReport, I am pleased to present this column from longtime FR friend Jeff Flint, who is an accomplished political and public affairs consultant -  Flash]

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Democrats aren't happy about the cuts that Governor Schwarzenegger made before he signed the budget, and they've even got a plan to pay for those programs that didn't survive.  The 14% of Californians who smoke will pay for them. 
I don’t smoke.  Why should I or any non-smoking taxpayer care? 

Time and again we’ve seen expensive public programs financed with tax revenues that never materialize.  Program costs soar while the revenue to pay for them shrinks.  Taxpayers get stuck with the difference.  It’s one of the reasons we have multi-billion budget deficits year after year.

Proponents of higher tobacco taxes admit that one of their goals is to convince people to quit smoking – and paying cigarette taxes – and maybe some of them do.  But raising tobacco taxes encourages less desirable behavior as well, from buying cigarettes over the Internet to counterfeiting tax stamps and shipping truckloads of cigarettes across the country to avoid California taxes.

Economists will tell you there’s a limit to what consumers will pay for any product, including cigarettes.  When taxes drive the cost beyond that limit, consumers will find a way to avoid paying those taxes.   That’s the basic theory of researchers at the Mackinac Center for Public Policy who analyzed the experiences of states that raised tobacco taxes. 

New Jersey saw revenues from its tobacco tax drop after increasing the tax to the second highest in the nation.  When the tax on a pack of smokes reached $2.57, New Jersey smokers discovered they could save by buying cigarettes over the Internet, on an Indian reservation, or in any number of states within a day’s drive where taxes are as low as $.07 per pack.

Here in California, military bases predate Indian reservations and the Internet as the primary source for cigarettes free of state taxes.  After California tripled its tax to $.10 per pack in 1967, authorities were embarrassed when receipts showed military bases were selling the equivalent to 725 packs a year per soldier, sailor and airman compared to 123 packs per civilian.  At the same time, retail sales in the state dropped seven percent.

The California Board of Equalization (BOE) estimated that the tax increase mandated by Proposition 99 in 1988 significantly increased smuggling in the state.    During the 1990 fiscal year, the state lost between $64 million and $132 million in tax revenue when more than 183 million packs of cigarettes illegally entered California – the equivalent of four full tractor-trailers each day.

Proposition 10 and the national Tobacco Master Settlement Agreement raised cigarette prices $.45 a pack in 1999, and by 2006, one of every three cigarettes consumed in California were untaxed.   BOE now estimates tobacco tax evasion cost California taxpayers $276 million last year. 

The higher the tax, the greater the potential for illegal profits.  The U.S. Department of Alcohol, Tobacco, Firearms and Explosives recently testified that smugglers can net as much as $680,000 for filling a U-Haul with cigarettes bought in a low-tax state and driven to a high-tax state. 

Federal law enforcement authorities say profits from cigarette smuggling have been used to finance terrorist organizations and have led to truck hijackings, theft of state tax stamps, counterfeiting of tax stamps, counterfeiting of name-brand cigarettes and violence against police officers and innocent citizens.  Convenience stores have become more attractive targets for armed robbers due in part to the value of stolen cigarettes. 

It might seem simple to tax a small minority who consume an unpopular product to pay for programs that the general public can’t afford, but if history is a reliable teacher, that road is full of potholes. 

Jeff Flint is a partner at Schubert Flint Public Affairs.

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