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Matthew J. Cunningham

Proposed Tobacco Tax Would Be Tobacco Smuggler Employment Act of 2014

The state budget has a $5 billion surplus and Governor Jerry Brown proposed paying down $11 billion in state debt and stashing away revenue in a “rainy day” fund as a buffer against future emergencies.  The existence of a surplus and sufficient state funds to reduce debt and establish a rainy day fund would seem to obviate any rationale for imposing yet another tax increase on one of the most intensely-taxed states in the Union.

But this is California, where an inexhaustible supply of rationales for raising taxes is one of the state’s great unnatural resources.

If proponents get their way, there will be an initiative to slap an additional $2 tax on tobacco products, with the money to be spent on cancer research and fund programs to discourage people from buying the products that fund the cancer research.

Wherein lays the irony of this type of taxation. The revenues are always dedicated to fund a worthy cause. Who can argue against funding cancer research? The initiative implicitly acknowledges that enough people will continue to purchase tobacco products to make it worth taxing – “smoking cessation programs” notwithstanding.

A recent news story illustrates the futility of this approach. Last month, a federal judge in Sacramento slapped two Las Vegas tobacco distributors with prison terms for running a complicated scheme using fictitious businesses and an elaborate dispersed delivery system to evade California tobacco taxes to the tune of $24 million. While these men are responsible for their actions, California’s excessive tobacco tax invites this sort of behavior – the wide disparity between tobacco taxes here and nearby states creates a powerful incentive for tobacco smuggling.

Consider how much more lucrative tobacco smuggling will become if this initiative qualifies and is approved by voters in November, and the state’s total tobacco excise tax spikes from 87 cents per pack to $2.87 per pack? The incentive to smuggle and evade taxes triples and it cannot be reasonably argued otherwise – human experience and the history of taxation demonstrate otherwise.

Californians can’t even expect the increase in criminal activity will be offset by significant funding for cancer research. Increasing tobacco taxes is effective in reducing legal tobacco sales; tax anything, and at a certain point you’ll tend to get less of it. If this initiative passes, we’d wind up with fewer taxable tobacco sales but more demands on a dwindling revenue source. This isn’t idle speculation. When a major increase in the federal tobacco tax kicked in at the beginning of 2010, during the Great Recession, First Five Commissions throughout California – which are completely dependent on a 10-cent-per-pack tobacco tax – experienced a decline in revenues as the new federal tax depressed tobacco sales.

Illinois enacted a tobacco tax in 2012 that was projected to generate $250 million a year in revenue, but in reality only produced $150 million.

Tobacco users are an easy target. They’re totally outnumbered by non-smokers, and their habit is a nasty and unhealthy one. Many voters have no problem heaping taxes on other people to pay for mom-and-apple-pie initiatives like cancer research. But the reality is the supply of smokers is finite, and they will put up with only so much taxation before the look for ways to escape punitive levels of taxation. The end result is less tobacco tax revenue to go around, more Americans inured to breaking the law and more demands put on law enforcement.

There’s reason to think California Voters will reject this insanity if it qualifies for the ballot. In 2012, Voters narrowly defeated Proposition 29, which would have increased the tobacco by $1 per pack to fund cancer research.  Hopefully, a wider majority will oppose this proposal to hike it by twice that amount.