The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Taxes on Ashes: California’s Proposition 56

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


As the legislative session comes to an end in California, the government’s addiction to regressive tax policies has not.  A well-organized campaign, composed of billionaires, medical groups, and trade associations, has collected enough signatures to include Proposition 56, a ballot measure in November, to raise California’s cigarette tax by 2 dollars per pack.

The announcement of the proposed measure comes less than a month after Gov. Jerry Brown (D-Calif.), signed legislation to make California the second state behind Hawaii to raise the legal smoking age to 21 from 18.

The average cost of a pack of cigarettes in California is now about $5.50, of which 87 cents is state taxes.  If the cigarette companies pass the full amount of this onto the consumer, the person who smokes a pack a day (at $7.50 per pack) is going to see an annual increase of about $750.  This will disproportionately impact lower-income wage earners, since the majority of smokers are poorer than non-smokers.

Across the country, taxing authorities have looked to tobacco, alcohol, and even sugar as easy targets to offset overspending and fill budgetary gaps.

Such regressive tax policy creates unstable tax revenue.  If people respond to the disincentives as intended and do not purchase the taxed product, then tax revenue from that product will substantially decrease.  The decrease in revenue will inevitably lead to another budgetary gap, forcing the legislature to (typically) increase taxes in another area to offset the loss or, better yet, cut spending.  More rational players understand that funding a program with an unstable revenue source is not sound policy.

According to the Campaign for Tobacco-Free Kids, a 10 percent price increase generally lowers consumption between 3 percent and 5 percent.  To underscore this point, only around 10 percent of Californians smoke cigarettes today as compared to thirty years ago, when more than a quarter of Californians were cigarette smokers.

The proposed tax increase would also be applied to e-cigarettes and other products with tobacco and nicotine.  The measure states that the revenue generated from the tax increase will be spent on education and prevention programs.  However, only a meager 13 percent is going to be allocated for tobacco prevention and control programs, while the vast majority of the money will help fund Medi-Cal, California’s healthcare program for low-income residents.

California and other states have been attacking tobacco for decades, while profiting from it at the same time.  In 1998, 46 states and five U.S. territories signed onto the Master Settlement Agreement (MSA) in order to recover taxpayer dollars lost to the treatment of tobacco-related health issues, MSA proceeds would then be used to fund anti-smoking campaigns and public health programs.  As part of the settlement, the states and territories will receive an estimated total of $246 billion over the first 25 years.  With California receiving $722 million in 2015 from the MSA, one wonders where that money has actually gone.

California was one of 10 states that decided to get as much from those annual payments as possible by mortgaging any future payments as collateral and issuing bonds.  In other words, California traded its future lifetime income for an immediate cash fix in the short term, at only pennies on the dollar.  Considering the decline of both cigarette sales and the corresponding payments, many financial analysts believe that many of the states, including California, will begin to default on these bonds by 2026.

Since the settlement payments were not fixed, but linked to tobacco sales, the states are now fiscally dependent on a revenue stream from an activity that they are aggressively pushing to exterminate.  Any substantial reduction in cigarette sales would be detrimental to their annual payment.

With that being said, with regard to the MSA, what the settlement money was intended to go toward is very different from how California has actually spent it.  While the “Yes on 56” campaign has flooded the airwaves and social media with fluffy platitudes about healthcare and tobacco education, the stark reality is that only a small fraction of the money is actually being spent towards tobacco-related health and education programs.  With cigarette sales declining every year, it is fiscally irresponsible for California to use tobacco as a funding mechanism for state-run programs.

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