Would a new CA tobacco tax actually DECREASE state revenues?

26 Jul, 2013 by Katy Grimes

I received two calls from the Board of Equalization late this week claiming information in a story I wrote about the latest tobacco tax bill was wrong. The calls were from Venus Stromberg, spokeswoman, and Brian Miller, tax counsel.

SB 768, by state Sen. Kevin de León, D-Los Angeles, would increase the state’s cigarette tax another $2 a pack from the current 87 cents. That would be a 230 percent hike, to $2.87.

I wrote, “The State Board of Equalization has found that California will actually lose hundreds of millions of dollars in revenue if SB 768 passes. Even legislators have become weary of funding programs using tobacco tax revenue because of its instability.”

But the BOE employees who called me said the tax revenues actually will be more than a $300 million net gain through the special fund SB 768 will create.

Yet according to a study by the BOE itself, programs funded by cigarette taxes have experienced a “funding gap” due to cigarette sale decreases. And the revenue raised from the cigarette tax in California has decreased, according to a Federation of Tax Administrators study, “The Tax Burden on Tobacco.”

However, the BOE analysis of the tobacco tax which I linked to in my first story is terribly confusing and also makes it sound as if the state will take a hit.

What’s odd is the two BOE employees who called me were unusually defensive, and would not explain their agency’s analysis. I asked for a quote to explain their study, but instead one of them referred me to an analysis by the Senate Appropriations Committee.

While they are pushing for a correction, they would not give me more information or an official BOE quote for attribution.

Committee analysis

The paragraph which the BOE employees referred to in the Senate Appropriations Committee analysis says:

“The Board of Equalization (BOE) estimates that this bill would result in a net cigarette tax revenue gain (nearly all of which would be special funds) of $355 million in 2013-14, and $1.4 billion in 2014-15. In addition, 2014-15 sales and use tax revenues would increase by $51 million, resulting from the higher excise tax.”

This doesn’t add up.

California’s Proposition 10 has seen its revenue slide every year. After voters passed Prop. 10 in 1999, the tobacco tax rose by 50 cents. But within two years, taxable sales dropped 26 percent, forcing many retailers out of business.

Because of the 2009 federal excise tax on tobacco, the maximum tax rate on large cigars has surged more than 700 percent and has already resulted in significant layoffs within the cigar industry, according to Stogie News.

In Michigan, the Mackinac Center for Public Policy did a study on the effects of cigarette tax increases on cigarette sales.

“Cigarette tax hikes come with harsh and real unintended consequences. Before reaching deeper into smokers’ pockets, state lawmakers should consider the deeper social costs of creating a lucrative black market for smuggled cigarettes,” wrote Michael D. LaFaive and Todd Nesbit, Ph.D. of the Mackinac Center.

“But state and local levies have grown so onerous in some parts of the country that they almost could be called ‘prohibition by price,’” according to the study. The study looked at cigarette smuggling into Michigan, where state taxes are $2 a pack — that is, less than the $2.87 California’s tobacco tax would be under SB 768. They found shocking results:

“And like other forms of prohibition, this one has led to a spike in smuggling-related criminal activity as smokers turn to illicit distribution channels. We estimate that for 2011, 29.3 percent of all cigarettes consumed in the Great Lake State were smuggled in.”

For SB 768, one bill analysis said:

“California tax-paid cigarette distributions have decreased dramatically over the past 30 years, both before and after passage of Proposition 10. Consequently, revenues for all funds supported by cigarette taxes have declined as well.”

Wrong estimates

Unfortunately for government budgets, revenue expectations from tobacco taxes tend to be chronically wrong. “Since 2003 there have been 57 cigarette tax increases across the nation and 68% of them have failed to meet projected revenues,” the Minnesota State News reported in 2011, when their state was faced with another tobacco tax increase. “In 2006, New Jersey raised cigarette taxes with the hope of pulling in $30 million in extra revenue each year. Not only did the tax hike fail to bring in extra revenue, but the state actually collected $20 million less in cigarette sales.”

New Jersey’s cigarette tax currently is $2.70 a pack, also less than the $2.87 it would be in California if SB 768 becomes law.

The Taxpayers Protection Alliance reports, “These types of ‘targeted’ tax increases harm small businesses and could result in smuggling, which would not only defeat the purpose of tax increase but also take away money from both those businesses and the state that they otherwise would have received without the proposed legislation.”