‘Sin tax’ would burn cigar-smoking lawmakers

Tobacco taxes are relatively easy for lawmakers to pass because they are a tax on a hated and “sinful” habit — smoking. But the smoking tax proposed in SB 768 would extend to cigars, a  favorite vice of many lawmakers and Capitol elites.

There are several chichi cigar lounges within walking distance of the Capitol, where in many cases the real political business of the state takes place.

A sin tax is a state-mandated tax added to products or activities seen as vices, such as alcohol, tobacco and gambling. These taxes are levied by governments ostensibly to discourage use without making the products illegal, while raking off taxes to pay for government programs.

Smoke tax

SB 768 is by Sen. Kevin DeLeon, D-Los Angeles. It would boost cigarette taxes $2 per pack. As I wrote earlier, the bill likely would promote cigarette smuggling.

But this bill is more than just a $2 per pack tax on cigarettes. SB 768 also targets cigar and pipe tobacco by creating a disproportionate tax increase on these products. Because of how the state excise tax works, there is no cap on the amount of tax that can be charged on cigars or pipe tobacco. If SB 768 passes, the state excise tax applied to cigars would go from 31 percent per cigar, to 75 percent.

On top of that, the state and local sales tax — as high as 10 percent in some cities — would be charged. Plus the recently enacted federal excise tax of 52.4 percent on cigars.

Total: California consumers would pay a total tax rate of 137.4 percent per cigar. This translates into nearly $1.40 in taxes for every $1 of product.

This tax reminds me of a car I rented while on a visit to Seattle: The city taxes cost me more than the actual cost to rent the car.

Tobacco products

Tobacco products are an important source of revenue for the nearly 34,000 retailers in California. According to the National Association of Convenience Stores, tobacco sales account for 35 percent of all in-store sales.  Many of these retailers are small “mom and pop” stores that specifically cater to the cigar and pipe market.

SB 768 will irreparably harm these retailers and small businesses by forcing them to cut jobs or even close their business altogether.

We’ve already seen this happen. After Proposition 10 was passed in 1999 and the tobacco tax rose by 50 cents, there was a 26 percent decrease in the taxable sales of tobacco within two years, forcing many retailers out of business. Because of the federal excise tax, 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.

States with high tobacco taxes open the door to smuggling and black market sales. This illegal activity puts a strain on law enforcement and results in a loss of revenue to businesses, as well as to the state.

According to a January study by the Tax Foundation, 60 percent of the cigarettes sold in New York state are smuggled from other states or Indian reservations with lower tobacco taxes.

According to a CNN summary of the study, “The report said that tobacco smuggling and the tax rate have risen practically in tandem since 2006. The New York State tax on cigarettes has risen 190% since that time, as the rate of smuggling increased 170%.”

Tax hit

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.

Californians aren’t the biggest fans of tobacco taxes anyway. In 2006, voters rejected a $2 tax on tobacco and more recently, in 2012, a $1 tax on tobacco. What makes politicians think Californians will be supportive now?

Smokers have always been easy targets, but there’s a bigger picture here. SB 768 will negatively affect our economy, jobs and the livelihood of millions of Californians.

 

By Katy Grimes