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Proposition 56: Will Californians Triple Their Cigarette Tax?

2 min readBy: Morgan Scarboro

Though most Californians have kicked the smoking habit, they will still face a decision this November: should the statewide cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. be increased by $2? Although California has the second-lowest smoking rate in the country at 11.6 percent, proponents still hope to raise a significant amount of revenue by hiking tobacco tax rates. The revenue would be used primarily to supplement healthcare funding for low-income adults.

Proposition 56 would raise the cigarette tax from its current 87 cents to a new rate of $2.87. The $2.87 rate does not include the federal excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. ($1.01 per pack), state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. (7.5 percent), or any local sales tax (averaging 0.98 percent). This rate change would jump California from the thirty-fourth highest statewide cigarette tax in the country to the ninth highest, and the second highest on the west coast.

Cigarette taxes have a host of unintended consequences, including the incentivization of cigarette smuggling. If Proposition 56 passes, California may open itself up as a more desirable cigarette smuggling destination as neighboring Oregon, Nevada, and Arizona all impose cigarette tax rates nearly $1 lower than the proposed California rate.

As of 2013, one of every three cigarettes smoked in California was smuggled into the state (6th highest in the nation), likely due to the state’s international border with Mexico. Increasing the cigarette tax rate would only intensify the volume of smuggling. Cigarette smuggling has become a profitable and at times violent criminal enterprise that has even been used to fund terrorist organizations due to its high reward, low-risk nature.

The ballot measure also introduces a new excise tax to California: a tax on vapor products. California law requires that when the cigarette tax increases, taxes on other tobacco products must increase by an equivalent amount. Proposition 56 will change the definition of other tobacco products to now include e-cigarettes.

Other tobacco products are currently taxed at $1.37 and Proposition 56 will increase the rate (including for vapor products) to $3.37. As we have previously noted, taxing vapor products at a punitive rate equal to or higher than the rate on traditional cigarettes discourages smokers from transitioning to products with fewer harmful health effects.

Healthcare funding is important. The cost of healthcare, moreover, is steadily increasing, while the revenues from cigarette taxes continue to decline as fewer Americans smoke, a trend that may be hastened along by higher cigarette tax rates. Funding priorities like healthcare should derive from broad-based, predictable tax revenue sources rather than narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s with declining revenue. If enacted, this tax increase will likely just be a Band-Aid for growing healthcare funding.

More entries in our series on Top Ballot Initiatives to Watch in 2016.

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