In Depth on Measure Imposes Additional Tax on Cigarettes for Cancer Research
Pros & Cons - In Depth
Proposition 29 is an initiative sponsored by “Californians for a Cure,” a coalition of health associations and cancer survivors. Their goal is to increase the amount of excise tax on cigarettes and other tobacco products to fund research on cancer and other tobacco-related diseases in California and to reduce tobacco use in the state.
The excise and sales taxes on tobacco products are directly responsible for hundreds of millions of dollars in revenue to the state. Tobacco products have also been indirectly responsible for nearly $10 billion of revenue to California from a 1998 settlement with the major tobacco companies (MSA – Master Settlement Agreement).
Along with these increases in revenue came other effects: higher prices for tobacco products, decreases in smoking, and fewer deaths related to smoking. There were other unintended consequences: increases in cigarette bootlegging, tax-avoidance, and ancillary crimes.
California Tobacco Tax Laws
All cigarettes sold in California by retailers such as grocery, convenience, and specialty stores as well as Indian reservations (for sales to non-Native Americans), must bear a tax stamp showing payment of the state excise tax. Tax stamps are purchased by licensed distributors, wholesalers, importers, and manufacturers of cigarette and tobacco products, who file monthly tax returns with the state Board of Equalization (BOE) and affix tax stamps to each pack before distribution. The cost of the tax stamps (the excise tax) is passed along to consumers in the price of the product. Sales taxes are applied to the price of the product, including all excise taxes.
Consumers who purchase more than 400 cigarettes or tobacco products for their own use from outside of California are required to pay the excise tax directly to the BOE. This includes purchases through the mail, by telephone, or the Internet, which are also subject to use taxes.
In California, there are restrictions on Internet purchases, requiring distributors to verify the purchaser is at least 18 years old and restricting common carriers such as UPS or Fed Ex from delivering cigarettes to individuals.
Tobacco Tax Consequences
Rising Prices / Lower Demand
A key policy issue regarding these taxes is their future revenue potential given declining tobacco consumption caused by higher excise taxes and health concerns. In 2009, the BOE reported tobacco tax revenue declined 8.1 percent. Whether this decline was due to a decrease in the number of smokers or from non-taxed tobacco purchases is not known.
According to the Centers for Disease Control, a 10 percent increase in the real price of cigarettes is estimated to reduce consumption by nearly 4 percent. If this projection were applied to the $1/per cigarette pack excise tax increase proposed in Prop 29, it would represent a 20 percent increase in the cost of a pack of cigarettes and would reduce consumption by 8 percent.
Currently, the average retail price of a pack of cigarettes in California is roughly $5, including all taxes.
According to the California Department of Public Health, California’s excise tax of 87 cents per pack places it 33rd among other states, with New York State as the highest at $4.85 and Missouri the lowest at 17 cents.
Whether the result of higher taxes or the success of anti-smoking campaigns, smoking in California has declined. According to the Centers for Disease Control and Prevention, in 2010 California’s smoking rate for individuals over age 18 was 14 percent. Among all states, Utah had the lowest smoking rate at 9 percent while West Virginia had the highest at 26 percent.
Increased Tax Evasion
As cigarette taxes (and prices) have increased, the incentives to evade the tax have increased, leading to three types of crime: border shopping (including unreported Internet purchases), smuggling, and “ancillary crime” (armed robbery, kidnapping and even murder committed because of cigarette smuggling). (Tax Foundation special report in October 2006.) Such crimes deprive the state of tax revenue and can fund organized crime.
In 2010 Congress passed the Prevent All Cigarette Trafficking Act (PACT Act), in recognition that the range of state cigarette and smokeless tobacco taxes creates a potential for interstate trafficking to avoid state tax. The law requires Internet tobacco product sellers to register, report and record sales with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), information which is shared with state taxing authorities. This law generally bans the mailing of cigarettes through the U.S. Postal Service.
A 2003 BOE survey of 1,300 retailers found untaxed cigarettes in inventory. Their report concluded that 274 million packs of untaxed cigarettes were being sold annually in California. In the fiscal year 2005-06, the BOE estimated 209 million of the 1.4 billion packs sold were sold tax free, a 15 percent evasion rate, representing a $182 million loss of revenue for the state. The BOE’s enforcement efforts result in a minimal amount of collections. In 2008-09 BOE’s investigative efforts assessed taxes of $14.8 million for evasion of cigarette and tobacco product taxes. The BOE introduced new encrypted tax stamps in January 2011, but still estimates that tax evasion will cost the state $182 million in 2011.
About $10 million was included in the 2011-12 proposed state budget for the BOE’s investigative efforts. This represents about 1 percent of the approximately $900 million in anticipated tobacco tax revenue.
- Taxing tobacco products saves lives by getting people to stop smoking. Increasing the cost of tobacco is an effective way to reduce consumption. If you don’t smoke, you don’t pay.
- Prop 29 supports cancer research with nearly $600 million per year going directly to doctors and scientists at California’s research institutions to find cures to cancer, heart and lung disease.
- Over the last decade, Big Tobacco spent 10 times as much marketing tobacco in California as the state spent on tobacco education. Prop 29 will keep California’s anti-smoking programs strong, to keep our kids from smoking and give smokers the help they need to quit.
- Strict accountability laws ensure that funds go directly to doctors and scientists, require independent audits and cap administrative costs.
- Prop 29 raises taxes by nearly $1 billion without allocating any money to pay down our budget deficit or to fund existing critical programs like education or public safety.
- This is another example of ballot box budgeting in which revenues are limited for specific purposes with little oversight from outside agencies, taking away the ability of the legislature to respond to changing fiscal problems.
- Voters approved a constitutional amendment requiring 40 percent of new tax revenue go to schools, but Prop 29 exempts itself from this requirement.
- Allows a new, unaccountable board to spend up to $110 million every year buying buildings and real estate for huge for-profit companies. Nothing requires those buildings to be built or the research done in California.
Clifford C. Eke, M.D., President, American Cancer Society; Richard J. Gray, M.D., President, American Heart Association; Jane Warner, President , American Lung Association; Balazs “Ernie” Bodai, M.D., Founder of the Breast Cancer Stamp; Beth Y. Karlan, M.D., Director, Women’s Cancer Program, Oschin Comprehensive Cancer Institute, Cedars-Sinai Medical Center; Livestrong – Lance Armstrong Foundation; Elizabeth Blackburn, PhD, Nobel Laureate in Medicine; Stand-up to Cancer; Tobacco-Free Kids Action Fund
The Argument in Favor is signed by Clifford C. Eke, M.D., President, American Cancer Society; Richard J. Gray, M.D., President, American Heart Association; Jane Warner, President , American Lung Association; Balazs “Ernie” Bodai, M.D., Founder of the Breast Cancer Stamp; Beth Y. Karlan, M.D., Director, Women’s Cancer Program, Oschin Comprehensive Cancer Institute, Cedars-Sinai Medical Center; Elizabeth Blackburn, PhD, Nobel Laureate in Medicine; Tobacco-Free Kids Action Fund
The Rebuttal to the Argument Against is signed by Beth Y. Karlan, M.D., Director Women’s Cancer Program, Oschin Comprehensive Cancer Institute, Cedars-Sinai Medical Center; Elizabeth Blackburn, PH.D, Nobel Laureate in Medicine; Balazs “Ernie” Bodai, M.D. Founder of the Breast Cancer Stamp
Financial Contributions: see the Maplight website for current information.
Official contact information - Californians for a Cure: californiansforacure.org
Altria Group Inc., the parent company of Philip Morris USA; Mike Genest, Former Director, California Department of Finance; Julian Canete, President, California Hispanic Chambers of Commerce; Tom Bogetich, Executive Director, California State Board of Education (Retired); Teresa Casazza, President, California Taxpayers Association; La Donna R. Porter, M.D., Former President, Golden State Medical Association; Marcy Zwelling, M.D., Past President, Los Angeles County Medical Association; R. J. Reynolds Tobacco Company
The Argument Against is signed by Mike Genest, Former Director, California Department of Finance; Julian Canete, President, California Hispanic Chambers of Commerce; Tom Bogetich, Executive Director, California State Board of Education (Retired); Teresa Casazza, President, California Taxpayers Association; La Donna R. Porter, M.D., Former President, Golden State Medical Association; Marcy Zwelling, M.D., Past President, Los Angeles County Medical Association
The Rebuttal to the Argument in Favor was signed by Mike Genest, Former Director California Department of Finance; Marcy Zwelling, M.D., Past President Los Angeles County Medical Association; Tom Bogeticht, Executive Director (Retired) California State Board of Education
Financial Contributions: see the Maplight website for current information.
Official Contact Information - Californians Against Out-of-Control Taxes and Spending: www.noon 29.org