The Economic and Criminal Consequences of Raising the Tobacco Tax

Joel Fox
Editor of Fox & Hounds and President of the Small Business Action Committee

The legislature seems intent on fast tracking a cigarette tax increase, passing it through two senate committees on the same day last week despite economic and criminal consequences that could arise if the tax becomes law. Testifying against SB 768 authored by Senator Kevin De Leon, California Retailers Association president Bill Dombrowski warned passing the 230% tax increase on a pack of cigarettes (from $ 0.87 to $2.87) would cost jobs and increase the sale of cigarettes through the black market.

He’s right on both counts.

The Mackinac Center for Public Policy studied the effects of cigarette tax increases on cigarette sales. The study’s authors concluded, “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.”

New York State has the highest cigarette taxes in the nation and not inconsequentially, the Mackinac study found that in 2011, smuggled cigarettes made up 61% of New York’s total cigarette market.

On this site a couple of years ago, Board of Equalization member, Michelle Steele reported that under California’s current tax rate on cigarettes about “209 million packs were estimated to have been sold tax-free, resulting in a
 $182 million revenue loss for the state.”

Imagine how a 230% tax increase would impact cigarette smuggling in California. Avoiding the tax is a crime as noted in the first sentence of Sen. De Leon’s bill: “The Cigarette and Tobacco Products Tax Law, the violation of which is a crime…”

The Mackinac Center already lists California seventh amongst all states in cigarette smuggling as a percentage of total state cigarette consumption.

As to the job loss Dombrowski referred, it goes hand in hand with the smuggling issue. Fewer cigarettes sold at stores will undercut the income especially of the many convenient stores around the state, putting jobs in jeopardy. According to the National Association of Convenience Stores, cigarette and other tobacco product sales account for more than 36 percent of all in-store sales at convenience stores nationwide.

Whether any of these arguments derail the tax hurtling toward passage remains to be seen.

The final test will rest with Governor Jerry Brown. If the tax gets two-thirds support in both houses of the legislature, will Brown sign a tax increase not approved by the voters?

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