Prop. 56: California Voters Approve Major Increase in Tobacco Taxes

Chris Micheli
Attorney and Lobbyist at the Sacramento government relations firm of Aprea & Micheli, Inc.

Californians have voted to add $2 per pack on cigarettes by adopting Prop. 56 on November 8. This ballot measure increases the cigarette tax by $2.00 per pack, with equivalent increases on other tobacco products and electronic cigarettes containing nicotine. The ballot measure allocates revenues primarily to existing healthcare programs.

In addition, funds generated by Prop. 56 will be allocated for tobacco use prevention and control programs, tobacco-related disease research and law enforcement, University of California physician training, dental disease prevention programs, and tax administration. If the increased tax under Prop. 56 causes decreased tobacco consumption in California, the ballot measure transfers tax revenues to offset decreases to existing tobacco-funded programs and sales tax revenues.

According to the revenue estimate prepared by the Legislative Analyst and Director of Finance, the ballot measure will result in a “net increase in excise tax revenues in the range of $1.1 billion to $1.6 billion annually by 2017-18, with revenues decreasing slightly in subsequent years. The majority of funds would be used for payments to health care providers.

“The remaining funds would be used for a variety of specified purposes, including tobacco-related prevention and cessation programs, law enforcement programs, medical research on tobacco-related diseases, and early childhood development programs.” While California has occasionally increased its tobacco taxes, Prop. 56 represents a significant increase at one time.

According to the official ballot arguments, a YES vote on this measure meant: “State excise tax on cigarettes would increase by $2 per pack—from 87 cents to $2.87. State excise tax on other tobacco products would increase by a similar amount. State excise tax also would be applied to electronic cigarettes. Revenue from these higher taxes would be used for many purposes, but primarily to augment spending on health care for low–income Californians.

“Tobacco-related healthcare costs California taxpayers $3.5 billion annually, even if you do not smoke. Prop. 56 works like a user fee, taxing tobacco to help pay for smoking prevention and healthcare—so smokers pay their fair share for their costs.” This has always been a popular line of argument — tax smokers who cause these increased health care costs.

A NO vote on this measure meant: “No changes would be made to existing state taxes on cigarettes, other tobacco products, and electronic cigarettes. Follow the 56 money: This $1.6 billion tax increase gives $1 billion to health insurance companies and special interests. Prop. 56 cheats schools out of $600 million a year by circumventing our minimum school funding guarantee. Only 13% of the money helps smokers or prevents kids from starting.”

According to the summary provided by the independent Legislative Analyst Office (LAO), tobacco products are subject to excise taxes (which are levied on a particular product) and sales taxes (which are levied on a wide array of products). The excise tax is levied on distributors (such as wholesalers) while the sales tax is imposed at the time of purchase.

In addition, cigarettes and other tobacco products currently are subject to state and federal excise taxes as well as state and local sales and use taxes. E‐cigarettes are only subject to sales taxes. This is the first instance in California that e-cigarettes will be subject to tobacco tax.

Under existing state excise taxes imposed on cigarettes, the current state excise tax is 87 cents for a pack of cigarettes. While excise taxes on other tobacco products are based on the excise tax on a pack of cigarettes, they are somewhat higher due to the provisions of Proposition 10 (another tobacco tax hike approved by voters years ago).

Currently, the excise taxes on other tobacco products are the equivalent of $1.37 per pack of cigarettes. Under existing law, any increase in cigarette excise taxes automatically triggers an equivalent increase in excise taxes on other tobacco products. That will occur again due to the increase imposed by Prop. 56.

Prop. 56 changes the definition of “other tobacco products” for purposes of taxation to include e‐cigarettes that contain nicotine or liquid with nicotine (known as e‐liquid). Changing the definition in this way causes the $3.37 equivalent tax to apply to these products as well.

In addition, sales taxes apply to the sale of cigarettes, other tobacco products, and e‐cigarettes. Sales taxes are based on the retail price of goods, which includes the impact of excise taxes. The average retail price for a pack of cigarettes in California is close to $6. Currently, the sales tax ranges from 7.5 percent to 10 percent of the retail price (depending on the city or county), with a statewide average of around 8 percent. Thus, sales tax adds roughly 50 cents to 60 cents to the total cost for a pack of cigarettes.

As outlined by the LAO, Prop. 56 results in four levels of spending of these increased revenues as set forth below:

“Step One. The measure requires that new revenues raised by the measure first be used to replace revenue losses to certain sources (existing state tobacco funds and sales taxes) that occur as a result of the measure. These revenue losses would occur due to lower consumption of tobacco products due to the higher excise taxes.

“Step Two. The State Board of Equalization would then receive up to 5 percent of the remaining funds to pay for administrative costs to implement the measure.

“Step Three. The measure provides specified state entities with fixed dollar amounts annually for specific purposes.

“Step Four. The remaining funds would be allocated—using specific percentages—for various programs, primarily to augment spending on health care services for low‐income individuals and families covered by the Medi‐Cal program.”

As a result of the passage of Prop. 56, California will begin generating over $1 billion annually for additional state spending on programs. While some proponents of the ballot measure desire for the tax increases to ultimately reduce or eliminate consumption of tobacco products in this state, these additional revenues will result in a significant increase in payments to health care providers and result in cost pressures to the other programs when the diminishing revenue source results.

Chris Micheli is an attorney and legislative advocate with the Sacramento governmental relations firm of Aprea & Micheli. He can be reached at (916) 448-3075.

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