Prop. 86 a Tax-the-Poor Scheme California Focus

If passed by the California electorate Nov. 7, Proposition 86 would almost quadruple the current tax on cigarettes to $3.47 a pack and would stand as perhaps the most ill-conceived tax increase of all time, although, to be fair, there’s a lot of competition for that distinction.

The “Tobacco Tax Act of 2006” is a creation of California’s hospital industry, which wrote the initiative in such a way that it will receive about 40 percent of the $2.1 billion a year the higher tax is expected to generate. Whether that figure is realistic is a point we will get to a little later.

This is the hospital industry’s second attempt at singling out a consumer product for a special tax. In 2004, the hospitals put forward Proposition 67, a tax on in-state telephone calls that was overwhelmingly rejected by an electorate that included a lot of people who like using their telephones. This time, the hospitals got smart by targeting a much slimmer slice of California’s population – the 14 percent of us who smoke.

If this gambit doesn’t work, look for them next to go after redheads born in January who live on streets starting with the letter M. Or perhaps foreign-born governors named Arnold.

Beyond the confiscatory nature of a tax on a small minority to pay for services that should be funded, if at all, out of general state revenue, another problem is that cigarette taxes are extremely regressive. Poor people are simply more likely to smoke than are rich people. And yet some of the same people who ceaselessly howl about President Bush’s “tax cuts for the rich” want to bang out a new tax that will cost a pack-a-day smoker who’s also poor $1,266.55 a year.

Actually, the tax is even more regressive than it seems, because not everyone will have to pay it. The per-pack tax in Nevada is $0.80. It’s $1.18 in Arizona and Oregon. A more-affluent smoker could make a quick trip to Vegas and know he would come home a guaranteed winner by stashing a six-month supply of smokes in the trunk.

There’s also the Internet and Indian reservations, which sell cigarettes tax-free. This tax will be like the “convenience fee” charged by your bank for using an off-network ATM. You pay it in a pinch, but for the most part it’s avoidable as long as you have a car or a computer.

And those are just the reasonably above-board ways to avoid the tax. How does the state stop smugglers from providing a lucrative new revenue source for organized crime by trucking in cigarettes from other, low-tax states? This is the reason Prop. 86 is opposed by more than 20 law enforcement organizations, including the California Fraternal Order of Police, National Association of Police Organizations (NAPO) and dozens of other associations.

The evidence that high taxes merely redirect, rather than reduce, cigarette purchases has been available for quite some time. Patrick Fleenor, an economist at the Tax Foundation, wrote in a 1998 study: “When a state reports lower taxable cigarette sales, that does not always mean that fewer cigarettes were smoked. … In Michigan, for example, taxable cigarette sales fell 26.7 percent after the state raised its cigarette tax from $2.50 to $7.50 per carton [not per pack]. Meanwhile, sales in Indiana and other border states skyrocketed.”

In high-tax New York state, the Health Department commissioned a study to determine the extent to which smokers avoided paying the tax. According to an Associated Press report, the department learned that “[m]ore than a third of New York smokers regularly avoid the state’s high cigarette taxes by buying from American Indian reservations, the Internet or duty-free shops.”

Of course, Prop. 86 contains 38 pages of spending mandates for state programs that are in line to get a cut of these new funds. These may well be worthy programs, but what happens when smokers respond rationally to a 300 percent tax increase by no longer buying cigarettes through taxable channels? The best guess: Money will flow to criminals and out-of-state retailers, and California’s taxpayers will be left holding the bag for the programs that smokers were counted on to pay for.

When that happens, maybe we can raise cigarette taxes once again to cover the shortfall.