Health and Economic Effects of Two Proposals to Increase the California State Cigarette Excise Tax

• Governor Gray Davis has proposed a $1.10 increase in the cigarette tax and Assembly Speaker Herb Wesson has proposed a $2.13 increase in the cigarette tax. • The state's Tobacco Education and Research Oversight Committee has noted that the California Tobacco Control Program has ceased to be competitive with the tobacco industry and recommended that $200 million from any tobacco tax increase be used to reinvigorate the Program; doing so would require 20 cents per pack to be allocated to the Program. Previous experience from California (and elsewhere) indicates that doing so would substantially reduce tobacco consumption. • There is strong public support for increasing the tobacco tax; with 74% approval, the highest of any option considered. • Allocating a portion of any cigarette tax increase to the Tobacco Control Program so it could assist smokers in quitting and prevent young people from starting would address the "fairness issue," that the tobacco industry and its allies have often used successfully to argue against tobacco tax increases. • The only loser from a tobacco tax increase and reinvigorated Tobacco Control Program would be the tobacco industry: a $1.10 tax would cost the tobacco industry $667 million in lost sales annually; a $2.13 tax would cost the tobacco industry $1.05 billion in lost sales annually • The Tobacco Securitization Bonds will not affect the general fund, even if smoking decreases. These bonds have been collateralized entirely by payments from the Master Settlement Agreement and the bondholders have no claim on the general fund or any other state revenue. • A tobacco tax (after allocating 20 cents for Tobacco Control) would generate substantial revenues for the state General Fund through a combination of increased excise and sales taxes: a $1.10 tax would net $806 million; a $2.13 tax would net $1.59 billion • Implementing either tax proposal will increase sales tax revenues for local government: a $1.10 tax would net $47 million for local government; a $2.13 tax would net $92 million for local government • The combined effects of the price increase and reinvigorated Tobacco Control Program would have substantial benefits for California smokers: with a $1.10 tax, 555,000 smokers would quit; with a $2.13 tax, 818,000 smokers would quit • There would be immediate benefits (in the first year) in terms of reduced heart attacks, low birth weight infants, childhood asthma, and sudden infant death: 475 heart attacks, including 145 deaths would be prevented with a $1.10 tax (700 and 215 with a $2.10 tax); 380 low birth weight births would be prevented with a $1.10 tax (560 with a $2.10 tax); 500 new cases of childhood asthma would be prevented (745 with a $2.10 tax); 20 cases of Sudden Infant Death Syndrome would be prevented (30 with a $2.10 tax); about $29 million would be saved in direct medical costs ($43 million with a $2.10 tax) • Over the longer term, risks for other diseases – such as cancer – would fall and risks of heart disease would continue to fall. The health and economic benefits at steady state would be: 1,500 cancer deaths would be prevented annually with a $1.10 tax (2,200 with a $2.10 tax); 1,400 cardiovascular deaths would be prevented annually with a $1.10 tax (2,000 with a $2.10 tax); 1,000 lung disease deaths would be prevented annually with a $1.10 tax (1,600 with a $2.10 tax); 5,800 smoking-related deaths would be prevented annually with a $1.10 tax (8,500 with a $2.10 tax); about $2.27 billion would be saved in total medical costs with a $1.10 tax ($3.34 billion with a $2.10 tax) • It is unlikely that increased smuggling, internet, or other nontaxed sales would substantially affect these revenue estimates. • These estimates are based on price elasticity values derived from taxable sales, which already account for any smuggling • When cigarette prices went up by $1.20 in 1999 (because of a combination of Proposition 10 and price increases by the tobacco industry to pay for the Master Settlement Agreement), there was not a substantial amount of smokers obtaining cigarettes from illegal sources. • An increase in smuggling or nontaxable sales large enough to offset the increased revenues would have to amount to around half all the cigarettes smoked in California, 483 million packs for a $1.10 tax and 573 million packs for a $2.13 tax. • Smuggling 483 million packs would require enough mobile homes to reach 135 miles, from Sacramento to Reno, Nevada if parked end-to-end; smuggling 573 million packs would require mobile homes stretching 169 miles, from Sacramento to 4 miles past Fernley, Nevada. • The Tobacco Securitization Bonds will not affect the general fund, even if smoking decreases. These bonds have been collateralized entirely by payments from the Master Settlement Agreement and the bondholders have no claim on the general fund or any other state revenue. • Even with a $2.13 increase in the cigarette excise tax, Californians still would be subsidizing smoking through the medical system at $5 per pack.