Cigarette tax hike initiative a bridge too far

This piece was originally published in the Orange County Register.

It seems there is a never-ending war on “sin” and a desire by some to try and tax it away. This includes higher taxes on snacks and cigarettes, among other items. As to the latter item, California voters will weigh in with a November ballot proposal to hike California’s cigarette excise tax by $2 per pack – a 229 percent increase.

This initiative, if adopted, will lead to rampant tax evasion and avoidance, among other unintended consequences. It would also levy a new tax on “vaping,” a demonstrably safer alternative to smoking tobacco, thereby discouraging a legitimate harm-reduction strategy.

Scholars at the Michigan-based Mackinac Center for Public Policy and others have examined in detail the interaction of cigarette taxes and illicit behavior. They report that in 2014, more than 30 percent of all cigarettes consumed in California were not properly taxed. Not all tax avoidance is illegal, but nearly one-third of California’s smokes are smuggled into the state, and this happens with taxes at the relatively low rate of 87 cents per pack.

If excise taxes on cigarettes leap to $2.87 per pack, California will saddle buyers with the ninth-highest cigarette tax in the country, just higher than New Jersey ($2.70). It will also likely incur a number of problems related to smuggling. These include, but are not limited to: theft of cigarettes, violence and public corruption.

The Mackinac Center used its statistical model to “what if” the proposed tax hike, and the results are stunning. The model reports that if the increase is adopted, the smuggling rate in California may leap to 64 percent of the total market. That is, for every 100 cigarettes consumed in the state, 64 of them would be smuggled in from somewhere else.

That would be by far the highest smuggling rate the Mackinac Center has ever seen in its research, even besting estimates of New York state, with its significant cigarette-tax rates. One reason California is susceptible to a large amount of cigarette smuggling is its geography. Cigarettes could be easily purchased in its three neighboring states (Oregon, Nevada and Arizona), but international smuggling from Mexico and elsewhere would likely be a factor too. California’s 11 commercial ports are open doors through which illicit smokes from around the world could likely pass.

The Mackinac Center’s model is designed to capture the percentage of consumption attributed to smuggling. It breaks down that number into two types, casual and commercial. Casual smuggling involves buying cigarettes from lower-taxed states or on the internet but only for personal consumption. Commercial smuggling involves long-haul, large shipments of cigarettes and done to make a profit.

In 2013, a Monterey Park man pleaded guilty to trying to smuggle cigarettes from Port Newark, N.J., to California. The cigarettes originated in China. If smuggling is profitable at those distances, imagine how profitable it would be for organized crime should the Golden State raise its excise tax by 229 percent.

Smuggling is not the only unintended consequence of high excise taxes on cigarettes, though. Illicit trafficking of cigarettes has led to violence against people and police, brazen thefts from retail and wholesale shops, public corruption, murder-for-hire plots and the distribution of counterfeit (and often adulterated) products. A higher tax in California will only encourage more of this criminal activity.

All of this for likely little improvement to public health. Research published in 2005 by economist Mark Stehr found that up to 85 percent of changes in consumption made after cigarette tax hikes can be attributed to tax evasion and avoidance – not kicking the habit. In other words, most smokers keep on puffing; they just acquire their cigarettes from other sources.

In addition to the $2 cigarette excise tax increase, the initiative would institute an ad valorem tax on certain vaping products of about 67 percent. This is supposed to represent a tax equivalent to the one placed on cigarettes. Research shows that vaping, a noncombustible alternative to smoking, is much safer than traditional cigarette consumption. If anything, vaping products should be viewed as part of a harm-reduction strategy for smokers instead of another sinful goose waiting to be plucked.

The real problem here is that raising excise taxes on cigarettes by $2 per pack and extending that tax to vaping products might do more harm than good.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.