Tobacco Tax: Facts & Analysis

Proposition 86, the Tobacco Tax Act of 2006, proposes to raise California’s state cigarette tax by $2.60 per pack ($0.13 per cigarette). If it passes, California smokers would face a total tax of $3.37 per pack (up from $0.77 per pack) starting January 1, 2007. Non-cigarette tobacco products would also become more expensive.

Revenues—projected to be about $2.1 billion in 2007—would be used to fund several public health programs, including affordable health insurance for every child, improved emergency care, tobacco prevention programs, and chronic disease research.

The Act was authored by the Coalition for a Healthy California, which initially comprised about a dozen health care and children’s advocacy groups. These included the California Hospital Association, the California division of the American Cancer Society, the American Heart Association, the American Lung Association of California, Children Now, PICO California, and the Children’s Partnership. Eighty health care organizations, clinics, hospitals, children’s advocacy groups, and smoking cessation groups are now members of the coalition. Gubernatorial candidate Phil Angelides has also endorsed it.

The measure is opposed by the tobacco industry, taxpayer rights groups, such as the Howard Jarvis Taxpayers Association in California, and some small business associations. The two committees formed to oppose Prop. 86 include “Californians Against Unaccountable Taxes,” sponsored by R.J. Reynolds Tobacco Company, and the “Committee to Stop the $2 Billion Tax Hike,” a coalition of business, law enforcement, taxpayer groups and Philip Morris USA.” Julie Soderlund, a spokesperson for Governor Schwarzenegger, says that the governor is also opposed to the measure, as well as to all tax increases. 

The California Hospital Association’s California Hospital Committee on Issues, the California division of the American Cancer Society, the American Heart Association, and the American Lung Association of California provided the bulk of funding. 

Revenue from the tax would go toward state and local programs that currently offer health insurance to indigent children, emergency rooms in public and private hospitals throughout the state, community clinics, schools, nursing education programs, tobacco control programs, local law enforcement agencies, and organizations and universities conducting research on a number of diseases, such as cancer, obesity, and heart disease.

In addition, proponents argue that the tax would reduce the number of smokers in the state, thereby reducing the number of smoking-related illnesses and deaths. This would not only benefit those who quit smoking or do not start as a result of the tax; it would also benefit Californians at large, whose tax dollars currently subsidize emergency health care services for people with smoking-related diseases.

An increased tobacco tax could potentially pose a threat to all citizens by increasing smuggling and black-market-related crimes, which have spiked in states with tobacco tax hikes.

The nearly 300-percent tax increase may also affect small businesses, which could see profits decrease as smokers turn to other sources for cigarettes or quit altogether. Because such taxes hurt small businesses and increase state residents’ overall tax burden, opponents argue that, like all new taxes, the tax is bad for California’s economy as a whole.

Opponents say that Proposition 86 may also hurt those it sets out to benefit, as decreasing smoking rates translate into a diminishing source of revenue for the emergency room services and children’s health insurance programs it aims to fund.

Finally, and perhaps most importantly, opponents argue that the tax punishes addiction while doing little to help the addicted. It also hits the poor harder than the rich, because the poor are on average far likelier to smoke. Ultimately, this means that wealth is transferred from a poor segment of the population to serve the whole. Poor smokers also must spend an increased proportion of their budgets compared to wealthier smokers to purchase the same number of cigarettes.

Revenue from the tax—projected to be $2.1 billion in the first year—would be placed in a Tobacco Tax of 2006 Trust Fund.

Based on the $2.1 billion projection, the fund would provide an estimated $170 million to Prop. 10 programs, which would experience decreased funding due to Prop. 86’s effect on cigarette sales. (Prop. 10 instituted a 50-cent per pack tax on cigarettes in 1998 to fund early childhood development programs.) The remaining revenue would be distributed as follows:

• 52.75 percent (estimated at $1.1 billion) is earmarked for treatment-related concerns, including $758 million for hospital emergency care services, $92 million for nursing education, $66 million for emergency physicians, $58 million for community clinics, $18 million for prostate cancer treatment, and $18 million for smoking cessation services.

• 42.25 percent (estimated at $891 million) is earmarked for prevention efforts, including $371 million for children’s health insurance (the Healthy Families program), $267 million for programs to prevent chronic diseases, including cancer, heart disease, and asthma, and $177 million for tobacco education, prevention, and law enforcement.

• 5 percent (estimated at $96.5 million) is earmarked for research on health and disease, including tobacco-related illnesses such as heart disease, lung disease, and cancer.

Proponents say that the higher tobacco tax from Prop. 86 would reduce cigarette consumption, increase state revenue, improve public health, and reduce health care costs in California.

As a basis for their arguments, proponents cite a study of Prop. 86 by the California Department of Health Services (DHS), which says that:

• Prop. 86 would reduce the number of cigarettes consumed in California by more than one quarter (26.3 percent).
• About half a million Californians would quit smoking.
• More than 700,000 children currently under 17 years of age would not become smokers in adulthood.
• The state would take in an additional $2.27 billion in revenues (this estimate is $170 million larger than the Legislative Analyst’s estimate of $2.1 billion).
• Total California tax revenues from cigarettes (excise tax of $3.47 per pack of cigarettes plus five percent sales tax) would increase more than $3 billion a year.
• The state would save more than $16 billion in health care costs.
• About 300,000 fewer premature deaths would occur, including nearly 180,000 deaths due to smoking among children currently under 17.

In addition, the Tobacco Tax Act would fund eligible hospitals to improve emergency rooms, update emergency equipment, offer additional emergency services, and train hospital staff in emergency procedures.

Prop. 86 would help to fund community clinics, which often provide emergency services to uninsured patients, and to nursing education programs to increase the number of nurses working in hospitals and emergency rooms throughout the state.

The Act would expand the eligibility criteria for California’s Healthy Families Program, so that the program would cover more children with family income too high to qualify for Medi-Cal but too low to purchase private insurance. Children whose family incomes are up to 300 percent of the Federal Poverty Level—now $60,000 for a family of four—would be eligible for Healthy Families.

The Act would make it easier for families to enroll their children by offering “express lane” enrollment through other programs, such as the National School Lunch Program and Food Stamp Program, and by simplifying paperwork and ensuring that Healthy Families and Medi-Cal operate as a single program from the consumer point of view, to minimize bureaucratic hassles and gaps in coverage. Read more about the California Healthy Families program.

The Act would also help to fund tobacco-use prevention programs, including smoking cessation programs. It would also provide funds to support local law enforcement agencies in enforcing tobacco-related laws.

Critics argue that tobacco taxes hurt small businesses and state economies by increasing state tax burdens. They also lead to increases in crime as persistent smokers turn to illegal sources for tax-free cigarettes.

Opponents also point out that tobacco taxes are discriminatory and unfairly hurt the poor, who spend a greater fraction of personal income on cigarettes than wealthy smokers, and who smoke in greater numbers.

Proposition 86 in particular has additional drawbacks, according to opponents. They say that while the tax is billed as an effective way to reduce smoking rates, it does relatively little to help smokers quit or to stop youth from smoking. The tax will benefit hospital corporations and HMOs (slated to receive about 40 percent of revenues), as well as research into non-tobacco-related health problems, such as obesity, while opponents say it earmarks just 10 percent of revenue for smoking cessation and prevention. 

Opponents also argue that the measure would exempt hospitals from certain anti-trust laws.