Tax hike cuts into cigarette sales
$2-per-pack increase appears to have caused a decline in ‘distributions’
Last fall, California voters approved the biggest increase in cigarette taxes since the state first began levying tobacco in the 1950s. Advocates for Proposition 56, which passed with a fairly overwhelming 64 percent of the vote, argued that a $2 per-pack tax hike would hurt pocketbooks enough to nudge millions of California smokers to quit, or at least to light up less frequently.
When the tax went into effect in April, smokers saw the average cost of a pack of cigarettes soar from under $6 to up to $9, making California one of the most expensive states in which to buy cigarettes. But the question then: Was that enough to force smokers to kick an increasingly expensive habit?
The early data suggests that yes, California cigarette sales have declined significantly since prices went up. In fact, the drop is even sharper than the state anticipated—which could spell trouble for state coffers.
Cigarette pack “distributions”— tax lingo for a pack of cigarettes
typically sold from a distributor to a retailer, and a good proxy for consumption— dropped 56 percent yearover-year in the two months following the tax increase, according to data obtained from the California Department of Tax and Fee Administration and analyzed by CALmatters. That’s a decline of nearly 82 million packs.
“This is a big effect,” said Dr. Stanton Glantz, a researcher at the University of California, San Francisco’s Center for Tobacco Control Research and Education. “I have felt for a long time where we’re getting to the point in California where smoking is so low that a couple of good shoves like this one, and we might be rid of it.”
Glantz and other tobacco experts cautioned that it is still far too early to make definitive conclusions: It’s difficult to draw inferences from two months of data, as both suppliers and consumers are still figuring out what they can and can’t afford.
Knowing that prices were about to rise, tobacco distributors and smokers also rushed to stockpile as many cigarettes as possible the month preceding the tax hike, deflating the April and May figures. California cigarette distributors sold nearly 104 million cigarette packs in March, by far the most of any month in the last two years.
But even after adjusting for stockpiling, the tax hike appears to be having a major impact: Cigarette sales still dropped 23 percent year-over-year for the threemonth period including the pre-tax run-up.
Experts say cigarette consumption will likely rise slightly in the months ahead, before stabilizing in the next four to five months. Lowerincome and younger-smokers are typically the first to cut back in response to a tax hike.
But what’s beneficial for public health isn’t necessarily good for the state budget, at least in the near term.
Prop. 56 was supposed to generate an additional $1.3 billion in revenue for the state to shore up Medi-Cal, the state health insurance program for low-income Californians. In the two months since the tax has been in place, the state has raised a total of $182 million—below what the Brown administration was expecting.
“Sales are still more sluggish than had been originally anticipated,” H.D. Palmer, spokesman for the Department of Finance, said via email. ”Given that we only have two months of data, it is too early to predict a trend. If the current trend holds, we would likely make a revision to our expected decline in consumption.”
How the new cigarette tax revenue would be spent became a hot-button issue in state budget negotiations last month. Ultimately, legislators and Gov. Brown agreed to divide the new revenue between increased payments to physicians and general MediCal expenses.
Palmer said that if cigarette tax revenues continue to come in lower than anticipated, the administration would need to identify an alternative revenue source or propose cutbacks to MediCal.
Of course, tax revenue is just one side of the equation when it comes to the fiscal effects of the new cigarette tax. Savings from lower health care costs as more low-income smokers quit are not factored into the revenue side of the state budget.