Congress should reject any regressive taxes on tobacco
The budget being debated in Washington, D.C. includes a tax increase that would hit low-income Californians the hardest and hinder California’s recovery — while also reducing state tax revenue, so we would have less funding for our state’s priorities.
The damaging proposal would double the federal tax on cigarettes (from the current $1.01 to $2.02 per pack of 20 cigarettes) and increase tax rates on other tobacco products and non-tobacco vapor products as much as 2,000 percent.
Californians already pay $3.88 in state and federal taxes on every pack of cigarettes, thanks to a $2-per-pack state tax increase approved just five years ago. Taxes would jump to $4.89 per pack under the federal proposal.
Chmura Economics & Analytics ran the numbers and estimated that retailers in the United States would lose $801.3 million of revenue per year, as well as 8,317 retail jobs, if the tax hike passes.
“Adding indirect and induced impacts, the national economy could lose $1.7 billion in economic output per year, with an estimated 14,030 jobs being lost,” the study found. “State and local governments will also be negatively impacted.”
Chmura estimated that California would lose $113.9 million per year in state and local revenue, and 670 Californians would lose their jobs as a result of the federal tax increase. The aggregate economic and fiscal impact in this state would be negative $218.4 million per year, the study found.
The proposed tobacco tax goes directly against the principle of taxing the rich, as it would have the largest impact on those who can least afford it. The Institute on Taxation and Economic Policy (ITEP) noted in its “Guide to Fair State and Local Taxes” that excise taxes like this “fall more heavily on middle- and low-income families than on the rich.”
“The regressivity of cigarette excise taxes is especially pronounced,” ITEP wrote, because “lower-income individuals are far more likely to smoke than are wealthy individuals.”
We also know that every time tobacco taxes increase, so does smuggling. Existing taxes are so high that smuggling from lower-tax areas, including foreign countries, accounts for a staggering 47.7% of cigarettes smoked in California, according to a November 2020 report from the Washington, D.C.based Tax Foundation. The only state with a worse problem is New York, where an estimated 53.2% of cigarettes come from smugglers.
Smuggling results in less tax revenue from legitimate sales. In California, the vast majority of state taxes on cigarettes are earmarked for specific purposes, including breast cancer research and treatment, anti-tobacco education, childhood tobacco use prevention, hospital services, medical research, local parks and recreation programs, law enforcement and early childhood development programs.
“Tax evasion hurts all of us by reducing revenue funding California’s essential state and local services,” California Department of Tax and Fee Administration Director Nick Maduros said in a 2019 press release announcing a crackdown on a smuggling ring. “Nearly 90 percent of the taxes collected on cigarettes and tobacco products are earmarked to fund important programs, including First 5 California.”
The crackdown involved suspects who avoided paying excise tax on approximately $26.5 million worth of cigars, chewing tobacco, and leaf tobacco from 2015 to 2018, resulting in a loss of approximately $5 million to $10 million to the state government.
From a budgeting standpoint, tobacco taxes have another major flaw: they decrease over time, so they can’t be relied upon to fund ongoing programs. “California Tax Facts,” published this year by the California Tax Foundation, notes that legal sales of cigarettes in this state plummeted from almost 3 billion packs in 1980 to just 635 million in 2018.
The federal proposal also could have a negative impact on people trying to quit smoking, as it would increase taxes on e-cigarettes. Researchers who studied the first state to tax e-cigarettes found “consistent and robust evidence that the e-cig tax ... increased adult smoking relative to what it would have been in the absence of this tax” (“E-Cigarettes and Adult Smoking: Evidence from Minnesota,” published in late 2019 by the National Bureau of Economic Research).
To protect Californians from regressive taxation and safeguard California jobs and revenue for state and local priorities, our representatives in Congress should reject the unnecessary tax hike.