California Hooked on Tobacco Taxes

Falling cigarette use burns hole in state budget


“Welcome to California. America’s nonsmoking section,” stated an ad from the California Tobacco Control Program. Tobacco users have listened, and so many have quit the unhealthy habit that the state budget is getting sicker.

The biggest hit could come from the money California gets from the 1998 Tobacco Master Settlement Agreement between the big tobacco companies and 46 states, including California. The deal called for $246 billion to be paid over 25 years.

An investigation published Monday by the journalists at California Watch found a big problem. “Rather than waiting for annual payments, the state and some local governments decided to borrow money against their anticipated future revenue. All told, they’ve issued $16 billion in bonds since 2001.”

Like a teenager taking a first drag on a Marlboro, California inhaled deeply – and now is coughing. “In 2007, California issued $4.4 billion in tobacco bonds,” California Watch said. “In order to pay back investors by 2047, it assumes that cigarette consumption will decline by about 1.8 percent per year, according to bond filings.” The actual rate of decline has been more than 3 percent per year, according to numbers from the California Department of Public Health

In 2010, an estimated 11.9 percent of Californians smoked, the second-lowest level among the states, after Utah’s 9.1 percent. In 1984, the California number was 25.9 percent. In 2007, it was 13.3 percent.

We have warned about such borrowing from the settlement funds, insisting that the money should be spent on a pay-as-you-go basis. Now the state is going to have to make up for the bond repayment shortfall by tapping into the general fund. The amount isn’t yet known. But Gov. Jerry Brown’s $7 billion tax increase, if voters pass it in November, could go, in part, to paying for the bond folly.

Fortunately, Orange County was not among those that raided cigarette settlement money. Supervisor John Moorlach reminded us of the battle in 2000 over county Measures G and H. Measure G would have diverted 40 percent of the tobacco settlement money to paying down the debt from the 1994 county bankruptcy. It lost, 54-46. Measure H dedicated all of the tobacco money to health care, public safety and tobacco use prevention. It passed, 65-35.

The county also gets money from 1998’s Proposition 10, which added a 50-cent tax on each pack of cigarettes to fund local programs for children up to age 5. Mr. Moorlach pointed out that Gov. Brown tried last year to seize the California First Five funds to backfill the state budget deficit, but counties sued successfully and kept the money. “That money is supposed to be used for kids 5 and under in each county,” Mr. Moorlach said.

Supervisor Bill Campbell said the First Five funds for Orange County have dropped from about $55 million a year when the program started to $27 million today and continue to fall by 4 percent to 5 percent per year, because of smoking cessation.

Finally, on the June ballot will be another proposed tax increase on cigarettes. Prop. 29 would add $1 tax to each pack to fund cancer research, supposedly raising $855 billion.

We’ve always opposed such “ballot box budgeting.” Another problem is that the Prop. 29 tax would tend to further depress cigarette use, making the bond repayment problem worse. Moreover, it would push cigarette prices for many brands above $7, a threshold that in Canada in the late 1990s produced a huge black market. If that happened, cigarette use could remain steady while tax revenue could drop.

Smokers are quitting. Cigarette-tax levels are maxed out. Time to let smokers alone.

So let’s get it started – What is your opinion on the situation?


#1 Candy Girl on 02.24.12 at 4:29 PM

Minnesota did the same thing. Other states have as well. This certainly suggests that states looking to ban and/or tax smokeless cigarette alternatives have reasons beyond the health of ex-smokers. States cannot afford to have people switch to less risky, smokeless alternatives unless they find a way to generate similar levels of revenue via taxes. This is short sighted and scandalous. State legislators should be rebuked for this and so should the investment bankers who structured such deals.

#2 Hallie on 02.27.12 at 12:47 PM

Very interesting. A friend sent me a link to what can only be described as a horrific data set on what’s happened with the Prop 10 tobacco tax money:

This makes me concerned in general about such taxes and how they are managed.

#3 Rod Mitchell on 02.27.12 at 5:05 PM

How ironic. The glee shown by all the states over “victory” with the Tobacco Master Settlement Agreement (MSA) is now coming to bite them in the a$$! Originally the MSA was to fund anti-youth smoking programs and support tobacco health related programs, but where did it go? Very little went to support the original goals. But now with the decrease in smoking the states are spinning around trying to find more funds for their coffers. So what they are doing is increasing the tobacco taxes, which in turn decreases tobacco use. And round and round we go until the black-market really kicks in. Gov’t can’t control the ILLEGAL drug trade, how can they control the black market of a LEGAL product? To quote Bugs Bunny: “What a bunch of maroons!”

#4 Hallie on 03.11.12 at 9:11 PM

One of the Prop 10 First 5 commissions distributed highly contaminated lead toys and then appears to have done as little as possible to inform the community:

#5 Miami Heat on 04.03.12 at 10:01 PM

pretty interesting but they are killing the goose that lays the golden $$$$

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