Policy Brief

A Bad Idea Gone Too Far

Proposition 86, The Tobacco Tax

Executive Summary

Proposition 86 seeks to expand California’s health care services and medical research funds by approximately $2 billion annually, initially through an excessive 300 percent increase in the state’s tax on tobacco products.

The largest single spending items in Proposition 86 would pay for uninsured hospital and emergency trauma care costs ($756 million annually) and children’s health coverage ($367 million), including expanding health coverage to children from families with incomes between 250 and 300 percent of the federal poverty line, or from $50,000 to $60,000 for a family of four. The proposal would make cigarette smokers pay part of the medical bills for obesity and people with diseases like diabetes, while less than 1 percent of the revenues generated by the new tax would actually go toward helping smokers quit. Less than 10 percent of the proposed tax funds would be spent on anti-smoking advertising and tobacco control and enforcement programs in total.

Fewer than 15 percent of California adults are smokers-the second lowest rate in the nation-but tobacco consumers constitute a relatively captive tax base, from which politicians can draw funds for a variety of programs, regardless of merit, without fear of meaningful political backlash. The tax itself and programs funded by these measures often have far-reaching consequences-such as increased tax fraud, smuggling, and diversion and waste of state funds-that are not fully appreciated by voters at the ballot box.

The proposed tobacco tax increase of $2.60 per pack of cigarettes would make California’s the highest tobacco tax ($3.47) in the country by more than $1.00-3.5 times the national average- and create an unprecedented incentive for legal and illegal tax avoidance. Neighboring states have far lower cigarette and sales tax rates, and there will be greater incentives to purchase cigarettes through the Internet, by mail order, and other sales avenues. As illustrated by the nation’s experience with alcohol prohibition, these types of regulations also provide unique opportunities for organized crime, which is why numerous law enforcement associations have come out against Proposition 86, including the Association of Los Angeles Deputy Sheriffs, Deputy Sheriffs Association of San Diego County, San Francisco Police Officers Association, Peace Officers Research Association of California, and the Los Angeles Police Protective League.

Tobacco tax revenues will initially cover the costs of new programs and expansion of health care benefits, but as tobacco sales continue to decline, programs founded on California’s tobacco consumers will be left stranded with budgetary needs far above the dedicated revenue stream.

Meanwhile, many health care programs outlined in Proposition 86 are already funded by the state budget. Rapid growth in the state’s general fund allowed for $1.2 billion increased spending for Health and Human Services in 2006-07, bringing the total to $73.1 billion. Last year California earned the highest grade in the nation for the State of Emergency Medicine according to the American College of Emergency Physicians. California already has one of the most generous health benefit systems for children. While there is still room for health care reforms that would lower costs and improve quality of care in California, Proposition 86 doesn’t address those concerns-it only adds 38 pages of mandates, new programs, and activities that over time will develop their own bureaucracies and become long-term liabilities for the state.

Attachments

Geoffrey Segal is the director of privatization and government reform at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He is also editor of Reason's Privatization Watch.

Segal recently served as an advisor to Florida Gov. Jeb Bush's Center for Efficient Government. In addition, his counsel has recently been sought out by Gov. Mark Sanford and Indiana Gov. Mitch Daniels, where he is working with the Government Efficiency and Financial Planning group inside the Office of Management and Budget. Segal is also an advisor to the Cost Cutting Caucus in the Virginia House of Delegates.

Segal is a highly skilled policy analyst with a strong, diversified background in policy research and project analysis focusing on public-private partnerships, competition, government efficiency, government spending and waste, transparency, accountability, and government performance.

Segal has worked closely with legislators in California, New York, Florida, Indiana, Virginia, Pennsylvania, Georgia, Illinois, Oregon, Kentucky, Ohio, Washington D.C., Colorado, Minnesota, Maryland, Maine, North and South Carolina, Hawaii, Arizona, and Texas in efforts to reduce government spending, improve government performance, and enhance accountability in government programs.

Segal has testified to the United States Senate and numerous state legislatures and agencies. He has written dozens of articles for leading publications including Investor's Business Daily, Atlanta Journal-Constitution, Indianapolis Star, Orange County Register, Los Angeles Daily News, and New York Sun. Segal is also a contributing editor to Budget & Tax News. A frequent guest on television and radio, he has appeared on Fox News Channel's "Your World with Neil Cavuto" as well as CNBC's "Closing Bell w/Maria Bartiromo" and "Power Lunch."

Segal earned a B.A. in Political Science at Arizona State University and a Master of Public Policy from Pepperdine University.

Skaidra Smith-Heisters is a policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Her research is part of Reason's New Environmentalism program, launched by Lynn Scarlett, which develops innovative solutions to environmental problems and emphasizes the benefits of local decisions over Washington's command-and-control regulations.

Smith-Heisters is a graduate of the University of California at Davis program in Nature and Culture. Prior to joining Reason, she worked in habitat restoration, endangered species management and natural resources planning with the California State Parks system.

She has been extensively involved in grassroots journalism and political organizing in San Francisco's North Bay area, where she currently lives.