August 12, 2009
"Cigarette tax hike would invite unintended consequences"
By Michael D. LaFaive and Todd Nesbit
California is in a world of hurt financially, and the electorate has shown itself to be in no mood for higher taxes. Despite this, lawmakers have introduced three separate initiatives to hike cigarette taxes by as much as $2.10 per pack. On June 17, Senate Bill 600, which would raise taxes by $1.50 per pack, was voted out of the Senate Health Committee.
We caution against such a tax hike, and not just for fiscal reasons. Research we released last December with Tax Foundation economist Patrick Fleenor indicates that cigarette smuggling in California and elsewhere is already rampant.
In 2006, a staggering 34.6 percent of all cigarettes consumed in the Golden State were the result of smuggling, with 14.7 percent of this attributed to smuggling from Mexico. Increasing taxes will only exacerbate this and other problems. Indeed, we estimate that a $1.50-per-pack tax hike would result in a smuggling rate exceeding 50 percent of the total market, legal and illegal.