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G 0 CIGARETTE EXCISE TAX FACTSHEET CALIFORNIA C NOVEMBER 1982 .

.TABLE OF CONTENTS I. POTENTIAL TAX REVENUES AND THE STATE OF CALIFORNIA II. CALIFORNIA AND THE CIGARETTE TAX III. BOOTLEGGING IV. COMPARATIVE REVENUE V. IMPACTS OF AN INCREASE IN THE CALIFORNIA CIGARETTE EXCISE TAX VI. THE BURDEN OF EXISTING TAXES

. POTENTIAL TAX REVENUES AND THE STATE OF CALIFORNIA In 1981, California grossed $280,626,000 in cigarette taxes when the average retail price was 66.4 cents per pack. During FY 1982, the average retail price increased and state tax revenues from cigarettes slipped to $279,207,165.1 On January 1, 1983, an eight-cent increase in the Federal Excise Tax will hike cigarette prices still further,• and it is reasonable to expect sales to decline. Any further increase in taxes at the state level would push cigarette prices toward the level of $1.00 in California, a price that may act as a psychological barrier which could further dampen sales. Raising the tax rate inevitably depresses sales, thereby causing revenues generated by the increase to fall short of expectations. Compounding this fact with expected consumer resistance to a $1.00 selling price could very easily be adverse to the state in attempting to generate additional revenue because the tax base can be eroded by decreased sales. For California specifically, cigarette demand will decline 2.5 percent for every 10 percent increase in real price, according to a statistically unbiased econometric model. Therefore, it can be expected that addition of the eight-cent Federal Excise Tax increase to the current average retail price on January 1 will lead to a decline in legitimate 1983 cigarette sales in California of about 94 million packs, even though the number of smokers in the state will increase. This decline will probably consist of an actual cutback combined with increased smuggling. As a result, wholesalers' and retailers' basic income would be cut by $13 million in 1983. 1Revenue figures verified by Business Taxes Division, California Board of Equalization.

II. CALIFORNIA AND THE CIGARETTE TAX California has been taxing cigarettes since 1959. In that period, the tax rate has climbed from three cents to ten cents a pack today. To date, this tax has generated more than $4.4 billion in gross.revenues for the state of California. In the fiscal year ending June 30, 1982, gross revenue from the cigarette tax in the state amounted to $279 million, an increase in revenue of more than 330 percent from 1960. C

C III. BOOTLEGGING One indirect measure of bootlegging is the degree of deviation of a state's per capita cigarette sales from the U.S. average. States losing sales through bootlegging would be expected to have per capita consumption below the national average, whereas states which are the source of the illegal cigarettes are expected to have per capita figures ranging above the norm. Data for 1982 show that overall per capita consumption in California is 115.4 packs. The U.S. average is 133.1 packs. According to a report produced by the Advisory Commission on Intergovernmental Relations, and updated by the Federal Bureau of Alcohol, Tobacco and Firearms, California lost an estimated $19.9 million in cigarette revenues through bootlegging, most likely smuggling from Mexico, in 1979. This loss represents an estimated 4.4% of total cigarette tax revenues for the state for that year. Any further tax increase would depress legal sales in California and would lead to increases in bootlegging and further losses in expected.revenue. In other states where high cigarette taxes exist, the criminal element has become involved. If California were to raise its tax on cigarettes, the state could probably expect a bootlegging problem of major proportions. ~

TABLE I CALIFORNIA AND SURROUNDING STATES, CIGARETTE TAX DATA, 1982 Cigarette Sales State Total Tax 1982 State Tax Rate Tax Per Pack Difference Oregon 19.4 * None 19.0¢ +4.0~ Nevada 10.0 4~ 14.0 -1.0 Arizona 13.0 3 16.0 +1.0 California 10.0 5¢ 15.0 1982 State Tax-Paid Sales Per Capita Difference Oregon 135.3 packs +19.9 packs Nevada 165.1 +49.7 Arizona 113.5 - 1.9 California 115.4 * Tax rate raised from 9¢ in June 1982.

TABLE II a, since ional jed here .LECTED SALES AND GROSS RECEIPTS TAX REVENUE, 1981 Percent of Total f their Tax Revenue (000) State Revenue 4.0 )nal 1980- 1981 1980 1981 ~ :1s $ 854,185 $ 839,317 4.4% 4.1% below 3e taxes : 446,262 460,447 2.3 2.2 • ily 31.0 :s 269,044 283,898 1.4 1.4 of : Bev 138,902 141,752 0.7 0.7 seem to :ls 126,306 133,288 0.6 0.7 ie for iral Mark ient et 35,844 46,248 0.2 0.2 :ilities 19,028 23,805 0.1 0.1 )n ~xes, .cuZture Dept. 14,781 15,143 0.1 0.1 : U.S. Bureau of the Census, State Government Tax )ns in 1981.

_____Y._____IMPACTS OF AN INCREASE IN THE CALIFORNIA CIGARETTE EXCISE TAX \ Higher cigarette taxes will have effects on those persons directly involved in the tobacco industry in California, and on those indirectly involved such as convenience store operators and small retailers. Higher cigarette taxes and the resulting decline in the purchase of tax-paid cigarettes will also reduce state revenue from other sources, such as the general sales tax, corporate income tax, and the individual income tax. For example, cigarettes are traffic-builders for the state's 43,943 retail establishments which sell cigarettes. When people reduce purchases of cigarettes, or turn to bootlegged cigarettes, the revenue derived from the sales and profits of. other products suffers as in-store traffic declines. In addition to retailers, California has 216 primary tobacco wholesalers and 95 other large grocers, drug and miscellaneous wholesalers who handle cigarettes across the state. Decreased consumption due to a higher cigarette tax rate will affect supermarkets and convenience stores as well. According to the September 1982 issue of Supermarket Business, tobacco products account for'14.83 percent of all non-food'sales in the United States. Forty-four percent of the cigarettes sold for domestic consumption are sold in supermarkets. Those cigarettes and other tobacco products •account for 3.51 percent of all supermarket sales. In convenience stores, excluding gasoline sales, cigarettes are the number one product sold. Tobacco products comprise 16.1 percent of the gross profit dollars of convenience stores, according to Convenience Store News (June 14, 1981).

VI. THE BURDEN OF EXSITING TAXES The California cigarette tax is already a regressive and inequitable tax. The cigarette tax discriminates against the more than six million residents of the state who smoke, but the tax falls most heavily on thos4 least able to afford it. Because the percentage of income devoted to buying cigarettes falls as income rises, California cigarette taxes are already levied at higher effective rates on the disadvantgaed and those on fixed incomes than on the more affluent. Any increase in the current tax rate will add to the tax burden on the lower income groups and will contribute further to the overall regressivity of the California tax structure. In 1981, 25 percent of what California smokers paid for a pack of cigarettes went to the Federal and state governments in the form of taxes. For a family.with two pack-a-day smokers, the following chart illustrates the burden of cigarette taxes in California as they fall on different income levels at the current rate. (See Table III). Sixteen percent of California families have an average buying income of less than $8,000 per year. It is these families who will suffer the most from an increase in the cigarette tax rate. A family with an income below the poverty level oi $5,000 per year with two pack-a-day smokers pays almost five times as much of its income for the pleasure of smoking as does a more affluent family making $25,000 a year. In addition, for those elderly California residents living on a fixed income, any increase in the California cigarette tax rate may take away this last affordable pleasure.

Median household effective buying income in California is $23,018 per year. Under the current tax the average household with two smokers is required to pay $167.90 in taxes on cigarettes a year for the pleasure of smoking. On January 1, 1983, when the Federal Excise Tax hike of eight cents per pack goes into effect, this same family will pay $226.30 in taxes for its cigarettes. ~