CA Poised to Increase Tobacco Tax

Will the Unintended Effect be an Increase in Smuggling, Terrorism & Organized Crime?

In California, where voters have rejected higher tobacco taxes at the ballot box twice in the past decade, a new effort is afoot to increase taxes on cigarettes by two dollars per pack.

State Senator Kevin de León, D-Los Angeles, authored SB768, which would increase cigarette taxes by two dollars per pack and lock future tax increases into law without subjecting them to a vote. De León is pushing this legislation despite the fact that California’s voters have twice rejected increased cigarette taxes at the ballot box.

Politicians love taxing things like cigarettes and alcohol because they get to eat their cake and have it too. They are enabled to project increased tax revenue, which they can then spend on programs that buy them votes while talking about the “good” they’re doing by raising the cost of the “sin,” reducing the use of tobacco and alcohol, which in turn saves lives.

The problem with all this is, like most grand political schemes, that’s not how it works out.  And in this case, there’s lots of evidence that raising taxes on tobacco creates lots more problems than it solves.

The best-case scenario is that increasing taxes in California will simply drive consumers to shop in neighboring states with lower taxes or at military commissaries and PX stores or Indian reservations. Those sources are active and profitable even within states because no federal taxes are assessed.

California is big enough so that those options probably won’t be an option for most smokers. The worst-case scenario is that these taxes push extra incentives at criminals to make money by getting away with selling cigarettes sans the state fees.

So, the greater the fee or tax on a product, the more lucrative the black market payday for the criminal. Here’s the unintended consequence of all this: the cigarette market becomes very attractive to smugglers and bootleggers and terrorists to finance their operations and illicit activities.  “Unintended consequence” is an acronym for government overreach.

Who benefits from increased taxes on tobacco?  According to the Cato Institute, “cigarette smuggling has provided a revenue stream for organized crime for over 50 years.”  More recently, Al-Qaeda, Hezbollah and MS-13 have profited from the trade.

“Some violent gangs now are selling cigarettes, drug traffickers are selling cigarettes-there are definitely some violent people who are involved,” Jeffrey Cohen, an associate chief counsel for the Bureau of Alcohol, Tobacco, Firearms and Explosives, told the Richmond Times-Dispatch.

John K. Ross from Reason sums up the situation nicely:

A trunk or a truck filled with cases of smokes can yield a five-to-seven-figure payday. It’s a temptation that many-including small-time criminals, cops, military personnel, convenience store owners, cigarette wholesalers, and organized crime-can’t pass up.

The problem strikes very close to home right in Sacramento where this ill-considered legislation is being proposed.  Even though gang activity in Sacramento County is less this year than it was in 2012, the opportunity to generate significant income from smuggled cigarettes could well generate a spike in gang crime in the Capitol.

Herb Brown notes, in the Sacramento Bee, that both brains and brawn are needed to fight the gang problem:

The Bee’s recent editorial on gangs was an important message to the public that while work is under way in Sacramento and throughout the state to combat our gang problem, there is growing concern that gang culture continues to proliferate across all demographics of our society. The significance of this threat resonates all the way from the local police chief to the governor.  …

Fighting gang activity must be done with brawn and brains. Our response of more sophisticated, intelligence-driven policing, information sharing, and impactful programs that make a difference in our communities is already under way.

While the significance of smart policing of gang activity may well be resonating up to the governor’s office, it’s obviously bypassed the legislature. Senator de León’s legislation is not just a step in the wrong direction — it’s a marathon. A massive increase, with an annual ratchet up built in to the legislation, is a terrible idea. The unintended consequences will include funneling a massive revenue stream to California’s gang culture as well as a likely reduction in overall tax collections from tobacco.

Again, Reason hits the nail on the head:

What we have here is a classic lose-lose situation. Levying high taxes on a popular commodity like cigarettes creates not only a black market, it also turns otherwise innocent people-who are just trying to circumvent an oppressive and confusing tax system-into criminals. Furthermore, cracking down on these criminals involves a whole slew of other resources (courts, police, etc.) that drain government funds.

Senator de León’s bill is lying in wait in committee, and it’s time to tell him, “NO!”