Proposition 56: Should California Voters Increase the State Excise Tax on Cigarettes and Other Tobacco Products?

The Proposition 56 tobacco tax measure will appear on the November 8, 2016 statewide ballot. This post summarizes what Prop. 56 would do, reviews the key context surrounding the measure, and discusses the policy issues it raises. The California Budget & Policy Center neither supports nor opposes Prop. 56.

What Would Proposition 56 Do?

Cigarettes and other tobacco products — the No. 1 preventable cause of death in California — would get a lot more expensive if voters approve Prop. 56. This measure would raise the state excise tax on cigarettes by $2 per pack, from the current $0.87 to $2.87, effective April 1, 2017. California’s excise tax on other tobacco products, such as chewing tobacco, would go up by an equivalent amount if the measure passes, and electronic cigarettes (“e-cigarettes”) that contain nicotine would be subject to the state excise tax for the first time.

Prop. 56 is projected to boost net state revenue by more than $1 billion in 2017-18, the first full fiscal year that the measure would be in effect. These new dollars would be deposited into a state special fund and used primarily to increase payments for doctors and other health care providers who serve the more than 13 million low-income Californians enrolled in Medi-Cal. Smaller shares of Prop. 56 funds would pay for tobacco control and enforcement efforts, tobacco-related disease research, physician training, dental disease prevention, and other activities. (For a full description of Prop. 56, see the analysis prepared by the Legislative Analyst’s Office (LAO). The LAO’s overview appears in the state’s voter guide, along with a “pro/con” section featuring proponents’ arguments in favor of Prop. 56 and opponents’ arguments against the measure.)

Key Facts About Smoking in California

The vast majority of adult tobacco users in California smoke cigarettes, according to the most recent review of the state’s tobacco control program from the California Department of Public Health (CDPH). Key facts about smoking in California include the following:

  • California’s smoking rate has dropped by half since the late 1980s. Smoking in California is much less common today than a generation ago. Roughly 1 in 9 adults (11.6 percent) smoked in 2014, down from nearly 1 in 4 (23.7 percent) in 1988. This 51 percent drop is due to a number of factors, including growing awareness of the health risks of smoking, changing attitudes about smoking, and laws banning smoking in public areas, including bars and restaurants. Increases in the state excise tax on cigarettes and other tobacco products have also contributed to this decline. For example, Prop. 99 of 1988 raised the cigarette tax by 25 cents per pack, and Prop. 10 of 1998 further boosted this tax by 50 cents, bringing it to the current 87 cents per pack.
  • People with low incomes are more likely than other Californians to smoke. In 2014, 16.1 percent of adults who had annual household incomes of $20,000 or less were smokers, compared to just 6.8 percent of those whose incomes exceeded $100,000, according to data from the CDPH. While the share of low-income Californians who smoke has declined in recent years — this rate exceeded 20 percent as recently as 2002 — the poorest Californians are still the most likely of the state’s residents to smoke. Smoking is also more prevalent among Californians with less education. “Together, these two risk factors — lower income and lower education level — illustrate the need for policy and systems approaches to address disparities in cigarette smoking rates,” the CDPH suggests.

Proposition 56 Would Lead to Improved Health Outcomes

By significantly boosting the price of cigarettes and other tobacco products, Prop. 56 is expected to immediately reduce tobacco consumption. Moreover, the measure could affect consumers’ behavior long after the tobacco tax increase would take effect on April 1, 2017. Higher prices could prompt an escalating number of smokers to quit as well as dissuade a growing number of people from lighting up in the first place. Beefed-up anti-tobacco campaigns — paid for with Prop. 56 revenues — would also help cut tobacco consumption, including the use of both cigarettes and e-cigarettes, the latter of which are particularly popular among young Californians. In short, Prop. 56 could restore California’s momentum in reducing tobacco use rates, which “have stalled in the last few years,” according to the CDPH.

Low-income smokers would be the most likely to cut back or quit in response to a tobacco tax increase, reaping significant health and financial benefits. Research shows that people with low incomes are more sensitive to changes in tobacco prices compared to those with higher incomes. As a result, low-income individuals “will be more likely than high-income people to smoke less, quit, or never start in response to a tax increase,” according to our colleagues at the Center on Budget and Policy Priorities (CBPP). “This means that the health benefits of [a tobacco] tax increase would be progressive.” Moreover, these health benefits would extend to nonsmokers, including children, through reduced exposure to secondhand smoke. “Children are especially vulnerable to the health effects of secondhand smoke, with those living in lower-income households significantly more exposed,” explains the CDPH.

It’s not surprising that low-income smokers would be more likely to cut back or quit as the cost of cigarettes goes up. Under Prop. 56, the average price per pack would rise to over $8 after factoring in all taxes, including excise and sales taxes. Even at “just” $8 per pack, someone who smokes a pack a day would spend nearly $3,000 per year on cigarettes. That’s roughly one-fourth of the federal poverty guideline for an individual in 2016 ($11,880 per year). Clearly, quitting smoking not only has huge health benefits, it also generates large financial returns by freeing up hundreds or even thousands of dollars in the budgets of former smokers.

Proposition 56 Revenues Would Primarily Support Ongoing Medi-Cal Spending, but How Would the Revenues Perform Over Time?

As smoking has declined over the past few decades, so have cigarette sales and state tobacco tax revenue. With a smaller share of Californians smoking, cigarette sales have plunged. California smokers consumed 2.7 billion packs of cigarettes in 1987-88, the fiscal year before Prop. 99 raised the state excise tax on cigarettes by 25 cents per pack. By 2014-15, cigarette consumption had dropped by about two-thirds (67 percent), to 881 million packs. Lower tobacco consumption means that California’s tobacco tax generates substantially less revenue today compared to the late 1980s, after accounting for the declining purchasing power of the dollar. Inflation-adjusted state tobacco tax revenue fell from $1.6 billion in 1989-90 to roughly $870 million in 2014-15 – a 44 percent decrease.

In the short term, the tax increase proposed by Prop. 56 would more than double annual state tobacco tax revenue. Specifically, the LAO projects that the measure would boost net state revenue by $1 billion to $1.4 billion in 2017-18. The lion’s share of these new dollars — $710 million to $1 billion in 2017-18 — would go to Medi-Cal, our state’s Medicaid program. These funds would be used to boost payments for health care services and treatment. California’s Medi-Cal reimbursement rates are widely viewed as inadequate, contributing to diminished provider participation in the program and constraints on access to care. State policymakers in 2011 approved a 10 percent cut to these payments; while some providers and services have been exempted from this reduction, the cut largely remains in place today. The new funding provided by Prop. 56, which would be matched with federal Medicaid dollars, would likely go a long way toward addressing provider shortages in various parts of California and ensuring timely access to care for Medi-Cal’s beneficiaries.

Although the revenues raised by Prop. 56 are significant, they would decline over time to the extent that tobacco consumption continues to fall in California, as seems likely. This means that fewer Prop. 56 dollars would be available to support increased Medi-Cal provider payments in future years, creating a gap between the cost of these payment increases and the revenues available to pay for them. State policymakers could address this gap by replacing lost Prop. 56 revenues with dollars from the state’s General Fund, by further raising the state tobacco tax and allocating some or all of the new revenues to Medi-Cal, by reducing Medi-Cal provider payments to a level that reflects available Prop. 56 funding, and/or by taking other actions.

Conclusion

Prop. 56 would increase the state’s excise tax on cigarettes by $2 per pack, boost the tax on other tobacco products by an equivalent amount, and — for the first time — apply the state excise tax to e-cigarettes that contain nicotine. These changes are expected to increase net state revenue by more than $1 billion in 2017-18. The vast majority of these new dollars would be used to increase payments for doctors and other Medi-Cal providers. Smaller shares of Prop. 56 funds would go to other activities, including a variety of tobacco control efforts.

Substantially higher tobacco prices, enhanced anti-tobacco media campaigns, and other factors would likely lead to ongoing reductions in tobacco consumption in California. Such declines would mean both health and financial benefits for those who quit using tobacco products or never start in the first place. In addition, increasing Medi-Cal reimbursement rates would help to boost providers’ participation in the program and help ensure timely access to care — and possibly improved health outcomes — for the more than 13 million low-income Californians who rely on Medi-Cal to meet their health care needs. However, declining tobacco purchases would reduce the annual revenue raised by Prop. 56, leaving less funding available to support the payment bump for Medi-Cal providers in the years ahead — a gap that future state policymakers would need to address.

On balance, the health-related benefits of Prop. 56, including a reduction in smoking and new funding for Medi-Cal, outweigh the uncertainty over how future policymakers would respond to annual declines in the measure’s tobacco tax revenues.

— Scott Graves