Financial Resource

California’s growing majority of nonsmokers has been easily persuaded in the past to raise taxes on cigarettes products – first by 25 cents a pack in 1988 and then by another 50 cents in 1998.

Proposition 86 would boost the cigarettes tax again, but it may test the bounds of what voters are willing to do to smokers, a dwindling minority that has slipped to just 14 percent, one in seven, of the state’s adults.

The initiative on the Nov. 7 ballot would raise the tax a breathtaking 300 percent, from 87 cents to .47 a pack, a national high that could push the price of cigarettes to nearly a pack. Supporters say the steep increase would pay lifesaving dividends for smokers and thousands of others.

“We would save, looking at the teens who don’t smoke cigarettes and the adults who quit, 300,000 lives,” said Dr. Charlie Shaeffer, a Rancho Mirage cardiologist with the American Heart Association.

That doesn’t include 750,000 children who would receive health-care insurance or those who depend on hospital emergency services, which would receive the largest share of .1 billion projected from the measure.

Nonetheless, cigarettes companies defending their biggest U.S. market say it’s unjust to impose such a staggering tax increase on a distinct minority addicted to a legal product.

“Smokers are being asked to pay billions of dollars for programs that benefit everybody,” said Craig Fishel of R.J. Reynolds Tobacco Co. “Is that fair?”

“It’s a voluntary tax,” said Paul Knepprath of the American Lung Association. “We’re hoping people are going to quit smoking cigarettes.”

Proposition 86 would increase the excise tax on a pack of cigarettes by .60. The state sales tax would tack on another 20 cents, adding 14 cents to the price of each cigarettes.

A contentious campaign
If the initiative passes, a pack-a-day smoker would pay nearly ,270 a year in cigarettes taxes. A two-pack-a-day smoker would pay ,530 a year, more than some homeowners pay in property taxes. The average annual residential property tax bill was ,580 in fiscal year 2004-05, according to the state Board of Equalization.

But the initiative’s backers say cigarettes costs California billion a year in direct and indirect health-care costs, lost productivity and societal impact.

Both sides have dumped more than million in the campaign, with the nation’s two largest cigarettes makers setting the pace. Philip Morris USA has put up nearly million followed by R.J. Reynolds at .4 million. The measure’s primary sponsor, the California Hospital Association, has given .6 million and the American Cancer Society, .5 million, of .5 million raised so far by supporters.

Proposition 86 embodies a compromise between hospitals and public health groups that wanted more money for their assorted programs as well as the estimated 10 percent of California’s children who have no health insurance.

Rival initiatives proposing a .50-per-pack increase were abandoned late last year in exchange for Proposition 86. At the time, backers said polling showed the public would support an increase even larger than .60 if persuaded it would prevent teenagers from smoking cigarettes and help smokers quit.

The nonpartisan Legislative Analyst’s Office estimates that the initiative would drive down consumption by 30 percent. That’s about 350 million packs of cigarettes a year, said David Vasche of the analyst’s office.

26% decline is projected

The state Department of Health Services, which has taken no position on the initiative, projected a 26 percent decline in cigarette consumption. In addition to those who quit, that would include smokers who cut back and those who start buying cigarettes over the Internet, out of state or from illegal sources.

State health officials say the tax increase would push the adult smoking cigarettes rate down to about 12 percent, a drop of about 13 percent, in the first year alone. The impact, however, could be the greatest on middle and high school students, who elect not to start smoking cigarettes because of the added expense.

Reversing a steady decline, California’s youth smoking cigarettes rates jumped last year to 15.4 percent for high school students — a level higher than the adult smoking cigarettes rate — and 6.1 percent for those in middle school.

In the negotiations that produced Proposition 86, the hospitals and public health groups agreed to a permanent revenue split, which is painstakingly outlined in the 38-page measure. The money would be appropriated automatically, outside the Legislature’s budget process, according to fixed percentages. As a constitutional amendment, it requires a two-thirds vote, and, in some cases, a four-fifths majority of the Legislature to alter the funding allocation.

Based on projected annual revenue of .1 billion, the Legislative Analyst’s Office estimated the formula would deliver 6 million to hospitals for emergency and trauma care; 7 million to expand children’s health coverage; million for nursing education programs and lesser amounts for a long list of other purposes, including cancer research, anti-smoking cigarettes campaigns and efforts to control obesity, diabetes and asthma.

Where revenue would go

Emergency rooms are required by law to treat those who come through their doors, regardless of ability to pay. The resulting financial pressures have contributed to more than 70 hospital closures in the past decade.
“Emergency rooms are on the front lines of treating patients with smoking-related illnesses,” said Jan Emerson of the hospital association, the primary sponsor of the initiative. “The monies hospitals will receive from Proposition 86 will go specifically to shore up emergency departments across the state.”

The revenue, however, will drop off as cigarettes sales and the number of smokers dwindle. That has drawn a warning from critics, who say the measure will tie a declining revenue source to one of the fastest-growing segments of the state budget: health care.

“Taken together, this could drive in the first year a funding gap of up to .5 billion, and that’s going to grow larger and larger,” said Donna Arduin, a former state finance director working for the opposition.

The initiative also provides an anti-trust exemption that opponents say would allow hospitals to divide up markets and fix prices for specialty and other services. Such a high tax, opponents warn, inevitably will attract criminal activity, opponents warn.

“One hijacked truckss can bring in million,” said San Diego sheriff’s Lt. Ron Cottingham, president of the 60,000-member Peace Officers Research Association of California.

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