by Lance T. Izumi, Fellow in California Studies
Pacific Research Institute
July 23, 2002

Announcer lead: Time for Perspectives. Lance Izumi says that the proposed increase in the state tobacco tax may raise less money than Governor Davis predicts.

In order to close the state’s massive budget deficit, Gov. Gray Davis proposes a slew of tax increases, including raising the state’s tobacco tax by 72 percent to a whopping $1.50 per pack of cigarettes. Davis estimates that the tobacco tax hike will bring in nearly half-a-billion dollars in additional revenues. Before he banks on these added tax dollars, however, Davis would be well advised to look at the problems currently being experienced by states and countries with high tobacco taxes.

New York smokers have gone to great lengths to avoid that state’s high tobacco tax, which is also $1.50 per pack. The New York Times reports that many tobacco consumers travel to Indian reservations in the state where cigarettes are tax free. One smoker who visits a reservation store called the Peace Pipe Smoke Shop admits that smoking may be a filthy habit, but “that doesn’t mean I’m willing to pay those crazy taxes.”

Last December, the U.S. Supreme Court let stand a lower court ruling exempting Indian nations from collecting state tobacco taxes. The losses to New York’s treasury are significant. The Times estimates that the state may be losing close to $290 million a year.

Great Britain, which has one of the highest tobacco taxes in Europe, is now experiencing rampant cigarette smuggling. Smuggling accounts for at least 1 in 5 cigarettes in the country. Recently, customs officers at one British airport discovered 26,000 cigarettes taped together in the shape of two surfboards. It is estimated that the government is losing nearly 4 to 5 billion dollars a year in tobacco tax revenues.

Californians are every bit as ingenious as New Yorkers and Britons. If the state tobacco tax is increased, there are Indian reservations here, too. Nevada, which has a low tobacco tax, is close by. Buying cigarettes on the Internet avoids taxes. In the end, a lot of the revenues that Governor Davis expects from his tobacco tax increase may go up in smoke.

With a perspective, I’m Lance Izumi.

Lance Izumi is the Director of Center for School Reform at the California-based Pacific Research Institute for Public Policy. He can be reached via email at lizumi@pacificresearch.org.