SACRAMENTO, CA - Turning a two-year budget surplus of $12 billion into a deficit of $24 billion, California’s current predicament, is a tough act to follow by any standard. But a debt-relief plan currently making the rounds here may be up to the task, at least in terms of irony, because it makes the state dependent on the very groups it has punished: smokers and the Big Tobacco companies.

The current spending plan of nearly $100 billion would raise cigarette taxes by $650 million per year, and chop $46 million from anti-smoking campaigns. Now comes the interesting part. California is due to receive $12.5 billion as part of a 1998 $206-billion settlement with tobacco companies. That is a lot of money but state leaders have found a way to transform the $12.5 billion into $4.5 billion.

They want to sell California’s $12.5-billion share of this settlement to investors, in a one-shot deal that gives new meaning to the term “discount,” for $4.5 billion, about a third of its value. They would use the money to alleviate the deficit, putting it in the general fund for parks, education, and health care. The entire package would cover about 20 percent of the budget shortfall but ultimately cost $8 billion.

It is as though some spendthrift youth attempted to cash out a trust fund for a third of its value to make car payments, pay off gambling debts, and cover living expenses. But no analogy does the plan justice.

The tobacco settlement was intended for anti-tobacco programs, not debt relief. As it stands, no money from increased tobacco taxes, which are likely to be counterproductive anyway, nor the tobacco settlement cash-out, is slated for use in anti-smoking programs. Understandably, that has upset some people in the public-health community. The plan’s long-term prospects are obviously better if more people smoke two packs a day than if they quit.

This hardly squares with the Davis Administration’s past anti-smoking evangelism and efforts to make it seem otherwise are laughable, the equivalent of Bill Clinton disclaiming sexual relations with Monica Lewinsky. Yet what truly amazes is the lack of attention the tobacco scheme has received in the press. Those tempted to endorse it should ask if they would accept similar accounting for themselves or their business.

The fix is attractive because the Davis administration is reluctant to stop spending, make cuts, and shrink government. Runaway spending is the reason the state has a deficit of $24 billion. In California, taxes and spending have outpaced both inflation and population growth since 1990. Residents pay a larger proportion of their income in taxes than they did before the introduction of Proposition 13 in 1978. This has prompted a flight of taxpaying workers to states that manage quite nicely without a state income tax.

Some legislators want to raise California’s income tax from nearly 10 percent to 11 percent. One may be sure that legislators are lamenting that California is not an independent country, so they could devalue the currency. A proposal eliminating the state’s constitutional mandate for a balanced budget would come as no surprise.

Meanwhile, California’s Tobacco Dependency Act, as it should be called, is bad fiscal policy and bad health policy. It should be consigned to the ashtray of history.

K. Lloyd Billingsley is editorial director of the Pacific Research Institute in San Francisco. He can be
reached via email at klbillingsley@pacificresearch.org.