In one sign of the silly thinking that dominates government, in many states and even federally, funding for various programs comes from utilization taxes on items the government wants you to use less of: alcohol, cigarettes, and gasoline, to name a few. When people follow the government/public health exhortations and lower their consumption, or when a product is outright banned, the tax revenue drastically decreases – and legislators are forced to either cut programs or push for different tax increases. Of course, they almost never cut programs.
We’re seeing that scenario play out in California right now related to the state’s ban on certain flavored tobacco products that went into effect in December 2022. The ban was passed by the legislature in 2020 but was immediately challenged, so it didn’t go into effect until after voters passed Proposition 31, upholding the ban, in 2022.
During that time, everyone involved (proponents, opponents, legislative analysts, independent think tanks) estimated that the tax revenue loss would be in the hundreds of millions of dollars. Advocates argued that the revenue loss would be offset by savings to Medi-Cal, because people would quit using tobacco and wouldn’t have as many tobacco-related healthcare costs. There are a few problems with that line of thinking. First, it assumes that people will stop using tobacco altogether because they can’t get these flavored tobacco products. There’s voluminous data suggesting that isn’t the case, since people will either buy it on the black market or they’ll switch to other, non-banned items. Second, it assumes that all of the people who use it and will quit are on Medi-Cal right now and that they are currently being treated for tobcaco-related medical issues that place a certain cost on the system. And, it assumes that the Medi-Cal savings will be realized almost immediately. Those are a lot of assumptions, and there’s no data to justify them.
It would seem that those proposing the ban would understand, at a very minimum, that there would need to be bridge funding for any programs affected by these tax revenue losses, and have at least a suggestion as to where that funding would come from. But again, this is California; I’ve long said that I believe legislators and lobbyists sketch out the framework of a proposed legislation on a napkin at a steakhouse near the Capitol, and that framework is what actually gets passed into law. Then they allow the regulators to sort out the details and fix the “unintended” consequences.
Making matters worse for vulnerable Californians is the fact that revenues from tobacco taxes are what fund mental health and early childhood programs. Proposition 10, the “California Children and Families Act,” imposed an additional tobacco tax on both consumers and producers, and funds the state’s “First Five” programs. These county-based programs “emphasize child health, parent education, child care, and other services and programs for children prenatal through age 5,” including post-partum support services.
Statewide, tobacco tax dollars make up about 73% of First 5’s annual budget, although this largely varies by county. For example, First 5 in Kern County relies almost entirely on tobacco taxes. Meanwhile, the First 5 in Monterey County said in its most recent annual report that almost 40% of its funding now comes from grants and philanthropy.
And now that funding is being severely impacted by the flavored tobacco ban. After the first full month of California’s flavored tobacco ban, the Tax Foundation reported that tax-paid cigarette sales fell 17.3 percent year-over-year, which equates to more than $300 million in lost tax revenue on an annual basis.
One mother, Angela McGregor, told Spectrum News that these services have been vital for her family.
The programs that have helped McGregor and her family are now under threat of going away or being reduced as a significant portion of the First 5 funding comes from a tobacco tax that has been declining as more Californians quit smoking.
And, according to Yolo County First 5 Executive Director Gina Daleiden, that funding decline has recently ramped up.
“The Proposition 10 tobacco tax has been declining at a rate of 3% to 5% per year,” Daleiden said. “And that decline will accelerate potentially more than 10%, 20%, maybe more percent with the passage of the flavored tobacco ban.”
Daleiden said all county-operated First 5 departments are trying to figure out where new funding can come from.
She said in Yolo County they’ve been able to partially offset some funds with money from a local cannabis tax, but said it’s an unstable source.
“Statewide, First 5’s are looking at ways to potentially access existing state and local government funding streams. And also thinking about an approach to the state for some funding from the budget directly to back fill the loss.”
Regardless of how one views the propriety or utility of government-funded early childhood programs, this issue highlights a seldom-discussed facet of the interplay between sin taxes and product bans. There’s an incentive to keep people using tobacco through legal sales, because it funds these programs. If these products are banned, it doesn’t diminish demand, but rather drives it underground, where they’re not taxed. A better practice would be (outside of getting rid of taxes altogether, which would be this libertarian-leaning writer’s true desire) to not tie “sin” taxes to things like healthcare and mental health funding, or to demand that legislators have immediate alternate funding planned before they enact one of these bans.