April 22, 2013 / 9:31 PM / 5 years ago

California mulls $2 tax for cigarettes, risk for tobacco bonds

SAN FRANCISCO, April 22 (Reuters) - California’s anti-smoking advocates are asking their legislature to back a $2 state tax hike on cigarettes - double the increase voters rejected last year - on the heels of President Barack Obama’s urging a federal cigarette tax increase earlier this month.

The proposed increase in California would lift its excise tax on a pack of cigarettes to $2.87, steeply raising the cost of smoking in the most populous U.S. state to help fund health-care programs.

“It’s expensive and it’s something the legislature ought to do,” said Jim Knox, an advocate at the American Cancer Society Cancer Action Network. “It’s going to save lives, reduce state health care costs and improve access to health care.”

A big tax hike would reduce cigarette sales, used to determine tobacco companies’ payments to issuers of the roughly $60 billion in outstanding tobacco bonds in the U.S. municipal debt market. The bonds sold by states, counties and cities are backed by more than $200 billion in payments U.S. cigarette makers in 1998 agreed to make over time to help them pay for the costs of treating ailing smokers.

Californians on average pay $5.44 for a pack of cigarettes with all taxes included, well below the $10.08 paid in New York, which has the highest cigarette taxes of any state.

New York’s excise tax on cigarettes is $4.35, compared with California’s 87-cent excise tax. The U.S. government imposes its own $1.01 excise tax on packs of cigarettes. Obama wants to increase that tax to $1.95.

The prospect of money for health programs may appeal to California’s legislature as its majority Democrats back federal health care changes.

Groups supporting the bill include consumer advocacy groups such as Health Access California, the American Heart Association and American Lung Association. The Service Employees International Union also is part of the effort, lending lobbying muscle in a statehouse where labor enjoys tremendous clout.


But the tobacco industry also has clout in the legislature, and routinely lobbies against tobacco-related bills and supports lawmakers’ political campaigns.

The legislature, which requires a two-thirds vote for tax hikes, last increased tobacco taxes in 1993, said Jane Warner, head of the American Lung Association’s California affiliate.

Warner is hopeful for a breakthrough as the number of lawmakers taking campaign funds from tobacco interests has been declining. But Jack Nicholl, a campaign director for three California initiatives regarding tobacco policy, expects an increase will need to go to voters, who narrowly rejected a cigarette tax hike last year. “It’s going to be a hard road through the legislature,” he said. “It’s just proved to be too difficult.”

Even with political hurdles facing the California bill, the muni bond market should take note of it, said Dick Larkin, director of credit analysis at HJ Sims.

Payments supporting tobacco bonds may vary year to year and with cigarette sales already in decline, the cash-flow for the bonds in under pressure, increasing default risk for the debt. Raising taxes would further cut sales and increase default risk.

Larkin said that risk could rise “significantly” if lawmakers in Sacramento back the $2 tax hike and Congress at the same time supports Obama’s proposed 94-cent increase in federal taxes on cigarettes.

“If it goes up $3 a pack, that could cause smoking in California to drop by 15 percent,” he said, adding that such a steep drop would add momentum to the declining national smoking rate.

The number of cigarette packs sold in California dropped to 972 million in 2011 from 2.5 billion in 1988, and the state’s per capita cigarette consumption per adult dropped to 34 packs in 2011 from 123 packs in 1990, according to the California Department of Public Health.

As of 2011, roughly 19 percent of U.S. adults smoked cigarettes, compared with about 33 percent in 1980, according to the Centers for Disease Control and Prevention.

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