Extras on Excise: Smoke 'Em If You Got 'Em; California's Tobacco Taxes Set to Skyrocket in 2017

On Nov. 8, 2016, over 64 percent of voters in California elected to pass Prop. 56, which made several important changes to cigarette and tobacco taxes within the state.

Most notably, on April 1, 2017, the tax rate for distribution of cigarettes in California will increase from $0.0435 to $0.1435 per cigarette, meaning the tax on a pack of cigarettes will jump from $0.87 to $2.87 overnight.

Proponents of the increase point out that California’s current cigarette tax rate is one of the lowest in the United States, ranking 37th in the nation and is well below the tax rates of other western states, including Washington ($3.025/pack), Arizona ($2.00/pack), Nevada ($1.80/pack) and Oregon ($1.32/pack).

National Public Radio (NPR) also notes that an increase in the price of cigarettes may cause the smoking rate in a population to decrease, even though California’s smoking rate is currently the second lowest in the country at 12 percent.

Regardless of the reasoning, California’s new rate will put the state in the top ten cigarette tax rates in the nation.

While this steep tax increase is certainly newsworthy, it is also important to note some other changes put in place by Prop. 56.

One such change is the expanded definition of “tobacco products,” which will also become effective on April 1. The new definition specifically lists electronic cigarettes as tobacco products, meaning e-cigarettes will be subject to tobacco excise taxes for the first time under California law. However, there is a caveat: only e-cigarettes sold in conjunction with substances containing nicotine (such as e-vapor, vapor juice and e-liquids) are subject to tax; e-cigarettes and other nicotine delivery devices sold by themselves (or otherwise without substances containing nicotine) are not subject to tax.

Prop. 56 also imposes a one-time floor stock tax on cigarettes, which requires retailers and wholesalers to take inventory of all cigarettes in their possession on April 1, 2017, and then pay an additional tax on that inventory prior to July 1, 2017.

While many changes to tobacco taxes will become effective this April, certain amendments will not become effective until July 1, 2017. One such amendment is the adjustment in the tax rate for distribution of “tobacco products.” 

California Rev. & Tax. Code § 30123(b) specifically mandates that any increase in cigarette excise taxes automatically causes an equivalent increase on excise taxes for other tobacco products. This means items historically considered “tobacco products,” such as cigars, pipe tobacco, chewing tobacco, snuff and snus—in addition to e-cigarettes—will also be subject to significantly higher taxes, albeit three months after the cigarette tax increase.

So, what is California projected to get out of all of these tax increases? 

According to the state’s Legislative Analyst’s Office, the new tax regime should increase net state revenue by over $1 billion in 2017–2018. This revenue will be distributed in accordance with Prop. 56, but will generally be used (1) to replace any tax revenues lost due to lower tobacco consumption; (2) to pay for the California Board of Equalization’s costs in administering the tax; (3) to pay specified state entities for costs of various programming, including the enforcement of tobacco-related laws, training primary-care physicians and educating the public about dental health disease, among others; and (4) to provide funds for various specified state health programs.

While only time will tell what effects Prop. 56 will have on California’s economy and healthcare systems, one thing appears certain: tobacco will soon cost a pretty penny in the Golden State. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are California’s tax increases long overdue or too much too soon?

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