Capitol Alert

Cigarette sales dive after tax hike, but why?

Cigarette purchases in California plummeted in the first weeks of a $2-a-pack tax hike after spiking in the months before the higher prices took effect.

Are people smoking cigarettes they had bought months earlier? Or is the sticker shock causing people to try to kick the habit?

Friday’s report by the nonpartisan Legislative Analyst’s Office presents an early look at possible changes in consumer behavior following voters’ approval last November of the tobacco-tax measure, Proposition 56.

The analyst’s office examined several months of revenue from tobacco taxes that were imposed before Proposition 56 passed. In the two months before the measure took effect April 1, tobacco tax revenue ran 24 percent and 37 percent above 2016 levels.

Seth Kerstein, who wrote the report, said one explanation for the jump in revenue is consumer stockpiling of cigarettes. His review included looking at available data on cigarette purchase trends following past tobacco tax hike increases, including a 62 cents-a-pack federal increase in 2009.

“We just didn’t see much that looked like this,” Kerstein said of the steep post-April 1 drop-off.

Revenue for existing cigarette taxes 

In its review of Proposition 56 in last fall’s voter guide, the analyst’s office assumed that the measure’s approval would cause purchases of cigarettes to fall by roughly 20 percent to 30 percent.

Those estimates might have been too low. Revenue from pre-Proposition 56 taxes was down 64 percent in May compared to a year earlier, according to Friday’s report. “At this point we do not know how much of the May decline was temporary and how much will be permanent,” the analyst’s office said.

It’s possible that some California consumers are buying lower-taxed cigarettes in neighboring states, or even over the internet. Kerstein, though, said stepped-up enforcement and travel distances hamper illegal purchases. “It seems the success rate for obtaining tax-free cigarettes is low,” he said.

Whatever the drop in revenue from pre-Proposition 56 tobacco taxes, overall tobacco tax revenue should increase significantly through June 2018. Proposition 56 alone will generate an estimated $1.4 billion, more than double the $657.8 million in projected revenue from earlier tobacco taxes.