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California Nonsmokers Poised to Vote Their Own Tax Increase



California citizens, about 86 percent of whom are reportedly nonsmokers, will soon vote on the Coalition for a Healthy California’s Tobacco Tax Act of 2006 (Proposition 86). A September 27, 2006 San Francisco Bay Area CBS 5 poll that surveyed 900 California adults reports 56 percent of voters will vote “Yes” on Proposition 86. The poll raises an important perspective: judging by the percentage of nonsmokers in California, it appears that about 30 percent of those who do not smoke already understand Proposition 86 to be a seriously flawed ballot measure. What might those voters understand about California’s proposed tobacco tax increase that 70 percent of their fellow nonsmokers apparently do not? Is it possible that 30 percent of California’s nonsmokers can see beyond the expedience of shifting the tax burden to a politically unpopular minority, to comprehend important facts?

Close examination of Proposition 86 indicates that California nonsmokers who reportedly would vote “No” on Proposition 86 may be the more astute, indeed prescient, voters. Many important arguments against this new tax have been presented by several “No on 86” groups and Web sites. This article focuses on additional information that has not been discussed to date, but which is central to the fiscal responsibility aspects of Proposition 86. The additional information also concerns facts that tobacco control advocates aware of, but have not disclosed in their advocacy to pass $2.1 billion in new taxes. Information that is not disclosed raises the possibility that the 70 percent of nonsmokers who would vote “Yes” are ultimately voting for a $2.1 billion per year in tax increases on themselves. I explain why below, in context of what we citizens in Washington have experienced after passing a similar cigarette tax ballot measure, Initiative to the People 773, in November 2001. The costly experience of taxpayers in other states may provide constructive guidance for California voters.

I approach this subject in three short sections. First, we take a look at the new revenues that Proposition 86 will allegedly raise in the near term and the fixed, long term state expenses that it will create. Second, information concerning tobacco control’s long term nicotine policy as recently published in a national journal is discussed. Third that information is summarized in terms of Nicotine Replacement Therapy Parity Pricing. Finally, a brief summary of those facts will show that Proposition 86 could be the largest state tax revenue give-away to corporate special-interests in the history of the state. Those who would vote “Yes” in Proposition 86 can then decide if they want to fund from their pockets and in perpetuity $2.1 billion in taxpayer subsidies for the biggest of Big Drugs.
 
Revenue vs. Expenses

According to a May 26, 2006 Executive Summary published by the Tobacco Control Section of the California Department of Health LINK the ballot measure will raise $2.27 billion per year in new cigarette excise tax revenues and another $58.6 million each year in increases sales tax revenue.

A July 20, 2006 Legislative Analyst’s Office report LINK that shows allocations for $2.1 billion per year in new tax revenues from this measure, the three largest beneficiaries of those new tax revenues are:

1. Hospital emergency care: $756 million
2. Children’s health coverage: $367 million
3. Tobacco control:
a.) Tobacco cessation: $ 18 million
b.) Media campaign: $ 55 million
c.) Competitive grants $ 36 million
d.) Local health departments $ 34 million
e.) Prevention education: $ 18 million
f.) Evaluation: $ 4 million
g.) Research: $ 32 million
Tobacco Control Total: $197 million

The bottom line is that the California Department of Health projects $2.3 billion in immediate revenue from Proposition 86 and the Legislative Analyst’s Office itemizes a full-page list of $2.1 billion in long-term, permanent state costs that will legislated for taxpayers if Proposition 86 passes. Predictably, the principal beneficiaries of new tax revenues from that ballot measure are also those who have sponsored and are aggressively promoting the ballot measure.

But what if the projected $2 billion-plus in new cigarette tax revenues do not materialize as represented? Taxpayers in Washington have learned a tough, expensive lesson about tobacco control advocate’s revenue projections since I-773 passed in 2001. Washington has the strictest smoking ban in the nation, even exceeding California’s ban, and the third highest cigarette excise tax as well ($20.25 per carton.) But careful analysis of cigarette consumption reveals an important fact: Washington collects only 55 percent of the cigarette excise taxes that its adult smoking prevalence rate says it should receive. If Washington’s trend follows in California, all taxpayers – smokers and nonsmokers alike – would be funding with new taxes a revenue shortfall of $1 billion per year to fund the long term, permanent costs created by Proposition 86. Considering that Proposition 86 would place California as the No. 1 cigarette tax in the nation with $3.47 per pack in total taxes, taxpayers can reasonably expect that declines in taxable cigarette consumption, and therefore cigarette taxes collected, could be even more severe.
 
In 2005 the Washington legislature passed a new estate tax (to replace a previous death tax that the state Supreme Court had ruled illegal), plus more taxes on alcohol and tobacco, to fund important state budget items such as K-12 education. Are California voters who would vote “Yes” on Proposition 86 willing to fund from their own pockets through new taxes $1 billion-plus in permanent revenue shortfalls that the ballot measure could create?
A Comprehensive Long Term Nicotine Policy

Tobacco Control, 2005;14:161-165
“Toward a Comprehensive Long Term Nicotine Policy”
N Gray, J E Henningfield, N L Benowitz, G N Connolly,
C Dresler, K Fagerstrom, M J Jarvis and P Boyle
Received 7 October 2004 Accepted 19 January 2005

“Clean nicotine is defined as nicotine free enough of tobacco toxicants to pass regulatory approval. A three phase policy is proposed. The initial phase requires regulatory capture of cigarette and smoke constituents liberalising the market for clean nicotine; regulating all nicotine sources from the same agency; . . . The second phase anticipates clean nicotine overtaking tobacco as the primary source of the drug (facilitated by use of regulatory and taxation measures); simplification of tobacco products by limitation of additives which make tobacco attractive and easier to smoke (but tobacco would still be able to provide a satisfying dose of nicotine). The third phase includes a progressive reduction in the nicotine content of cigarettes, with clean nicotine freely available to take the place of tobacco as society’s main nicotine source.” (Underline, bold, italic added.)

The above comprehensive long term nicotine policy research paper was published in 2005 by the journal Tobacco Control. One of the paper’s authors, Neal Benowitz is with Department of Medicine, Psychiatry and Biopharmaceutical Sciences, University of California San Francisco. He has been actively involved as a leader in tobacco control advocacy for about two decades. California tobacco control advocates who support Proposition 86 are necessarily aware of the contents of the above research paper. What the paper coauthored by Benowitz reveals is a clear and concise plan to replace tobacco with Nicotine Replacement Therapy delivery devices such as Nicorette gum, NicoDerm CQ patches, Commit lozenges, and Nicotrol nicotine inhalers.

But no Nicotine Replacement Therapy product pays any state excise tax in Washington. So the comprehensive long term nicotine policy becomes a plan to cause consumers to switch nicotine brands from highly-taxed cigarettes to ZERO TAXED “Smoke Free” Nicotine Replacement Therapy. In effect, each box of Nicorette or NicoDerm CQ, etc. sold in Washington becomes a transfer of $20.25 in state excise tax revenues out of state coffers, removing those funds from state budgets. Carried to its Phase 3 completion as described above, that nicotine policy would reduce California cigarette excise tax revenues to virtual ZERO because the written purpose of the policy is for zero taxed Nicotine Replacement Therapy products to “take the place of tobacco as society’s main nicotine source.”

We therefore observe that tobacco control advocates and their political supporters hold out with their left hand – and handsomely benefit from – Proposition 86, while holding behind their back in the right hand a clear and concise plan to eliminate the cigarette excise tax revenues that fund new state costs the ballot measure creates. That creates the appearance of Proposition 86 being an underhanded “bait and switch” for California taxpayers. It would be nice if tobacco control advocates were required to keep both hands above the table when playing revenue roulette with taxpayer’s money.

In Washington, we have learned about that apparent “bait and switch” the hard way. Our state’s 55 percent cigarette excise tax collection rate painfully illustrates the costs of tobacco control’s long term nicotine policy by providing a measure of how deeply that policy encroaches on projected cigarette excise tax receipts. Those who would vote “Yes” on Proposition 86 are funding tobacco control’s bets on its own in-house Nicotine Replacement Therapy roulette wheel. The house always wins.
 
Parity Pricing
 
“Increasing cigarette taxes is a WIN, WIN, WIN solution for states - a health win that reduces smoking and saves lives; a fiscal win that raises revenue and reduces health care costs; and a political win that is popular with the public. It's no wonder that 42 states and the District of Columbia have increased cigarette taxes since January 1, 2002, more than doubling the average state cigarette tax from 43.4 cents to 93.7 cents a pack. The average state cigarette tax will rise even more to 96.1 cents per pack in January 2007 when recently approved tax increases in Hawaii and Texas take effect.”

Considering the long term nicotine policy, the above statement is misleading. Perhaps there will always be those who the campaign regards as nicotine “addicts.” But what nicotine products will they use?

Washington’s I-773, which added 60 cents per pack in cigarette taxes, passed November 2001. During the 2005 legislative session Washington legislators passed an additional 60 cents per pack cigarette taxes. Total cigarette tax increases from 2000 to 2006 were $1.20 per pack, or $12.00 per carton.

In 2000 I began a research project. I bought a carton of Marlboro cigarettes and a box of Nicorette gum at the same store on the same day. Purchase receipts and copies of the box or carton with lot numbers were preserved. What I learned from this project was at once stunning and troubling. I compared the prices for Marlboro and Nicorette purchases in June 2000 and January 2006. The receipts reflected the tax increase in the cost of Marlboro. But the receipts also revealed that for the period that spanned a $12.00 increase for cigarettes, the cost of Nicorette increased by $12.06 per box, on a per unit basis. The phenomenon where the cost of product A increases in correspondence with price increases for product B is referred to as Parity Pricing. Since GlaxoSmithKline does not pay state excise tax on Nicorette, the increases in the cost of cigarettes due to the Campaign for Tobacco Free Kids tobacco tax advocacy became bottom line profits for the company. In effect, every box of Nicotine Replacement Therapy sold becomes a state subsidy for the product’s manufacturers and distributors.

The story concerning Washington’s I-773 and California’s Proposition 86 therefore converge around a deeply troubling set of facts concerning two corporations and one private foundation.

1. GlaxoSmithKline distributes Nicorette gum, NicoDerm CQ patches, and Commit lozenges.

2. Johnson & Johnson subsidiary ALZA Corp. subsidiary manufacturers NicoDerm CQ for GlaxoSmithKline. Through its June 26, 2006 purchase of Pfizer Consumer Health Care for $16.6 billion Johnson & Johnson will also own Nicorette, if the transaction is approved by the Federal Trade Commission under 1976 Hart-Scott-Rodino Antitrust Improvements Act requirements.

3. Robert Wood Johnson Foundation, which owns a reported $3.9 billion stake in Johnson & Johnson common stock has invested at least $446 million in grants to tobacco control advocates since 1992 (including $84 million in grants to the Campaign for Tobacco-Free Kids). Such advocacy not only inflates the cost of cigarettes for consumers but through Parity Pricing it also artificially inflates the cost of Nicotine Replacement Therapy smoking cessation products as well.

Like California’s Proposition 86, I-773 was actively supported by the Campaign for Tobacco Free Kids. As noted above the campaign has an $84 million vested interest in Proposition 86 passing. The University of California at San Francisco has also received tens of millions in tobacco control grants from the Robert Wood Johnson Foundation under the foundation’s SmokeLess States program. Tobacco control advocates who aggressively support Proposition 86 are directly tied through $3.9 billion of common stock and $446 million in special-interest grants to the corporations who will benefit the most through Nicotine Replacement Therapy price increases.

Considering the above, my recommendation to those who would still vote “Yes” on Proposition 86 is simple. Go ahead, voters, put up your own money to fund tobacco control’s bet on its own in-house tax roulette wheel.

What slot do you think the tax revenue ball is going to fall into? You’re gambling $2.1 billion per year in new state costs that the house will not win on its own bet.

Mr. Kjono has researched and written about tobacco control for the past twelve years. He is a former columnist and board member for www.forces.org. Mr. Kjono’s commentary about youth smoking, “Let’s Really Save the Kids” was republished in the Luncent Press/Greenhaven Books 2000 anthology “Teen Smoking” under the title “A Better Way to Talk To Teens About Smoking.” His works on this subject have also been published in numerous trade journals, including the Los Angeles Daily Journal, plus Chief Engineer and Heating/Piping/Airconditioning magazines. He has also appeared on BBC London, Fox News, and CNN concerning tobacco control subjects.

Mr. Kjono can be reached at normkalr@earthlink.net.
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