One month following California’s implementation of a state-wide flavored cigarette ban, tax-paid cigarette gross sales dropped 17.3 %. Greater than 5.6 million fewer packs have been bought in January 2023 than in January 2022. On an annual foundation, California will possible see revenues fall by greater than $300 million.
We beforehand estimated {that a} menthol ban in California would lower annual state revenues by $329 million when combining the income losses from cigarette excise taxes, decreased gross sales taxes, and fewer Grasp Settlement Settlement funds. The unique estimates by the California Division of Tax Charge Administration estimated the decline in income from the flavour ban at $218 million. Primarily based on the preliminary gross sales information, nevertheless, the state will possible exceed $218 million in misplaced income by August.
The outcomes from the flavour bans in California and Massachusetts ought to function a cautionary story to policymakers in different states. If the state misplaced income primarily as a result of folks have been giving up tobacco merchandise, some policymakers would possibly regard that as a win—however to a big diploma, that’s not what’s taking place. The state is dropping income whereas customers flip to cross-border purchases or, usually, illicit commerce, which makes everybody worse off.
Massachusetts was the primary state to ban the sale of flavored cigarettes. Their menthol ban took impact in June 2020. Within the first fiscal 12 months following the ban, revenues fell by $120 million (26 % of cigarette excise tax income). The decline of gross sales in Massachusetts was virtually fully offset by a rise in purchases in neighboring states, together with a 34 % enhance in gross sales in New Hampshire and a 25 % enhance in gross sales in Rhode Island. In different phrases, Massachusetts sacrificed $120 million in annual income to don’t have any important impact on smoking.
Worse, Massachusetts launched important incentives for smuggling and collaborating in black markets. In 2020, with the flavour ban in place for under half of the 12 months, Massachusetts noticed cigarette smuggling enhance by an estimated 6.6 proportion factors. Roughly 11.2 million extra packs have been smuggled into Massachusetts in 2020 than in 2019. The smuggling drawback in California will possible be a lot worse.
California is uniquely deprived relating to smuggling and illicit markets. Not solely does the state have a big geographic border with Oregon, Nevada, and Arizona, however the state additionally shares a land border with Mexico and hosts two of the biggest transport locations within the nation—the Port of Los Angeles and the Port of Lengthy Seaside.
California has the second-highest smuggling price within the nation. Roughly 45 % of all cigarette packs consumed within the state should not bought in California. In 2020, 47 million packs of cigarettes have been both bought throughout state strains or smuggled throughout the border. These foregone gross sales value the state $1.4 billion in tax income, the very best determine for any state. The flavour ban will exacerbate that misplaced income, whereas additional propping up a harmful illicit commerce.
Whereas the Massachusetts taste ban inspired customers to go throughout state strains to buy menthol cigarettes, the state had no present discernable marketplace for internationally smuggled cigarettes. In 2019 and 2020, all smuggling into Massachusetts was estimated to return from different U.S. states.
California, however, has a longtime, sturdy market already in place for smuggled worldwide cigarettes. In 2020, roughly 1 in 6 packs of cigarettes smoked within the Golden State have been smuggled from a world outlet.
“Low cost whites” or “illicit whites” are a staple of the worldwide counterfeit market. These generic-looking white cigarettes are produced legally in low-tax jurisdictions however are sometimes meant for smuggling, with Chinese language manufacturing main the worldwide counterfeit market. Tutorial research hyperlink the consumption of low-cost whites to areas with excessive cigarette tax charges and prohibitive buy restrictions like California.
As the flavour ban in California enters its third month, the pricey penalties of the coverage are simply starting to mount. Declining income and stronger incentives for customers and producers to go to the black market will enhance felony exercise and make it tougher and fewer enticing for Californians to function in a secure and controlled market. Policymakers ought to fastidiously contemplate the unintended penalties as they set charges and regulatory regimes for all tobacco and nicotine merchandise.
