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California State Auditor Report Number : 2015-119

State Board of Equalization
Its Tobacco Tax Enforcement Efforts Are Effective and Properly Funded, but Other Funding Options and Cost Savings Are Possible

Figure 1

A flow chart depicting the flow of California’s revenue from taxes on cigarettes and other tobacco products during fiscal year 2014-15. Cigarettes are taxed at 87 cents per pack of 20 and other tobacco products are taxed at about 29 percent of wholesale cost. These taxes brought in a total of $835 million in revenue in fiscal year 2014-15, including $748 million from cigarette taxes and $87 million from other tobacco products. Of this $835 million, $86 million went to the Cigarette Tax Fund, $268 million to the Cigarette and Tobacco Products Surtax Fund, $20 million to the Breast Cancer Fund, and $461 million to the California Children and Families Trust Fund. Cigarette Tax Fund revenues are transferred to the State’s General Fund; Cigarette and Tobacco Products Surtax Fund revenues, which are imposed by Proposition 99, go to certain health and environmental programs; Breast Cancer Fund revenues support breast cancer-related research and breast cancer screening for uninsured women; and California Children and Families Trust Fund revenues, which are imposed by Proposition 10, go to early childhood development and smoking prevention programs. The board used $30 million of the $835 million of taxes collected to pay for the administration, collection, and enforcement of these taxes. Each fund paid a share of this cost mostly in proportion to its share of the total cigarette taxes collected.

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Figure 2

A line graph showing that while cigarette tax revenue has increased, the number of cigarette packs distributed for sale has declined from fiscal year 1987-88 to fiscal year 2013-14. There are two lines on the graph. The green line represents the number of packs distributed for sale, which the graph shows was just over 2.5 billion in fiscal year 1987-88 and steadily decreased to about 900 million in fiscal year 2013-14. The red line represents the tax revenue, which the graph shows was about $250 million in fiscal year 1987-88, with two large increases in total revenue following the passage of Propositions 99 and 10 in January 1989 and January 1999 respectively. Proposition 99 increased cigarette taxes by 25 cents per pack which brought the total tax to 35 cents per pack. Proposition 10 imposed a 50 cents per pack increase. Although tax revenue increased significantly for a few years following the passage of these two Propositions, the revenues followed a slow, steady decline afterwards. Cigarette taxes were also increased by 2 cents per pack in January 1994. Total cigarette tax revenue was about $750 million in fiscal year 2013-14. The graph shows that in 1998 California entered into the Master Settlement Agreement with tobacco manufacturers to settle lawsuits for damages related to the health effects of smoking. Also, on January 1, 2004, the Cigarette and Tobacco Licensing Act went into effect and on January 1, 2005, the requirement to use an encrypted tax stamp for cigarettes became effective.

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Figure 3

A line graph showing a decrease in the number of inspections that resulted in a seizure of cigarettes that lack a California tax stamp from fiscal year 2004-05 to 2013-14. There are three lines on the graph. The green line represents inspections that resulted in the seizure of cigarettes with counterfeit tax stamps, which were about 875 in fiscal year 2004-05, decreasing dramatically to about 290 in fiscal year 2005-06 and steadily decreasing to nearly zero in fiscal year 2013-14. The red line represents inspections that resulted in the seizure of cigarettes without any tax stamp, which were about 460 in fiscal year 2004-05, decreasing to about 50 in fiscal year 2010-11, followed by a slight increase the next two years then going back down to just under 100 in fiscal year 2013-14. The blue line represents inspections that resulted in the seizure of cigarette with other states’ tax stamps, which was under 100 in fiscal year 2004-05 and near zero from fiscal years 2006-07 through 2013-14.

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Figure 4

A color-coded map of the United States showing the type of stamp used by states to indicate that cigarette and other tobacco products’ taxes have been paid. States use a variation of either an encrypted stamp or a traditional stamp, or no stamp at all. Blue represents the one state, Massachusetts that uses an encrypted stamp on cigarette packs and one or more other tobacco products. Green represents the three states, California, Michigan, and New Jersey that use an encrypted stamp on cigarette packs only. The tan color represents the five states, Washington, Illinois, Iowa, New York, and Vermont that use a traditional stamp on cigarette packs and one or more other tobacco products. Red with white strips represents the three states, North Dakota, North Carolina, and South Carolina, with no stamp. The remaining 38 states are coded in a light peach color; these states use a traditional stamp on cigarette packs only.

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Figure 5

A color-coded bar chart depicting the amount of each state’s cigarette tax as of October 2015. The bars are stacked horizontally, with states and the District of Columbia listed by the tax per pack of cigarettes. The bars for States that border California including Arizona, Nevada, and Oregon are yellow and California is green. The bars for the remaining States are blue green. The tax per pack of cigarettes ranges from a low of about 20 cents in Missouri to a high of about $4.30 in New York. California’s tax is 87 cents per pack and the national average is $1.61 per pack.

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