California’s Proposition 56 would tax electronic cigarettes the same as other tobacco products

Californians are fond of direct democracy, if the frequency of ballot initiatives in this state is any indication. On each even numbered year from 1996 to 2014 voters in the Golden State decided on an average of eighteen measures. This November, sixteen proposals on topics ranging from prescription drug price regulations to the required use of condoms in pornographic films are offered to the public for an up or down vote. Nearly all these measures were placed on the ballot by citizens through the collection of signatures on petitions.

One initiative that has garnered considerable attention is Proposition 56 which would create the “California Healthcare, Research and Prevention Tobacco Tax Act of 2016 Fund” in the State treasury. All revenue from the tax would be earmarked for this Fund. Sponsors of the ballot initiative, including billionaire activist Tom Steyer, state that the purpose of the tax is to “provide funds to support preventive programs aimed at discouraging individuals from using cigarettes and other tobacco products, including electronic cigarettes.”

Higher rates of excise tax

Voters in California previously raised the cigarette excise tax by 25¢ and 50¢ per pack through ballot initiatives in 1988 and 1998, respectively. Despite these increases, the current state excise tax of 87 cents per pack is below the national average. If adopted, Proposition 56 would add $2.00 of tax per pack and levy an equivalent tax on other tobacco products including electronic cigarettes at a rate to be determined annually by the State Board of Equalization.

Proposition 56 amends Section 30121 of the Revenue and Taxation Code by classifying electronic cigarettes as tobacco products. Electronic cigarettes would include components and accessories “when sold in combination with any liquid or substances containing nicotine” but not if sold separately. The potential effect of a new tax on electronic cigarettes combined with a broad taxable base including devices and accessories could be a disruptive increase in consumer prices. As recently as October the state of Pennsylvania introduced a 40% levy on the wholesale price of electronic cigarettes. Rather than pay the high tax and raise the price to consumers many vape shops have closed their doors and gone out of business. Several state legislators are hurriedly trying to repeal the tax and replace it with a low specific levy on the nicotine containing liquid only.

Constitutional Impact

One particularly controversial component of Proposition 56 is the addition of Section 23 to Article XVI of the California Constitution. The amendment would dictate that revenue derived from the tax not be considered “General Fund revenues”, effectively removing it from the review and scrutiny of legislators in the annual budget process. Economists generally frown on such strict earmarking of tax revenue as it introduces rigidity into the budget process and fails to keep pace with changing legislative priorities.

As of October 28 over 100 million dollars have been contributed by promoters and opponents of Proposition 56. Only a week remains before voters decide. Vapers’ ability to purchase their preferred alternative source of nicotine at an affordable price hangs in the balance.