BLACK MARKET PREDICTED WITH BOOST FOR CIGARETTE
TAX IN 1988 THRIVING

California's bad habit of settling political conflicts with
blockbuster ballot measures began in 1978 with Proposition 13, the
property tax limitation whose effects continue to reverberate nearly
three decades later.

By 1988, a decade later, the syndrome was in full flower, with several
dozen high-profile measures proposed. Not all qualified for the
ballot, but tens of millions of dollars were spent - big money in
those days - on the ones that did. They included five measures on
insurance and personal-injury lawsuits and Proposition 98, the school
finance measure that is the most powerful factor in the annual state
budget wrangle.

Speaking of bad habits, another of those high-dollar measures in 1988
was Proposition 99, the first of a spate of drives to raise cigarette
taxes. At the time, although cigarette sales in California had been
decreasing as smoking's health effects had become better known, it was
still a fairly common practice. Thus, the proposed boost in taxes from
10 cents a pack to 35 cents was highly controversial.

The tobacco industry committed millions of dollars to an
anti-Proposition 99 campaign. One of its most controversial propaganda
themes was that by raising taxes on cigarettes, the measure would
create a criminal black market in untaxed smokes. Pro-tax advocates
and editorialists universally dismissed the allegation as fanciful.

The new tax, approved by 58 percent of voters, never generated the
$650 million per year in revenue that its proponents promised. After a
brief $500 million spike, revenues began a yearslong slide until
another boost in cigarette taxes, this time 50 cents a pack, was
enacted in 1998. That one, sponsored by actor-director Rob Reiner to
benefit early childhood development, caused another temporary uptick
in cigarette revenues to $1.2 billion a year, but they have also since
declined. Last year, voters rejected a $2.60 per pack boost to
underwrite health care.

Per capita cigarette sales, as calculated for tax purposes, have
dropped from nearly 150 packs per year in the early 1960s to scarcely
a fifth of that level today, undoubtedly a good thing from the public
health standpoint. But as smoking has become much more expensive
because of higher taxes and surcharges imposed by cigarette makers to
pay for a multibillion-dollar lawsuit settlement, the old campaign
propaganda about a black market has come true.

Earlier this month, the dimensions of the black market became evident
when three Southern California men were sentenced to federal prison
and ordered to pay the state nearly $2 million in lost taxes for their
roles in a massive scheme to smuggle untaxed cigarettes from Virginia
to California. The Bureau of Alcohol, Tobacco, Firearms and
Explosives, which cracked the case after an undercover investigation,
described it as "a complex conspiracy" that involved potentially huge
profits.

The state Board of Equalization, in a 2003 report to the Legislature
that is now being updated, estimated that the state was losing $292
million per year in taxes on black market cigarettes, mostly those
brought in by organized smuggling rings. There was also so-called
"casual evasion" by individuals buying cigarettes in nearby states,
from Indian tribes and through Internet sales.

The report helped persuade the Legislature to pass bills to tighten
oversight of cigarette retailers and wholesalers - laws that state tax
officials hope will reduce the traffic in black market smokes.

Nevertheless, the lucrative trade in untaxed cigarettes proves that
the 1988 campaign claim was on the mark. As with liquor during
Prohibition and illicit drugs today, when government makes a commodity
illegal or expensive, it creates a market that criminals will supply.