The 1980's and Proposition 99

In the 1970s, a smuggler could make between $10,000 and $50,000 in profit with just one truckload, cigarettes being so small that 200,000 packs would fit in an 18-wheeler. The maximum profit could be earned if the wholesale source were one of the Indian reservations or Southeastern tobacco states, but convenience, reliability and stealth also factored into the decision of where to buy.

Yet the entire decade of the 1970s and most of the 1980s passed without another California tax hike. Because of high inflation, the 10-cent excise tax had less and less impact each year, and California's smokers seemed less inclined to hunt up a source for lower-taxed cigarettes.

In 1985, the ACIR followed up its earlier study with another look at the tax-exemption problem. Its newer research chronicled the decline of tax-exempt sales on military bases, confirming that California's comparatively low tax rate had solved much of the problem. The general consensus among scholars who have studied the problem and police who have combated it is that California's low cigarette taxes before 1988 did not attract much bootlegging. Its distance from the Southeast probably helped.[195]

The passage of Proposition 99 three years later, however, hiked cigarette taxes by 25 cents per pack and dedicated the revenues from the tax to smoking prevention. By raising the state's cigarette tax from 10 cents to 35 cents per pack, or 250 percent, Proposition 99 created an opportunity for smugglers to drive a tractor-trailer load of cigarettes into California and make $50,000 in criminal profit, reducing California's excise tax revenue. Commercial smuggling surged, and regular taxed sales dropped by one third over the next decade. Some asserted that smokers had quit in droves rather than pay the tax, but federal data indicate that actual cigarette consumption dipped by less than 5 percent.[*]

Consumers began to appreciate the military commissaries and post exchanges they hadn't frequented in recent years, and tax-free sales on base rose by more than 10 percent over the next five years.[196]

There was another reason customers returned to military bases in the late 1980s: The U.S. Supreme Court finally ruled against the Native American Tribes, forcing them to collect tax from non-Indians. With their location inconvenient to non-Indian customers, the reservation stores could no longer compete. Most closed down.

[195] For a discussion of this topic, see Cigarette Bootlegging: A State AND Federal Responsibility, 79-90, and Preliminary Estimates of California Cigarette Tax Evasion, California Board of Equalization, June 1999. While traditional over-the-road bootlegging has been less of a problem in the state, according to government officials, California has experienced diversion of tax-free cigarettes — such as those sold at military bases and on Indian reservations — into its ordinary retail market. See, for example, Cigarette Bootlegging: A State AND Federal Responsibility, 13.

[196] Stephen Green, "More Smokes Smuggled, Taxes Lost," Sacramento Bee, April 14, 1994.

[*] Authors' calculations using data from The Tax Burden on Tobacco, U.S. Centers for Disease Control, and U.S. Census Bureau.