Skip to comments.Tobacco Bonds Deliver a Lesson -- Decline in smoking hurts payment of state notes (CA-DUH!)
Posted on 03/15/2012 4:58:12 PM PDT by Mark
The percentage of Californians who smoke has dropped to an all-time low of 11.9 percent, the second-lowest in the nation behind Utah's 9.1 percent. That's good news for the health of Californians, but bad news for the state's budget and First 5 program, which funds local services for children up to age 5.
The decline in smoking was anticipated, but it has descended at a much sharper rate than predicted. As a result, California will face difficulty in funding $16 billion in bonds the state has issued since 2001. The bonds are supposed to be financed by payments from the 1998 Tobacco Master Settlement Agreement between big tobacco companies and 46 states, including California. However, the settlement payments are not fixed, but linked to tobacco sales.
Unlike many other states, California made the mistake of deciding not to take the annual payments from tobacco firms but instead borrowed money against expected receipts. Now that the payments are less, the state faces another fiscal problem.
California is one of only a few states that guaranteed some of those bonds with general fund revenue. If tobacco settlement money does not cover the debt, the state will have to pick up some of the tab. There are currently $2.9 billion in bonds outstanding that are backed by a state general fund guarantee.
To add to its fiscal woes, California went back to investors in 2007, when it issued $4.4 billion in 40-year tobacco bonds. To have sufficient revenue to pay back investors by 2047, the state assumes cigarette consumption will decline by about 1.8 percent per year. However, because of higher taxes, anti-smoking laws and health concerns, smoking has declined by about 3 percent, and sales have dropped much more quickly than predicted.
The First 5 program, initiated by Rob Reiner's Proposition 10, also has suffered considerable revenue losses that are not likely to be made up with other state funds.
In fact, Gov. Jerry Brown tried to raid what was left of the First 5 funds, but he was blocked by counties that successfully sued to keep the money.
There will be another attempt to get more revenue from smokers with a proposed June ballot initiative to get $1 per pack tax increase on cigarettes.
Such a huge levy would boost cigarette costs to more than $7 a pack for some brands, which is likely to increase the rate of decline in smoking or create a black market, either of which could further deplete revenues to pay the tobacco bonds.
There are a couple of lessons to be learned from this situation:
First, it makes far more economic sense to accept regular long-term payments than to borrow money against them for short-term use.
And second, ever-increasing huge taxes on a product are likely to be counterproductive as use of the product declines or sales go underground.
Unfortunately, with the state's reluctance to adapt to economic realities, we are less than confident that either lesson will be learned in Sacramento.
Just like raising taxes on business and people with the means to pick up and leave.
People are either quiting or switching to Nicorette gum (which works very well).. They’ll probably start taxing the crap out of Nicorette gum. But anyway, smoking is a ‘luxury’ and when luxury goes, so goes smoking. Let the KaliKommie “second hand smoke is killing our children” and ‘butt-free beaches” crowd scramble for more money.. Watch out, pot smokers! Hahahaaa...
That’s ok, because the purpose was to get people to stop smoking and be healthier. It was for the children. Right?
“Thats ok, because the purpose was to get people to stop smoking and be healthier. It was for the children. Right?”
I just love watching California Government “Hump Itself!” I hope Rob Reiner goes apoplectic when he sees his “child indoctrination program” go under. The solution here is always to issue more bonds, but figuring out the viability of the repayment process, not so much!
Once you kill the golden goose, you go after all the birds you can find.
Those that were okay with the high taxes on cigarettes will now get to cover those costs for the kids.
I always said that anyone who told me they were “for the children “ had better be smoking....put your money where your mouth is.
but you know, its all for the children and for our "own" good so they say.
WARNING TO ALL OF YOU HATERS OF TOBACCO USERS - YOU ARE NEXT
Actually going cold turkey has a better track record for long term.
Theyll probably start taxing the crap out of Nicorette gum.
That will never happen because it is the funding behind Nicorette that caused this problem to begin with.
Tobacco should move 100% to the black market like Marijuana is now, just to punish the parasitic government.
Thanks for the ping,Gabz.
The rise in bootlegging will be a boost to the economy though. :-)
The definition of stupid.
“Let’s see. Demonize something. Tax it to death”
The left has already sarted on all things made with sugar. It’s just a matter of time.
Tax chocolate and the end has come!
Along with that they’ve set their eyes upon the obese and will surely find ways to force penalties (taxes) upon them. I guess rising food costs is punishment, but 0bamacare will make the obese pay ‘in spades’. Political correctness gone amok!
All them there chickens coming home to roost...
With some dragons thrown in for emphasis.
This statement could spawn its own laundry list.
Rush and other talkers had this sized up from day one.