Dan Walters: Taxes fed illegal sale of smokes

California's bad habit of settling political conflicts with blockbuster ballot measures began in 1978 with Proposition 13, the property tax limitation whose impacts 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 -- big money in those days -- was spent 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 impacts 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 as 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 years-long 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 tax 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 federal 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.