Cap-and-Trade, Cigarette Tax and the Tale of Dwindling Funds

SmokingCalifornia’s cap and trade program and cigarette tax increases have something in common — the more they encourage behavioral changes in reducing greenhouse gas emissions and smoking, the less revenue they bring in. If the goal is to reduce the pollutants and the smoke then the programs can claim some success. But, these programs also appear to be about the money.

While the Legislature considered ways to divvy up the current cache of cap and trade money, tremors were felt through the system when the May cap and trade auction sold only 11 percent of the permits offered to business and fell far short of the expected revenues.

The cap and trade program is designed for companies to cap greenhouse gases or purchase permits at auction or traded in the market.

What happens if the polluting companies achieve the goal of reducing greenhouse gases and do not need permits? As Stanford economist Frank Wolak told the Los Angeles Times in a comprehensive article on the cap and trade issue, “To the extent that not all the permits are being sold, that is a success of the program.”

But not necessarily a positive to those who want to spend the money that come from the cap and trade auctions.

Chief among them is Gov. Jerry Brown. He needs the money to bolster his bullet train project, which is not capturing the revenues it needs to meet its enormous cost. Other programs designed to reduce climate change are also dependent on money from cap and trade. If greenhouse gases are reduced and there is no need to spend on permits, money is not available for the train or other projects.

There is a similar story when cigarette taxes are raised. Programs are funded with the expected revenue but when the increased taxes turn off smokers from purchasing cigarettes (that’s part of the plan we are told by advocates) the money dries up liked cured tobacco leaves.

Cigarette purchases are down and so is the revenue. The fund that pays the First 5 commissions has seen state revenue from the cigarette tax drop about $150 million annually since its peak. Now there is an initiative bid for an additional cigarette tax. The measure’s proponents recognized the potential for revenue decreases if the tax passes. In the measure, they wrote that if the new tax causes reduced tobacco consumption, that make-up revenue from the new tax would be transferred to existing tobacco funded programs.

But once this new tax reduces consumption where does the money come from to fund those existing programs or for the recipients who will receive money if the cigarette tax initiative passes?

Is cap and trade a different kind of revenue source than taxes on cigarettes? The California Chamber of Commerce doesn’t think so. That organization is seeking a court ruling that cap and trade revenue is a tax. Like the cigarette tax, given the goal of both the cap and trade fee and cigarette tax, the cap and trade charge could also be considered a “sin” tax. It is being levied to punish (and reduce) a certain practice.

It has been argued that not as much money would be needed for the anti-smoking programs or greenhouse gas reduction because problems associated with these concerns would be at least partially solved.

Show of hands from those who believes the money won’t be missed by those who currently receive it and that they won’t try to find a way to make their budgets whole again.

Thought so.

This piece was originally published by Fox and Hounds Daily