Californians Debate Prop. 56 Ahead of March 2 Vote

With so much upward potential for California's cigarette, liquor and gasoline taxes, nothing so alarms their manufacturers like a Legislature suddenly freed from its two-thirds "supermajority" (search) requirement to raise taxes.

Now, as public employee unions push Proposition 56 (search) to lower that threshold to 55 percent, tobacco, oil, liquor and insurance companies have emerged as the measure's most identifiable opponents. Widespread industry fears of being quick, easy targets for tax hikes are showing up as several million dollars to defeat the measure March 2.

"We feel we could easily be scapegoated, and we would expect to be taxed in the next couple of years," said Mike Falasco, lobbyist for the San Francisco-based Wine Institute (search). "We don't expect to be targeted once, but again and again."

California lawmakers have not suggested they will rapidly raise taxes if the ballot measure passes, and backers of the measure have downplayed the idea. But evidence shows such companies may have reason to worry.

A January poll by the Public Policy Institute of California (search) revealed that 75 percent of likely voters favor tax hikes on cigarettes and alcohol to help stem the state's red ink. Numerous other states have already done so, raising cigarette taxes by a combined $3.9 billion during the last two years, gasoline and diesel fuel taxes by $475 million and liquor taxes by $43 million during the same time, estimates the Denver-based National Conference of State Legislatures (search). Finally, comparisons with other states show California's excise taxes on wine are among the nation's lowest, while those on beer, distilled spirits and gasoline are in the nation's mid-range.

Such figures suggest plenty of capacity to absorb increases as the state's budget crisis expands into its fourth year and lawmakers grapple with spending cuts, bonds and tax hikes to close billions of dollars in shortfalls.

Already, Sen. Gloria Romero, D-Los Angeles, has proposed raising liquor taxes by a nickel per drink to raise $500 million for California's trauma centers. Romero's idea follows last year's unsuccessful move by former Gov. Gray Davis to raise California's 87-cents-per-pack cigarette tax to $1.97.

"Whatever the industry, their concern is the same," said Al Lundeen, anti-Proposition 56 spokesman for oil companies, cigarette makers, and insurance firms that fear potential increases in their $2 billion annual premiums tax. "It raises a great deal of uncertainty about what taxes are around the next corner."

The March ballot measure aims to overturn Proposition 13's (search) two-thirds legislative requirement to raise many state taxes, but it does not affect local property taxes. It also ends a 1933-era requirement for a two-thirds majority to pass a state budget. Proposition 56 would make state legislators stay in session without pay when they miss their June 15 constitutional deadline to pass a budget as they have done every year since 1986.

Opponents, however, have focused solely on its ability to raise taxes more easily.

Beer companies such as Anheuser Busch, Miller Brewing and Coors Brewing and their California distributors have contributed an estimated $1 million for television commercials against the measure. The Wine Institute and Washington D.C.-based Distilled Spirits Council have provided another $400,000 each.

"Every time you increase the tax on beer, wine or spirits, you reduce the profitability of the industry and reduce the sales volume of the industry and you cause a loss of jobs," said Dr. Peter Cressy, president of the Washington, D.C.-based Distilled Spirits Council (search). The group claims it has defeated new alcohol taxes in 32 of the 34 states that proposed them during 2002 and 2003.

As California's alcohol consumers pay an estimated $294 million in excise "use" taxes this year, 19 states charge higher taxes than California's 20 cents a gallon for beer. Forty states charge more than California's 20 cents a gallon for wine, reports the Tax Policy Center of the Washington, D.C.-based Brookings Institution. The state's $3.30 a gallon use tax for distilled spirits is in the middle nationally, the institution reports.

Similarly, 18 states charge more than California's 87-cent-per-pack cigarette tax. New Jersey, by comparison charges $2.05 per pack. Cigarette taxes brings $115 million a year to California's general fund, nearly $1 billion for special health programs, and were last raised in 1999.

"By our estimate, 20 states raised cigarette taxes in 2002 and 14 raised them this past year," said NCSL fiscal analyst Arturo Perez, who called cigarette taxes "the most common form of tax increases that we saw in the last two years."

Nationally, 37 states charge a higher "use" tax for gasoline than California's 18 cents per gallon, reports the American Petroleum Institute. Amid recent Capitol talk of raising the 1994-era tax for highway improvements, major oil companies such as Chevron Texaco, Exxon Mobil and BP Corp. have contributed nearly $800,000 to defeat Proposition 56. The API also notes that when California's other state and local taxes are considered, the state ranks fourth nationally behind Hawaii, New York and Nevada for total taxes per gallon.