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TEXT-Fitch: Calif. tax could depress payments to all tobacco bonds
June 5, 2012 / 9:02 PM / in 5 years

TEXT-Fitch: Calif. tax could depress payments to all tobacco bonds

 (The following statement was released by the rating agency)	
 June 5 - Fitch Ratings believes California Proposition 29 (Tobacco Tax for
Cancer Research Act) could reduce the payments that all states receive from
tobacco companies under the Master Settlement Agreement (MSA). If Proposition 29
is approved today, the tax on cigarettes in the state will increase by $1.00 per
pack to $1.87 per pack. Consistent with prior experience, we believe that higher
taxes on cigarette consumption will further depress cigarette consumption in the
state, which in turn would impact all tobacco MSA payments.	
	
MSA payments are tied to national shipment volumes and are allocated based on
each state's population when the MSA was signed in 1998. As such, any
consumption decline in California would result lower allocations to all MSA
recipients.	
	
A similar magnitude tax of $1.01 was implemented federally in March of 2009.
Subsequently, consumption decreased 10% the following year, well outside the 4%
12-year average rate of decline. California is allocated approximately 12% of
the MSA payments.	
	
We believe that there are some factors that could soften the impact. Notably,
while California is the most populous state, it has the second lowest incidence
of tobacco consumption per capita. And, we suspect that a proportion of
remaining smokers have become relatively price insensitive.	
	
The incremental tax revenue is slated to be used to fund cancer research,
smoking reduction programs, and tobacco law enforcement. The last time a
cigarette tax increase was on the California ballot was in 2006. It was
defeated.	
	
	
Additional information is available on www.fitchratings.com.	
	
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at www.fitchratings.com. All opinions
expressed are those of Fitch Ratings.	
	
 (New York Ratings Team)	
 

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