Fitch Ratings said in a press release Tuesday that the California Proposition 29, the Tobacco Tax for Cancer Research Act, could reduce payments that all states receive from the Tobacco companies under the 1998 Master Settlement Agreement (MSA).

California Proposition 29 would increase tax on cigarettes in the state by $1.00 per pack to $1.87 per pack in order to support cancer research, smoking reduction programs, and tobacco law enforcement. The last cigarette tax increase proposed on a California ballot was in 2006 and it did not pass.

Analysts at Fitch noted that a similar incremental tax of $1.01 was implemented federally in March of 2009 and consumption declined 10% the following year.  Fitch believes that California's Proposition 29 would also lead to less cigarette consumption, which would lead to decreased MSA payments throughout the nation.

"MSA payments are tied to national shipment volumes and are allocated based on each state's population when the MSA was signed in 1998," the Fitch analysts noted in the release." As such, any consumption decline in California would result lower allocations to all MSA recipients."

However, California already accounts for the second lowest incidence of tobacco consumption per capita, despite being the most populous state. It's likely that the remaining California’s smokers will be relatively unresponsive to price, according to Fitch.

MSA payments made by tobacco companies in 2012 have mostly met official estimates, but Curtis Erickson, head of high-yield municipal trading at Mesirow said, in an April ASR report, that new taxes over the past couple of years and the lingering effects of the recession have made accurate estimates difficult.

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