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California’s New Excise Tax on Guns & Ammunition

By on October 27, 2023 Categories: ,

This guest post does not necessarily represent the views of the Duke Center for Firearms Law.

On September 7, the California legislature passed AB 28, which creates an 11% state excise tax on all guns, ammunition, and gun parts sold by licensed gun dealers in the state. (An excise tax is like a sales tax on specific goods or services.) Dealers can charge the customers the tax or, in theory, cover it themselves out of their profits. The law includes two significant exemptions: for purchasers who are active or retired law enforcement officers, and for dealers whose gross quarterly receipts for guns, gun parts, or ammunition are less than $5000.  

Some news outlets have (mis-)attributed the new law to Governor Gavin Newsom (see also here), but it was passed by the state legislature by an overwhelming majority in both houses, and merely signed by the Governor into law. The new tax on guns was not a unilateral action by Governor Newsom, though he publicly supports stronger (stricter) gun laws, including this one. Note also that California has several other state-level excise taxes already in place – on cigarettes, alcohol, gasoline, call phone plans, cars, tanning salons, etc. Unsurprisingly, the gun industry opposed this legislation, but it is normal for industries to oppose or lobby against excise taxes on their line of business.

Earmarked Revenue: The new law creates a Gun Violence Prevention and School Safety Fund, to which all the gun tax revenue will go. The tax revenue is projected to be about $160 million per year. (Predicting excise tax revenues can be tricky, because some taxes suppress sales of the taxed item, which means fewer instances where the tax can apply.) The law also stipulates how the Fund should distribute the collected tax revenue: the first $75 million goes to the California Violence Intervention and Prevention (CalVIP) Grant Program for violence prevention programs, while the next $50 million goes to the state Department of Education for school security improvements. The next $15 million goes to the Judicial Council for a court-based firearm relinquishment program, the $15 million after that goes to the state DOJ to fund a gun violence victims compensation fund, and so on. The tax goes into effect in 2024.

Legislative Findings/Declarations: At the beginning of the Act (sec. 2), AB 28 sets forth a lengthy section of policy reasons or arguments for the bill, mostly focused on the astronomical social cost of gun violence—including a heavy burden on the public fisc. One particularly noteworthy subsection (“o”) anticipates a court challenge under Bruen, citing several historical examples of firearm taxes:

In the historical record, other states, including Mississippi (1844), North Carolina (1857), Georgia (1866), Alabama (1867), Hawaii (1870), Nebraska (1895), Florida (1898), Wyoming (1899), and Virginia (1926), have similarly enacted longstanding commercial, occupational, or other taxes on those selling, purchasing, or possessing firearms and other dangerous weapons.  

Another noteworthy section of this preamble material (“l”) mentions that the Act mirrors a longstanding federal excise tax on firearms and ammunition, to which I will now turn – and pointedly includes quotes from the NRA and the NSSF supporting the federal gun tax.

Longstanding Federal Excise Tax: For more than a century, the federal government has had a similar excise tax in place on guns and ammunition—but not parts, which the California tax includes.  Congress enacted the original version of the Firearms and Ammunition Excise Tax (FAET) in 1919 as part of the Revenue Act that year; the initial rate was 10%. These taxes were briefly eliminated (in stages) in the late 1920’s, but they reappeared in the Revenue Act of 1932. The 1937 Federal Aid in Wildlife Restoration Act (also known as the Pittman-Robertson Wildlife Restoration Act), redirected revenues from the FAET to the Wildlife Restoration Trust Fund, administered by the Fish & Wildlife Service, which distributes grants to states for wildlife conservation and programs to teach safe hunting practices (a more detailed explanation of the apportionments is here). After some minor fluctuations in the rate early on, for many years the federal tax has stood at 10% for handguns and 11% for long guns and ammunition, normally paid by the manufacturers and (presumably) passed through in the wholesale price to dealers, and then reflected in the retail price ultimately paid by customers.

A seemingly unrelated case currently before the Supreme Court could impact the federal gun tax. On October 3, the Supreme Court heard oral arguments in Consumer Finance Protection Bureau v. Community Financial Services Association of America, Limited, and the Justices seemed divided over the constitutionality of an agency’s funding system that occurs outside the annual budget process (under the Appropriations Clause in the U.S. Constitution). It is not clear where the Court will ultimately draw the lines for federal agencies and programs funded outside of the general treasury revenues and allocations, but some possible scenarios cast doubt on the future of federal excise taxes earmarked to fund specific agency activities.

As noted above, the NRA and the NSSF have publicly supported the Pittman-Robertson tax (see also here) and both organizations opposed a recent attempt by Republicans in Congress to repeal it. In a somewhat confusing turnabout, the NRA sharply criticized California’s excise tax, asserting, “It is unjust to saddle law-abiding gun owners with special taxes. Such a measure makes it more expensive for law-abiding citizens to exercise a constitutional right, and discourages them from practicing to be safe and proficient with their firearms for purposes such as self-defense, competition, and hunting.”  The NRA tried to mobilize its members to pressure Governor Newsom to veto the bill.

What will the Law Accomplish?  No single gun regulation can eliminate all potential gun crime, and it is often debatable (and sometimes unknowable) whether a specific policy will “work.” Nor is there consensus about how to measure the effectiveness of policies. In addition, whether or how much the effectiveness of a policy matters under Bruen’s historical test for the constitutionality of a law is an open question (for a good pre-Bruen discussion of gun taxes and the Second Amendment, see here and here).

In 2016, a federal judge struck down a local gun tax in the Northern Mariana Islands, in Murphy v. Guerrero, but this predated the Bruen decision, so a future court would have to apply a different analysis. The case is also factually distinguishable because the territory gun tax at issue in Murphy was exorbitant ($1000) and designed to make guns unaffordable, while the California tax is quite modest by comparison. In 2022, the San Jose City Council enacted a municipal ordinance requiring gun owners’ insurance and imposing an annual fee, which could be the legal equivalent of a tax, and this blog covered the litigation challenging that ordinance here and here (the court upheld the law, applying Bruen’s historical test).

It is not clear whether a modest excise tax like this will “discourage” (to use the NRA’s term) purchases or usage of firearms or ammunition, and it is therefore unclear whether it will reduce gun violence, or by how much. Conversely, if the tax does cause some reduction in gun crime, it is not clear whether or how much this effect would reduce new purchases of guns or ammunition. The RAND Corporation has conducted an even-handed meta-review of the academic literature on the effectiveness of gun taxes, and the bottom line is that we do not have enough information at this point to make a confident assessment, in part because California is the first state in modern times to impose such a tax. There has been no opportunity to undertake an empirical study of the real-world impact of the law; and the federal law is so old that it is impossible to make meaningful comparisons to how much more crime there would be without the law. The RAND report observes, however, that other types of excise taxes have been studied extensively (the most common being “sin taxes” or “Pigouvian taxes” designed to discourage consumption of alcohol, tobacco, etc.) The results are mixed, varying depending on the type of item taxed, the amount of the tax, whether substitute products are readily available, and how easy it is to cheat on the tax (i.e., travel to a neighboring jurisdiction that doesn’t have the tax). The published studies on these taxes (mostly alcohol, cigarette, and sugary soda taxes) seem to have come in waves – first in the 1990s, then another wave around 2011-14, and another wave of new articles in the last two years. Victor Fleischer published an article in 2015 criticizing Pigouvian taxes, and gun taxes in particular. Sam Brunson then answered this in an article a few years ago advocating for gun taxes, Paying for Gun Violence. I also responded to Fleischer’s arguments in one of my articles.

In terms of discouraging market behavior through forced price increases, cigarettes, alcohol, and sugar are short-term consumable goods, which makes consumers respond to incentives differently than they might for long-lasting, reusable instruments like guns. Guns are also far more expensive than the usual subjects of sin taxes, so it is unclear whether consumers already willing to pay hundreds of dollars (or even a few thousand) to purchase a firearm will be deterred by an 11% markup, which may be less than variations in prices that already occur due to inflationary periods, special discount sales, or the dealer’s location. (It might turn out that a gun tax functions more like other luxury taxes – imposed on expensive, usually long-lasting items – than typical “sin taxes.”)

The possibility that the gun tax will not affect consumer behavior, however, cuts both ways in terms of policy arguments: it simultaneously undermines the rationale in favor of the law and the concerns that the law will adversely impact the rights of law-abiding gun purchasers in any significant way. Also note that the tax could reward private sellers of used guns (not dealers) by directing some potential customers to them. If so, the law benefits current gun owners by making their guns somewhat more valuable (i.e., the potential resale price in private sales) to the same extent that it burdens those buying guns in the future from a dealer. And, if the expected resale price of the gun in private sales is high enough to offset the sales tax at the dealer level, there may be no decrease in sales at all. Studies of alcohol taxes reveal that retailers respond by offering a wider variety of discount brands in their stores, so customers can offset the tax burden by buying a cheaper brand. It will be interesting to see if this happens with California gun dealers. The other main rationale for Pigouvian taxes is that they raise revenue that can be earmarked for mitigating the social harms of a product, and that was certainly articulated by the California legislature as a motivating reason for the new gun tax.

The other issue with Pigouvian taxes is that they tend to affect various categories of consumers differently (this is a consistent finding in studies of alcohol and tobacco taxes) – new versus returning customers, wealthy versus poor customers, or older versus younger customers. Sometimes excise taxes have the greatest effect on the youngest/poorest purchasers, which some policymakers consider an upside (for example, in discouraging young people from taking up smoking, or discouraging underage drinking). If most gun crimes are committed by younger individuals or those living in poorer areas, then a similar phenomenon with the gun tax could cause an unexpectedly large reduction in gun crime. One could also frame this as a question of fairness: the idea that the people who contribute to the massive number of guns on the street should bear their fair share of the social costs caused by their choices.

Tax laws are not solely instrumental (raising revenue or disincentivizing certain behaviors); they are also expressive of the current values and norms. The fact that income taxes have different rates for “earned” versus “unearned” income, or the various rules about capital gains taxes or business deductions, reflect underlying values about which activities are more worthwhile, necessary, or virtuous. Another analogy could be the mandatory IOLTA programs for lawyer trust accounts (where some of the earned interest is taken and redistributed to legal aid clinics), which are not only a means to an end, but also make a statement about social justice and access to legal services for those in poverty versus the transfers of wealth represented by the client funds in those accounts. In the context of a gun tax, the effectiveness of the law is not only in how much it reduces crime or raises revenue for helpful programs, but also in the expressive value of the law for the legislators and the constituents they represent.