BILL ANALYSIS SENATE REVENUE & TAXATION COMMITTEE Senator Lois Wolk, Chair SB 1210 - Florez Amended: May 5, 2010 Hearing: May 12, 2010 Tax Levy Fiscal: Yes SUMMARY: Enacts an Excise Tax of One Cent per Teaspoon of Added Caloric Sweetener in a Bottled Sweetened Beverage or Concentrate EXISTING LAW levies a sales and use tax on the transfer of tangible personal property from one person to another unless explicitly exempted. The current state sales and use tax rate is 6% until July 1, 2011, when state law reduces the rate to 5% (ABx3 3, Evans, 2009); however, local sales and use taxes can increase the total sales and use tax rate to between 8.25% and 10.25%. EXISTING LAW exempts from the sales and use tax the sale, storage, use, or other consumption of food products, including fruit and vegetable juices; however, carbonated beverages are not exempt. EXISTING LAW (California Constitution) prohibits the Legislature, counties, cities and counties, cities, and special districts from levying or collecting a sales and use tax on the sale, storage, use, or other consumption of food in the state, unless specifically provided for by statute prior to adoption of the initiative which added Section 34 of Article XIII (Proposition 163, 1992). The initiative also amended state law to include snack foods on the list of exempt foods, but did not change the taxability SB 1210 - Florez Page 4 of carbonated beverages. EXISTING LAW levies excise taxes in addition to sales taxes when purchasing certain goods. In California, excise taxes apply to gasoline and diesel fuel (currently 18 cents per gallon; both rates change under ABx8 6, Committee on Budget, 2010), tobacco (87 cents per pack), and alcohol, (20 cents per gallon of beer and wine; 30 cents per gallon of sparkling wine) and distilled spirits ($3.30 per gallon below 100 proof; $6.60 per gallon above 100 proof). Generally, excise taxes apply to items deemed harmful to the public. THIS BILL applies an excise tax of one cent per teaspoon of added caloric sweetener in a bottled sweetened beverage or concentrate sold or offered for sale to a retailer. The tax applies to distributors, who must separately state the amount of tax due to the Board of Equalization (BOE) on the receipt or invoice given to the retailer, but retailers are liable for tax at the time of sale to a consumer. The tax goes into effect on the first day of the first calendar quarter THIS BILL makes findings regarding the prevalence of adult and child obesity, and the increased risk of specified diseases for obese populations, among others. The measure also defines its terms, including: "beverage container," "bottled sweetened beverage," "caloric sweetener," "concentrate," "consumer," "distributor," "medical food," "milk," "natural fruit juice," "natural vegetable juice," "nonalcoholic beverage," "non-caloric sweetener," "person," "powder," "retailer," "sale," "simple syrup," "sweetened beverage," "syrup," and "teaspoon." THIS BILL requires all persons required to pay the tax to register with the BOE on a form prescribed by BOE, which must include the person's name under which the applicant conducts business, the location of his or her place of business, and any other information BOE may require. Persons must file returns and pay tax electronically on or before the last day of the calendar month following the calendar quarter to which it related with a remittance SB 1210 - Florez Page 4 payable to the BOE. The bill provides that BOE shall administer the tax pursuant to the Fee Collections Procedures Law, authenticate and prescribe forms and returns as necessary, and may prescribe regulations, including emergency regulations, necessary to implement the bill. BOE shall be reimbursed for its administration and collection costs upon appropriation to the Legislature. THIS BILL creates the Children's Health Fund in the State Treasury, into which BOE deposits all proceeds from the excise tax, or interest or penalties assessed by the BOE, less refunds and reimbursement to BOE for its administration and collection costs. The Legislature shall appropriate all moneys from the fund. FISCAL EFFECT: According to the BOE, SB 1210 results in revenue increases of $636 million in 2010-11, and $1.377 billion in 2011-12, all deposited into the Children's Health Fund in the State Treasury. By increasing the taxable base by adding the excise tax, SB 1210 also increases in sales tax revenues for the state General Fund and local agencies of $34.7 in 2010-11, and $66.9 in 2011-12. COMMENTS: A. Purpose of the Bill According to the Author, "SB 1210 would levy an excise tax of a penny per teaspoon of added sugar in soda and other sweetened beverages. Initial projections estimate that the excise tax on soda producers and distributors would raise $1.5 billion a year, with funds going directly to local communities to support schools and build communities where children are active, eat healthy foods SB 1210 - Florez Page 4 and grow up to live long, healthy, and productive lives." B. I'd Like to Buy the World a Bottled Water? The famous economist Adam Smith wrote in the Wealth of Nations (1776): "It has for some time past been the policy of Great Britain to discourage the consumption of spirituous liquors, on account of their supposed tendency to ruin the health and to corrupt the morals of the common people." While few would equate sugary srinks with the moral decay of American society, proponents of SB 1210 make a very clear excise tax case for soda damaging the public health. A Health Policy Research Brief from the UCLA Center for Public Health Research shows startling increases in the number of adults and children who are obese or overweight in the last thirty years, and references studies that show that links greater consumption of sweetened beverages with adult and child obesity and overweight, and demonstrates that reducing intake of these beverages results in reductions of obesity and overweight. Epidemiological research shows the classic case for assessing an excise tax: the societal costs including lost productivity and health care costs of obesity and overweight are clearly linked with sweetened beverages but not paid for by the beverage drinker, representing an externality that is not accounted for in the price system. Essentially, sweetened beverages are sold at a price which does not account for the societal costs they incur that are paid by the taxpayer with general purpose revenues. By adding an excise tax, SB 1210 seeks to correct the market failure by adding costs, thereby depressing consumption, of a product that causes obesity and overweight. C. Pour Me Another In contrast to Adam Smith, Dr. Samuel Johnson wrote in his 1755 dictionary: "EXCI'SE. n.s. ... A hateful tax levied upon commodities, and adjudged not by the common SB 1210 - Florez Page 4 judges of property, but wretches hired by those to whom excise is paid." Opponents to SB 1210 raise similar points: first, that adult and child obesity and overweight are not the fault of an industry which supplies consumers with a product they want; instead, governments can better improve public health by investing ina nd promoting physical education and superior nutrition. Second, opponents argue that enacting additional taxes on sweetened beverages will squeeze margins, depress earnings, therefore leading to layoffs and wage cuts, in addition to increasing taxes on lower-income persons who spend a higher percentage of dispensible income on these drinks. Tax theory posits that taxing something necessarily means getting less of it, meaning that if the Legislature enacts SB 1210, causing lower consumption of sweetened beverages that will result in lower revenues and profits for the sweetened beverage industry, as well as fewer employees needed to produce and distribute less quantity demanded. D. Getting Chubby The sales and use tax base may include excise taxes as part of the base, such as gasoline, and sometimes it's excluded from the taxable base. SB 1210 chooses the former route by assessing the excise tax on the number of teaspoons of added caloric sweetener in a bottled sweetened beverage or concentrate without subtracting that amount out of the taxable sale, resulting in a slight increase of General Fund revenues to the state, as well as some cream to local agencies too. While the bill seeks to affect the behavioral changes of reducing consumption of sweetened beverages, if enacted as currently constructed, SB 1210 would also provide some scraps to very hungry state coffers. E. Different Base Most excise taxes do not differentiate the content of SB 1210 - Florez Page 4 the taxed product, with the notable exception of the excise tax on distilled spirits. For example, gasoline is subject to an 18 cent tax per gallon regardless of whether a specific blend of gas pollutes more or than another blend, and cigarettes are taxed the same regardless of tar or nicotine content. SB 1210 works differently because the tax for any beverage depends on the exact number of teaspoons of added caloric sweetener in a bottled sweetened beverage or concentrate, which can vary from drink to drink. The benefit of this approach is that the tax is flexible and pegged to the ingredient deemed bad for society, sugar, and beverages with more sugar will have a higher imputed tax than less sugary ones, hopefully influencing consumers to make healthier choices. The drawback of using a very specific measurement is that tax collection and administration could be complex: a 12 ounce can of soda contains between 30 and 40 grams of sugar, but a 64 ounce container of berry punch contains 250 grams of sugar, according to the BOE analysis. Taxpayers would have to make more carefully measure the sugar content of the drinks distributed to comply with the tax, which would be considerably more complex than counting boxes of cigarettes or tanker trunks of gasoline. Support and Opposition Support:California School Nutrition Association, Chula Vista Healthy Eating Active Communities, Venice Family Clinic, Network of Ethnic Physician Organizations, Stanford School of Medicine, Department of Pediatrics (28 physicians), Latino Coalition for a Healthy California, Center for Public Health Advocacy, Partnership for Children and Youth, California Chiropractic Association, Children Now, California WIC Association, San Mateo County Board of Supervisors, California Medical Association, California Academy of Family Physicians, Central California Regional Obesity Prevention Program, American Academy of Pediatrics, California Center of Public Health Advocacy, Fresno Metro Ministry, Dental Health Foundation, California Food Policy SB 1210 - Florez Page 4 Advocates, California School Nutrition Association, Catholic Healthcare West, Center of Science in the Public Interest, Prevention Institute, Strategic Alliance for Healthy Food and Activity Environments, Santa Monica-Bonita School District. Oppose:248 Individuals, California Nevada Soft Drink Association, California Chamber of Commerce, California Grocers Association, California Independent Grocers Association, California Manufacturers and Technology Association, California Restaurant Association, California Retailers Association, California Taxpayers Association, Wine Institute, California Automatic Vendors Council --------------------------------- Consultant: Colin Grinnell