BILL ANALYSIS Ó AB 669 Page A Date of Hearing: May 2, 2011 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Henry T. Perea, Chair AB 669 (Monning) - As Amended: April 7, 2011 VOTE ONLY 2/3 vote. Fiscal committee. SUBJECT : Taxation: sweetened beverages: Children's Health Promotion Fund SUMMARY : Enacts the Sweetened Beverage Tax Law, which would impose a tax of $0.01 per fluid ounce on "bottled sweetened beverages." Specifically, this bill : 1)Contains numerous legislative findings including the following: a) The prevalence of obesity in the United States has increased dramatically over the past 30 years. From the 1960s to the late 1970s, the prevalence was relatively constant, with about 15% of the population classified as obese. After the 1970s, these rates began to climb. By 2006, 23.3% of Americans were considered obese. In California, obesity rates have increased even more, rising from 8.9% in 1984 to 25.5% in 2010. Although no group has escaped the epidemic, ethnic minorities and the poor are disproportionately affected. b) The rate of children who are overweight has also increased dramatically in recent decades. After being relatively constant from the 1960s to the 1970s, the prevalence of overweight children has more than quadrupled among children between ages 6 and 11 and nearly tripled among those between ages 12 and 19. c) The obesity epidemic is of particular concern because obesity increases the risk of diabetes, heart disease, certain types of cancer, arthritis, asthma, and breathing problems. Depending on their level of obesity, from 60% to over 80% of obese adults have type 2 diabetes, high blood cholesterol, high blood pressure, or other related AB 669 Page B conditions. It has been reported that up to 60% of obese children 5 to 10 years of age have early signs of heart disease. d) Type 2 diabetes, previously only seen among adults, is now increasing among children. If the current obesity trends are not reversed, it is predicted that one in three children and nearly one-half of Latino and African American children born in the year 2000 will develop type 2 diabetes in their lifetime. e) There is overwhelming evidence of the link between obesity and the consumption of sweetened beverages such as soft drinks, energy drinks, sweet teas, and sports drinks. California adults who drink a soda or more per day are 27% more likely to be overweight or obese, regardless of income or ethnicity. f) Research shows that almost one-half of the extra calories Americans have been consuming since the 1970s could come from soda, with the average American drinking nearly 50 gallons of sweetened beverages a year, the equivalent of 39 pounds of extra sugar every year. g) It is the Legislature's intent, by adopting the Sweetened Beverage Tax Law and creating the Children's Health Promotion Fund (Fund), to diminish the human and economic costs of obesity and dental disease in California. This act is intended to discourage excessive consumption of sweetened beverages by increasing the price of these products and by creating a dedicated revenue source for health programs designed to prevent and treat childhood obesity and dental disease and reduce the burden of attendant health conditions. 2)Imposes a new tax on distributors for the privilege of distributing "bottled sweetened beverages" and "concentrate" in this state, calculated as follows: a) The tax on "bottled sweetened beverages" distributed in this state shall be $0.01 per fluid ounce. b) The tax on "concentrate" distributed in this state either as "concentrate" or as a "sweetened beverage" derived from that "concentrate" shall be equal to $0.01 per AB 669 Page C fluid ounce of "sweetened beverage" produced from that "concentrate." 3)Defines a "bottled sweetened beverage" as a "sweetened beverage" contained in a "beverage container." a) A "sweetened beverage," in turn, means any sweetened nonalcoholic beverage sold for human consumption that contains any added "caloric sweeteners," including the following: soda water, ginger ale, root beer, all beverages commonly referred to as cola, lime, lemon, lemon-lime, and other flavored beverages, including any fruit or vegetable beverage containing 10% or less natural fruit juice or natural vegetable juice, as defined, and all other drinks and beverages commonly referred to as "soda," "soda pop," and "soft drinks." The term does not include any of the following: i) Any product sold in liquid form for consumption by infants, which is commonly referred to as "infant formula"; ii) Any product sold in liquid form for weight reduction; iii) Water, to which no caloric sweeteners have been added; iv) Any product containing milk, milk products, or plant protein sources; v) Medical food, as defined; and, vi) Coffee and tea. b) A "beverage container," in turn, means any closed or sealed container regardless of size or shape, including those made of glass, metal, paper, plastic, or any other material or combination of materials. 4)Defines "caloric sweetener" as any caloric substance suitable for human consumption that humans perceive as sweet and includes, without limitation, sucrose, fructose, including high fructose corn sweetener, glucose, other sugars, and fruit juice concentrates. AB 669 Page D 5)Defines "concentrate" as a syrup, powder, or base product that is used for mixing, compounding, or making sweetened beverages in a beverage dispensing machine. The following items, however, are specifically excluded from the definition: a) Any product solely used in preparing coffee or tea; b) Infant formula; c) Any product used for weight reduction; d) Any product containing milk, milk products, or plant protein sources; e) Any frozen concentrate or freeze-dried concentrate to which only water is added to produce a sweetened beverage "containing more than Ý10%] natural fruit juice or more than Ý10%] natural fruit juice"; f) Any product that is sold and is intended to be used for the purpose of an individual consumer mixing a sweetened beverage; g) Medical food, as defined in Health and Safety Code Section 109971; and, h) Any product to which no caloric sweeteners have been added. 6)Requires the State Board of Equalization (BOE) to administer and collect the tax pursuant to the Fee Collection Procedures Law. 7)Provides that the taxes are due and payable to the BOE quarterly on or before the last day of the month following each quarterly period. 8)Establishes the Fund in the State Treasury, which shall consist of all taxes, interest, penalties, and other amounts collected pursuant to this bill, less refunds and reimbursement to the BOE for expenses incurred in administering and collecting the tax. 9)Provides that all moneys in the Fund, upon appropriation by AB 669 Page E the Legislature, shall be allocated for the purposes of statewide childhood obesity prevention activities and programs as follows: a) 20% to the State Department of Public Health (DPH) to coordinate statewide childhood obesity prevention activities and to fund state-level childhood obesity prevention and children's dental programs; b) 35% for community-based childhood obesity prevention programs. DPH shall be responsible for distributing these funds to community-based organizations and to local health departments, with priority given to counties that have established childhood obesity prevention coalitions to build political support for programs; c) 10% to evidence-based prevention, early recognition, monitoring, and weight management intervention activities in the medical setting. DPH shall be responsible for identifying activities and allocating these funds; and, d) 35% to elementary and secondary schools for educational, environmental, policy, and other public health approaches that promote nutrition and physical activity. The Superintendent of Public Instruction shall be responsible for the allocation and distribution of these funds. 10)Becomes operative on July 1, 2012. EXISTING LAW : 1)Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state. 2)Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must be remitted to the BOE. AB 669 Page F 3)Provides a sales and use tax (SUT) exemption for specified "food products." The term "food products" is defined to include all fruit juices, vegetable juices, and other beverages including bottled water. Carbonated beverages, however, are specifically excluded from the exemption. 4)Imposes no additional taxes on nonalcoholic sweetened beverages. FISCAL EFFECT : The BOE estimates that this bill would generate Fund revenues of about $1.66 billion in fiscal year (FY) 2012-13 and $1.72 billion in FY 2013-14. In addition, the BOE estimates that this bill would generate additional SUT revenues of $135.1 million in FY 2012-13 and $139.4 million in FY 2013-14. COMMENTS : 1)The author has provided the following statement in support of this bill: Childhood obesity is reaching crisis proportions in California and throughout the United States. AB 669 would tax sweetened beverages, which are the leading contributor to obesity trends, and generate $1.7 billion annually to combat childhood obesity. We are all currently paying for the health care associated with obesity and those who consume sugary drinks should pay their fair share of these expenses. 2)This bill is sponsored by the California Center for Public Health Advocacy, which states, "ÝThe] link between sugary drinks and the obesity epidemic makes a tax on sugary drinks a logical funding source for mediating the harm of these products upon society. One of the most successful public health interventions in recent years is the taxation of tobacco in order to fund programs that mediate the harms to society caused by that product. It is time for California to build upon the success of the tobacco tax in order to fund our schools and critically needed childhood obesity prevention efforts." 3)Proponents state, "With nearly 119 million Americans overweight or obese, there is a crisis of obesity and related illnesses in California and the United States. The 2006 report, F as in Fat: How Obesity Policies Are Failing in AB 669 Page G America, finds that United States governmental policy efforts have consistently failed to provide viable solutions to the growing obesity crisis. This report also found that California ranks twenty-third nationwide in the prevalence of obesity. ÝCitation omitted.] Shockingly, the annual cost of medical care attributable to obesity in California is estimated to be almost $7.7 billion." 4)Opponents state, "AB 669 would impose a tax on soft drinks. While we are in no position to comment on health issues related to soda consumption, we are concerned that such a tax could drive down consumption and adversely affect employment in the soft drink industry." 5)The BOE notes the following in its staff analysis of this bill: a) Funding necessary for administrative start-up costs . "This bill proposes a new sweetened beverage tax to be imposed beginning July 1, 2012. In order to notify and register distributors, develop computer programs and reporting forms, and hire appropriate staff, an adequate appropriation would be required to cover the BOE's administrative costs that would not already be identified in the BOE's 2011-12 budget. "Typically, the BOE would seek payment from the Fund for administrative start-up costs through the budget change proposal (BCP) process. However, the Fund would not have a balance to reimburse the BOE's administrative start-up costs prior to the collection of the tax. To address this funding issue, this bill should be amended to add language authorizing a loan from the General Fund, or other eligible fund, to the Fund, to be repaid from taxes collected and deposited into the ÝFund]. "The constitutional and statutory provisions prohibit the BOE from using special fund appropriations to support the administration of the sweetened beverage tax program. Without an appropriation for administrative start-up costs, the BOE would have to divert General Fund dollars to the proposed tax program, which would have a negative impact on the revenues of State and local government." b) Product exclusions . "This bill excludes from the AB 669 Page H definition of "concentrate" any product containing milk or milk products, and any product that is solely used in preparing coffee or tea. As such, this would exclude powdered coffee, tea, or chocolate milk mix from the tax, even if those products contain added caloric sweetener. The definition of "sweetened beverage" also excludes any product containing milk or milk products, and coffee and tea, thereby excluding products such as chocolate or strawberry milk, smoothie beverages, and bottled coffee beverages that have added caloric sweetener. "Also excluded would be syrups and powders that are intended to be used for the purpose of an individual consumer mixing a sweetened beverage. This would include, for example, products such as chocolate milk Ýpowder] and syrup, sweetened tea mixes, and sweetened punch and lemonade mixes which are generally available at places such as grocery stores and general merchandise department stores for a consumer to purchase and mix beverages at home." c) Proposed tax would be subject to the SUT . "Under current Sales and Use Tax Law, the total amount of the retail sale is subject to sales or use tax unless specifically exempted or excluded by law. Because the new tax imposed pursuant to this measure is not specifically exempted or excluded, it would be included in the total amount of the sale and, therefore, subject to sales or use tax. "In order to be reimbursed for the excise tax, persons subject to the tax pursuant to this measure may request payment from their customers. Ultimately, this cost would be reflected in the retail sales price of bottled sweetened beverages and concentrates sold to the consumer and would be subject to the sales and use tax, unless specifically exempt as a food product." 6)Committee Staff Comments: a) A national epidemic : Sugar-sweetened beverages have been linked to health problems ranging from obesity to diabetes. For example, a study examining middle-school students over two academic years showed that the risk of becoming obese increased by 60% for each additional serving AB 669 Page I of sugar-sweetened beverages per day.<1> Moreover, it is a fallacy to suggest that consumers bear the full costs of their consumption choices. Medical costs for overweight and obesity alone are estimated to be $147 billion annually - or 9.1% of national health care expenditures - with half of these costs paid for publicly through the Medicare and Medicaid programs.<2> As such, some have proposed taxation as a means of both reducing the consumption of sugar-sweetened drinks and generating revenue for health programs. b) How much tax are we talking about? : This bill would impose a tax on sweetened beverages of $0.01 per fluid ounce. This would translate to an additional tax of $0.12 for a 12-ounce can of soda. This tax appears to be modeled on a proposal advanced in the New England Journal of Medicine, which advocated an excise tax of $0.01 per ounce for beverages containing any added caloric sweetener.<3> The authors of this study estimated that such a tax would lead to at least a 10% reduction in calorie consumption from sweetened beverages. c) Keeping pace with inflation : The author may wish to consider amendments providing for the automatic adjustment of the tax rate over time to keep pace with inflation. a) Technical amendments : Committee staff suggests the following technical amendments to the bill: i) On page 2, line 5, insert "the" before "prevalence"; ii) On page 3, line 35, insert "the" before "consumption"; ------------------------- <1> Ludwig DS, Peterson KE, Gortmaker SL. Relation between consumption of sugar-sweetened drinks and childhood obesity: a prospective, observational analysis. Lancet 2001; 357:505-8. <2> Finkelstein EA, Trogdon JG, Cohen JW, Dietz W. Annual medical spending attributable to obesity: payer-and-service-specific estimates. Health Aff (Millwood) 2009; 28:w822-w831. <3> Brownell KD, Farley T, Willett WC, Popkin BM, Chaloupka FJ, Thompson JW, Ludwig DS. The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages. New England Journal of Medicine 2009. AB 669 Page J iii) On page 5, line 15, replace "which" with "that"; iv) On page 5, line 37, replace "proteins" with "protein"; v) On page 6, line 2, replace "fruit" with "vegetable"; and, vi) On page 9, line 37, insert "be" after "required to". b) Related Legislation : i) AB 2100 (Coto), of the 2009-10 Legislative Session, would have imposed a tax of $0.01 per teaspoon of added sweetener in a bottled sweetened beverage or concentrate. AB 2100 was held in this Committee. ii) SB 1210 (Florez), of the 2009-10 Legislative Session, would have imposed a tax of $0.01 per teaspoon of caloric sweetener in a bottled sweetened beverage. Revenues from the tax would have been deposited in a newly established Children's Health Promotion Fund, with moneys allocated for statewide childhood obesity prevention programs. SB 1210 was held by the Senate Committee on Revenue and Taxation. iii) SB 1520 (Ortiz), of the 2001-02 Legislative Session, would have, among other things, imposed an excise tax of $2 per gallon of soft drink syrup or simple syrup. These provisions were eventually amended out of the bill. SB 1520 failed passage in committee. REGISTERED SUPPORT / OPPOSITION : Support California Center for Public Health Advocacy (sponsor) Abraham Lincoln High School Alameda County Board of Supervisors American Heart Association Balboa High School California Academy of Family Physicians California Academy of Physician Assistants AB 669 Page K California Association for Health, Physical Education, California Chiropractic Association California Food Policy Advocates California Medical Association California Pan-Ethnic Health Network California Park & Recreation Society California Primary Care Association California Rural Legal Assistance Foundation California School Nutrition Association California Tax Reform Association California WIC Association Center for Oral Health Center for Science in the Public Interest Central Valley Health Network Children Now Children's Advocacy Institute County of Santa Clara Board of Supervisors First 5 LA Food Empowerment Project Galileo Academy of Science & Technology High School George Washington High School Health Improvement Partnership of Santa Cruz County International Studies Academy High School John O'Connell High School Lowell High School Mission High School Philip & Sala Burton High School Raoul Wallenberg High School Recreation and Dance San Francisco Unified School District San Mateo County Board of Supervisors Thurgood Marshall High School Opposition CalChamber California Automatic Vendors Council California Grocers Association California League of Food Processors California Manufacturers & Technology Association California Nevada Soft Drink Association California Restaurant Association California Retailers Association California Taxpayers Association California Teamsters Public Affairs Council AB 669 Page L Grocery Manufacturers Association Howard Jarvis Taxpayers Association 11 individuals Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098