BILL ANALYSIS                                                                                                                                                                                                    ”




                                                                  AB 669
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          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 









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               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 









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               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.  









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          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 ›10%] natural fruit juice or more 
               than ›10%] 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
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            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.  










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          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, "›The] 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 









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            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.  ›Citation 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 ›Fund].

               "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 









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               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 ›powder] 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 










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               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.  








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               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









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          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
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          Grocery Manufacturers Association
          Howard Jarvis Taxpayers Association
          11 individuals
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916) 
          319-2098