BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair SB 622 (Monning) - Sweetened Beverage Tax: Children's Promotion Fund Amended: May 8, 2013 Policy Vote: G&F 5-2, Health 7-2 Urgency: No Mandate: Yes Hearing Date: May 23, 2013 Consultant: Robert Ingenito SUSPENSE FILE. Bill Summary: SB 622 would impose a one-cent per fluid ounce tax on bottled sweetened beverages and concentrate. Fiscal Impact: The Board of Equalization (BOE) estimates that this measure would result in a total revenue gain of about $1.8 billion (General Fund and special funds), in 2014-15, and $1.9 billion in 2015-16. This amount includes additional excise and sales and use tax (SUT) revenue, as the excise tax raises the sales price of the affected items on which the SUT is based. BOE would incur unknown (an estimate is pending), major costs to implement to administer the new tax, These costs include: taxpayer identification, notification and registration; regulation development; manual and publication revisions; tax return design; computer programming; return, payment, and refund claim processing; audit and collection tasks; staff training; and public inquiry responses. Additional costs would result to the extent the State is the purchaser of items affected by the bill. Total spending is unknown but could be in the range in the hundreds of thousands of dollars. Background: State and local sales and use taxes are imposed on the sale or transfer of tangible personal property (TPP). The total combined SUT rates range from 7.5 percent to 10 percent based on the location of the sale. Currently, state law exempts the sale, storage, use, or consumption of food products, including fruit juices, vegetable juices, bottled water, and snack foods, from the sales and use tax. Carbonated beverages are not exempt. No other BOE-administered program imposes a tax or fee on nonalcoholic sweetened beverages. SB 622 (Monning) Page 1 In efforts to prevent childhood obesity, the Legislature enacted a series of policies that regulate the types of sweetened beverages available and amount of milk fat content in beverages served in licensed child care facilities (AB 2084, Brownley, 2010), as well as when fruit and vegetable-based drinks, non-sweetened water, and specified milk beverages may be sold in schools (SB 677, Ortiz, 2003; SB 965, Escutia, 2005). Seven other states -- Hawaii, Mississippi, Oregon, Rhode Island, Texas, Vermont, and West Virginia -- have introduced similar measures as SB 622 for this legislative session. None have been enacted. Proposed Law: This bill would establish the Sweetened Beverage Tax Law, which imposes an excise tax, at a rate of one cent per fluid ounce of added caloric sweetener in a bottled sweetened beverage or concentrate, on every distributor for distributing bottled sweetened beverages and concentrates in the State. BOE would administer and collect the fee and deposit all taxes, penalties, and interest collected under the law into the Children's Health Promotion Fund, which this bill would establish. Related Legislation: In 1983, Assembly Bill 105 (Moore) imposed a $0.07 per gallon excise tax on the distribution of nonalcoholic carbonated beverages, except carbonated water and carbonated fruit juice. The bill's provisions also included a $0.50 per gallon excise tax on the distribution of nonalcoholic carbonated beverage syrup. That bill died in the Assembly Revenue and Taxation Committee (AR&T). In 2002, Senator Ortiz introduced Senate Bill 1520, which imposed an excise tax upon every distributor, manufacturer, or wholesale dealer at a rate of $2 per gallon of soft drink syrup or simple syrup, $0.21 per gallon of bottled soft drinks, and $0.21 per gallon of soft drinks that may be produced from powder sold in this state. The soda tax provisions were removed from the April 29, 2002, version of the bill. Two bills were introduced in 2010. AB 2100 (Coto) proposed a tax of one cent per teaspoon of added sweetener in a beverage or in a sweetened concentrate. Assembly Bill 2100 was held under submission in the AR&T. SB 1210 (Florez) was substantially similar to AB 2100 and was placed on SB 622 (Monning) Page 2 suspense in the Senate Committee on Revenue and Taxation with no further action. Staff Comments: The bill becomes operative on July 1, 2014. However, BOE would incur costs (IT programming, notification and registration of taxpayers, etc.) in the preceding fiscal year, and the agency's budget as currently proposed for 2013-14 does not includes funds for SB 622's implementation. Consequently, BOE would require an appropriation to cover upfront administrative implementation costs. Typically, BOE seeks administrative cost reimbursement from the account or fund into which tax proceeds are deposited. However, the special fund this bill creates would lack monies to reimburse BOE prior to collection of the tax, which could necessitate a loan from another source. To effectively implement this bill, the BOE must: notify and register taxpayers; develop computer programs; hire and train key staff; create necessary forms and schedules; and answer taxpayer inquiries. These functions must take place before the tax becomes operative. Staff notes that the retail sales price of TPP is subject to the SUT, unless specifically exempted or excluded by law. Since the proposed excise tax imposed pursuant to this bill is not specifically exempted or excluded, it would be included in the total amount of the sales price and, therefore, subject to sales or use tax. To the extent that the tax is reflected in the retail prices of sweetened beverages, SUT revenues would be higher than would otherwise be the case. BOE staff cites an industry publication that reports that in 2012, California consumed 174 billion ounces of sweetened beverages, implying that this measure's excise tax revenues would have been $1.74 billion. BOE assumes a decline in consumption through at least 2015-16, consistent with microeconomic theory regarding taxpayers response to price increase. Staff notes that the BOE revenue may be overstated. The industry-published consumption statistic that drives BOE's revenue estimate implies that per-capita consumption of sweetened beverages (excluding the age 0-9 cohort) was 5,305 ounces, or about 41 gallons. Even accounting for the fact that SB 622 (Monning) Page 3 the published data may include beverages that are below the 50 percent threshold in the bill, the imputed per-capita consumption may overstate actual consumption.