BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
SB 768 (de León) - Cigarette and Tobacco Products Taxes:
California Tobacco Tax Act of 2014
Amended: May 14, 2013 Policy Vote: G&F 5-2, Health 6-2
Urgency: No Mandate: Yes
Hearing Date: May 23, 2013 Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: SB 768 would impose an additional excise tax of
$2.00 per package of 20 cigarettes. The bill would also impose a
one-time "floor stock tax" on the cigarettes held or stored by
dealers and wholesalers.
Fiscal Impact: The Board of Equalization (BOE) estimates that
this bill would result in a net cigarette tax revenue gain
(nearly all of which would be special funds) of $355 million in
2013-14, and $1.4 billion in 2014-15. In addition, 2014-15 sales
and use tax revenues would increase by $51 million, resulting
from the higher excise tax.
Additionally, though this measure does not directly increase the
tobacco products tax, current law triggers an automatic tobacco
products tax increase whenever the tax imposed on cigarettes is
increased. Specifically, current law requires the BOE to
annually determine the tobacco products tax rate at a rate
equivalent to the combined rate of all taxes imposed on
cigarettes. Thus, when the cigarette tax is increased, the
tobacco products tax rate increases as well. BOE estimates the
increase to be $86 million in 2014-15.
BOE administrative costs related to this bill are substantial,
likely about $10 million annually. These costs include: taxpayer
notification, tax return design, computer programming, cigarette
tax stamp design and denomination changes, and compliance and
audit efforts to ensure proper reporting, and floor stock tax
administration. Furthermore, the bill requires enhanced efforts
to ensure proper floor stock tax reporting and collection,
greater compliance efforts for additional billings and
delinquencies, and an increase in BOE program and investigative
staff presence due to increased tax evasion.
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The bill would also result in increased administrative costs to
various state departments to administer the new revenues from
the measure. The bill caps all administrative costs at two
percent of revenues, roughly $30 million annually based on BOE's
figures.
Background: Existing federal law imposes a tax of $1.01 per pack
of 20 cigarettes with the majority of the funds being used to
fund children's health programs. The federal cigarette tax rose
by 62 cents in 2009 to fund the "S-Chip" federal children's
health programs. Existing state law imposes a tax on
distributors of cigarettes and tobacco products which fund a
variety of programs and services including: health education,
research, hospital care, fire prevention, environmental
conservation, breast cancer research and early detection
services, and early childhood development programs. The excise
tax on cigarettes is imposed at a total rate of 87 cents per
pack of 20 cigarettes, allocated as follows:
10 cents to the General Fund.
25 cents to the Cigarette and Tobacco Products Surtax
Fund (created by Proposition 99 in 1988).
2 cents to the Breast Cancer Fund (created by AB 478,
Chapter 660 of 1993).
50 cents to the California Children and Families Trust
Fund (created by Proposition 10 in 1998).
The tobacco products tax is imposed at a rate that is based on
the combined rate of tax imposed on cigarettes, as determined by
BOE. The 2012-13 tobacco products rate is 30.68 percent.
Revenue from the tax imposed on tobacco products is split
between the Proposition 99 and Proposition 10 funds.
California tax-paid cigarette distributions have decreased
dramatically over the past 30 years, both before and after
passage of Proposition 10. Consequently, revenues for all funds
supported by cigarette taxes have declined as well. Based on
outcomes from similar tax increases, there is strong evidence
that the Proposition 10 tax increase results in greater declines
in annual cigarette and tobacco sales than would have been the
case had the Proposition not passed. Current law, as added by
Proposition 10, requires BOE to determine the effect of
Proposition 10 on the consumption of cigarettes and tobacco
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products and directs that a transfer of funds to Proposition 99
and Breast Cancer programs be made to backfill for revenue
losses to those programs resulting from consumption changes
triggered by Proposition 10. The intent of the backfill is to
keep the funding levels of certain Proposition 99 and breast
cancer programs from declining any more than they would have
decreased without the Proposition 10 tax increase. These
determinations do not affect the amount of taxes paid by
taxpayers. The Proposition 10 backfill determination is strictly
an issue of the magnitude of funds allocation from one set of
funds to another.
Proposed Law: SB 768 would impose an additional excise tax of
$2.00 per package of 20 cigarettes, and indirectly increase the
tax on other tobacco products. The bill would also impose a
one-time "floor stock tax" on the cigarettes held or stored by
dealers and wholesalers. Except for payment of refunds, the
bill would require BOE to deposit all revenues into the Tobacco
Tax Fund, which this bill would create. The bill would require
the Tobacco Tax Fund monies to be transferred in unspecified
percentages to the:
Tobacco Prevention and Education Account for transfer to
the State Department of Public Health (DPH), State
Department of Education, and the University of California.
Tobacco Disease Related Health Care Account for transfer
to the State Department of Health Care Services to improve
quality and access to specified health care programs.
Tobacco Law Enforcement Account for transfer to the BOE,
Department of Justice, and the Department of Public Health
for the purpose of "supplementing funding for the
enforcement of laws that regulate the distribution and sale
of cigarettes and other tobacco products, including, but
not limited to, laws that prohibit cigarette smuggling,
counterfeiting, selling untaxed tobacco, selling tobacco
without a proper license and selling tobacco to minors, and
enforcing tobacco-related laws, court judgments, and
settlements."
Staff Comments: According to BOE estimates, this bill is
expected to raise total of approximately $1.4 billion in
revenues related to the excise tax increase of $2.00 per pack of
cigarettes. The assumed increase in the retail price of
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cigarettes and tobacco products as a result of this bill would
also have an impact on sales and use tax revenues. State and
local sales and use tax revenues are expected to increase by $51
million in 2014-15, of which $27 million is General Fund.
Furthermore, SB 768 would impose a one-time "floor stock" tax on
existing inventories of cigarette dealers, wholesalers, and
distributors in an amount equal to the difference between the
old tax rate and the new tax rate. This is intended to equalize
the excise tax paid by these entities on their inventory (which
was purchased before the effective date of the tax increase) and
those products purchased after the effective date. The floor
stock tax mitigates the windfall profits that would occur
otherwise. The floor stock tax is estimated to generate
approximately $95 million. BOE would incur additional
administrative costs associated with the administration and
enforcement of the floor stock tax, but these costs would be
offset by the proceeds from the tax.
BOE would incur non-absorbable costs related to the
administration and collection of the additional cigarette and
tobacco products tax proposed by this measure. These costs
would be related to notifying taxpayers, developing returns,
programming computers, developing and carrying out compliance
and audit efforts to ensure proper reporting, and administering
a floor stock tax. BOE identified preliminary costs associated
with a similar measure in 2009 to be estimated at $11.4 million
for fiscal year 2009-10 and $8.8 million for fiscal year
2010-11, and each fiscal year thereafter.
This bill requires BOE to annually determine the effects of its
provisions on the consumption of cigarettes and tobacco products
and determine the extent to which there has been a decrease in
consumption as a direct result of the additional tax imposed.
If there is a negative impact, SB 768 would provide for a
backfill similar to the one in current law.
BOE indicates that 951 million tax-paid cigarettes, were
distributed in 2011-12, and forecasts that the number will
decline to 724 million packs by 2014-15. The decline reflects
both the long-term decline in cigarette consumption that has
occurred over the last 30 years, and well as reduced demand in
response to this bill's $2.00 per pack increase. Finally, BOE
research suggests that a tax rate increase as large as the one
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imposed by this bill is likely to cause both a decrease in
actual consumption and an increase in tax evasion. Staff notes,
however, that the bill also provides revenue for increased
enforcement efforts, which should partially mitigate the
decreases due to tax evasion.