BILL ANALYSIS Ó AB 10 X2 Page 1 (Without Reference to File) ASSEMBLY THIRD READING AB 10 X2 (Bloom) As Amended March 3, 2016 Majority vote ------------------------------------------------------------------- |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+---------------------| |Public Health |9-4 |Bonta, Bonilla, |Maienschein, Baker, | | | |Campos, Eduardo |Mayes, Steinorth | | | |Garcia, Levine, | | | | |Santiago, Mark Stone, | | | | |Thurmond, Wood | | | | | | | | | | | | ------------------------------------------------------------------- SUMMARY: Authorizes a board of supervisors of a county or city and county to impose taxes on cigarette and tobacco distributors, including within an incorporated city within the county; allows counties, or cities and counties to enter into AB 10 X2 Page 2 agreements with other counties, or cities and counties to share any startup and administrative costs; and, also allows them to enter into an agreement with the State Board of Equalization (BOE) to perform functions incident to the administration or operation of a tax imposed pursuant to the authorization of this bill. FISCAL EFFECT: This bill has not been analyzed by a fiscal committee. COMMENTS: According to the author tobacco is the leading cause of preventable death and disease in the United States and treatment for tobacco-related health conditions costs the state billions of taxpayer dollars. The author notes since the 1988 passage of Proposition 99, California has seen smoking rates drop drastically due to the tax increase as well as due to the programs funded by the tax. The author contends it is time to take the success of the statewide tax and utilize it on a more local level, empowering local authorities to discourage the use of tobacco products and providing a new source of funding to important local programs. The author states, while rates of tobacco usage have decreased in recent decades, there are still large numbers of teenagers and young adults who are picking up their first cigarette and becoming addicted and the Surgeon General projects that, without a serious reversal of current trends, 5.6 million youth age 0-17 alive today will die prematurely from tobacco use. The author concludes it is time to focus on what can be done on a local level to directly address the issues that are leading Californians to begin and maintain this harmful habit. Tobacco taxes in California. Prior to 1989, California levied an excise tax of $0.10 on each pack of 20 cigarettes. Passage of Proposition 99 in November 1988 increased the excise tax on cigarettes by $0.25 per pack (to $0.35 per pack) effective January 1, 1989 and imposed a "tobacco products tax" on cigars, AB 10 X2 Page 3 chewing tobacco, pipe tobacco, and snuff. The tobacco products tax, which is stated as a percentage of the wholesale cost of tobacco, was set at a rate equivalent to the excise tax on cigarettes. Proposition 99 revenues are deposited into the Cigarette and Tobacco Products Surtax Fund to support anti-smoking education programs, tobacco-related diseases research, indigent health care and public resources. An additional $0.02 per pack cigarette increase was added in 1994 to fund Breast Cancer Research. The proceeds from the tax are deposited in the Breast Cancer Fund, with allocations to the Breast Cancer Research Program and the Breast Cancer Control Program. Passage of Proposition 10 in November 1998 further increased both the cigarette and tobacco products tax rates, bringing the state tax to $0.87. Proposition 10 increased the cigarette tax rate by $0.50 per pack and the other tobacco products tax rate increased by an equivalent amount, effective January 1, 1999. Proposition 10 requires that revenues from the Proposition 10 tax increase be deposited in the California Children and Families First Trust Fund for the purpose of promoting, supporting, and improving the development of children from the prenatal stage to five years of age. Proposition 10 also indirectly generated a second increase in the other tobacco products tax rate, beginning July 1, 1999. This additional increase resulted because Proposition 99 requires the other tobacco products tax rate to be recalculated on July 1 of each year based on the wholesale price of cigarettes in March of that year. Thus, when Proposition 10 increased the tax on a pack of cigarettes by $0.50 on January 1, it indirectly triggered an additional increase in the other tobacco products tax on July 1, 1999. Revenues from this additional increase were deposited in the Cigarette and Tobacco Products Surtax Fund to fund Proposition 99 programs. There is a federal excise tax on cigarettes of $1.01 per pack. Tobacco-related diseases. Every year, an estimated 443,000 AB 10 X2 Page 4 people in the United States die from tobacco and smoking-related illnesses or exposure to secondhand smoke, according to the Centers for Disease Control and Prevention (CDC). The CDC also reports that another 8.6 million people suffer from serious smoking-related illnesses. According to the Department of Public Health (DPH), smoking causes heart disease, cancer, stroke, and chronic lower respiratory diseases, which are the leading causes of death and disability among adults in California. Smoking-attributed diseases are an economic burden due not only to health care expenses but also productivity losses related to disability or early death. DPH asserts, since the 1988 passage of Proposition 99 in California, adult smoking rates declined by more than 40% from 22.7% to 13.3% in 2008. As smoking rates declined, mortality and morbidity rates for diseases related to smoking also declined. This parallel trend, according to DPH, supports causal association between these conditions and smoking. Tobacco taxes and other states. California's tobacco tax rate ($0.87) ranks 33rd when compared to the rates of other states. The national median cigarette tax rate is $1.54 per pack. The highest tobacco tax rate is in New York at $4.35 per pack and the lowest is Virginia at $0.30 per pack. Some local governments, such as New York City ($5.85 per pack total tax rate) and Chicago ($5.66 per pack total tax rate) have their own tax in addition to the state tax. California has not raised its cigarette excise tax since 1998. According to the Campaign for Tobacco-Free Kids, the average price for a pack of cigarettes in California is $5.44 with all taxes included. Impacts of higher cigarette prices. According to the Legislative Analyst's Office (LAO), most revenue estimates assume that an increased tax on cigarettes would raise the retail prices of cigarettes to include the new cost. This could potentially result in consumers reducing the quantity of taxable products they consume. The LAO further reports, since the use of tobacco products has been linked to various adverse health AB 10 X2 Page 5 effects, an increased cigarette tax could reduce state, and local government health care spending on tobacco-related diseases over the long-term. DPH maintains that higher taxes are particularly effective in reducing smoking among vulnerable populations, such as youth, pregnant women, and low-income smokers. Increases in tobacco prices affect the behavior of the young and low-income, who tend to be more responsive to price changes than older and wealthier individuals. Higher tobacco taxes could encourage more low-income smokers to quit. However, if individuals considered to be low-income do not quit, the tobacco tax increase could be considered a regressive tax because these populations would be spending more of their income on the product. Higher cigarette prices through tax or fee increases can also exacerbate tax evasion and foster illegal cigarette sales. These illegal activities include increased smuggling of cigarettes and tobacco products into California and the sale of counterfeit cigarette stamps and products. According to the BOE, cigarette tax evasion is highly correlated with cigarette prices and excise tax rates. It was this concern regarding illegal sales that led to the enactment of the California Cigarette and Tobacco Products Licensing Act of 2003 [AB 71 (Horton), Chapter 890, Statutes of 2003], which established a comprehensive licensing program for retailers, manufacturers, distributors, and importers of cigarettes and tobacco products. According to the BOE, the California Cigarette and Tobacco Licensing Act of 2003 has been successful in reducing illegal sales. The American Cancer Society Cancer Action Network (ACS CAN) is the sponsor of this bill and states California has one of the lowest tobacco taxes in the nation, currently ranking 35th with a tax of 0.87. ACS CAN notes the average nationwide cigarette tax in $1.60 per pack, and that local control of tobacco taxes AB 10 X2 Page 6 is a critical tool in allowing communities to set public health priorities that can better meet the needs of its citizens. ACS CAN concludes tobacco taxes are one of the most effective ways to drive down smoking and studies have shown communities benefit when those tobacco taxes are passed. The American Heart Association/American Stroke Association (AHA/ASA) states regular, significant increases in the retail price of cigarettes reduce the number of people who begin smoking and increase the number of smokers who quit. AHA/ASA points out for every 10% increase in the price of cigarettes; there is a 4% reduction in overall cigarette consumption and a 0.5% reduction in youth consumption. The California Distributor Association opposes this bill stating it would create massive confusion for retailers and consumers alike because small businesses in the same area but different municipalities will have different tax-rates, allowing the store with the lower tax a business advantage. Analysis Prepared by: Lara Flynn / P.H. & D.S. / (916) 319-2097 FN: 0002647 AB 10 X2 Page 7