BILL ANALYSIS Ó SENATE COMMITTEE ON PUBLIC HEALTH AND DEVELOPMENTAL SERVICES Senator Ed Hernandez, O.D., Chair BILL NO: ABX2 10 --------------------------------------------------------------- |AUTHOR: |Bloom | |---------------+-----------------------------------------------| |VERSION: |March 3, 2016 | --------------------------------------------------------------- --------------------------------------------------------------- |HEARING DATE: |March 7, 2016 | | | --------------------------------------------------------------- --------------------------------------------------------------- |CONSULTANT: |Myriam Bouaziz | --------------------------------------------------------------- SUBJECT : Local taxes: authorization: cigarettes and tobacco products 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 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. Existing law: 1)Imposes a tax on distributors of cigarettes and tobacco products, set at $0.87 per pack of 20 cigarettes. Requires the taxes on cigarette and tobacco products to 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. 2)Establishes the BOE and requires the BOE to administer the tobacco tax provisions, including collecting the tax. 3)Requires the BOE to annually set a tax on other tobacco products, such as cigars and chewing tobacco, at an amount equivalent to the tax on cigarettes. 4)Requires a distributor, wholesaler, manufacturer, or importer of cigarettes or tobacco products to register with and be licensed by the BOE. ABX2 10 (Bloom) Page 2 of ? 5)States that the cigarette and tobacco products taxes apply in lieu of all other state, county, municipal, or district taxes on the privilege of distributing cigarettes or tobacco products. The in-lieu language does not prohibit the application of a fee, the sales and use tax, Uniform Local Sales and Use Tax Law, or Transactions and Use Tax Law to the sale, storage, use or other cigarette or tobacco products consumption. This bill: 1)Allows a board of supervisors of a county, or city and county, to impose a tax on the privilege of distributing cigarettes and tobacco products in the county or city and county . 2)Requires a board of supervisors, subject to California Constitution limitations, to adopt an ordinance to levy a tax on the privilege of distributing cigarettes and tobacco products. The vote threshold is majority for a general tax, and two-thirds for a special tax . 3)Allows the Board of Equalization to collect and administer the local tax on behalf of a county or a city and county. 4)Allows the board of supervisors of a county, or city and county, to contract with another county, or city and county, to share any administration costs in order to impose the local tax. 5)Requires the Board of Equalization to allow, upon request, a county, or city and county officer or employee to examine any records regarding the administration of the cigarette and tobacco products tax ordinance of the county or city and county. Allows the Board of Equalization to require reimbursement for costs incurred in complying with such requests. FISCAL EFFECT : This bill has not been analyzed by a fiscal committee. PRIOR VOTES : ----------------------------------------------------------------- |Assembly Floor: | 46-27 | |------------------------------------+----------------------------| ABX2 10 (Bloom) Page 3 of ? |Assembly Appropriations Committee: | | |------------------------------------+----------------------------| |Assembly Public Health and | 9-4 | |Developmental Services Committee: | | ----------------------------------------------------------------- COMMENTS : 1)Author's statement. 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. 2)Smoking prevalence. According to the 2012 Surgeon General's Report, nearly 90 % of smokers in the United States started smoking by the age of 18, and 99 % started by age 26. In California, 64 % of smokers start by the age of 18 and 96 % start by age 26. According to the Department of Public Health (DPH), in 2010, 36.8 % of high school students had smoked a whole cigarette by age 13 or 14, and illegal tobacco sales to minors rose to 8.7 % from 5.6 % in 2011. Yet, the state's adult smoking rate has hit a record low. In 2010, 11.9 % of the state's adults smoked, down from 13.1 % in 2009, making California one of only two states to reach the federal Healthy People 2020 target of reducing the adult smoking prevalence rate to 12 %. However, research highlights that the burdens of smoking do not fall evenly across the state. According to the American Lung Association (ALA), African-American men and women have the highest smoking usage rate at 21.3 % and 17.1 % ABX2 10 (Bloom) Page 4 of ? respectively, followed by white men at 17.2 % and Latino men at 16 %. The ALA reports that Korean men have an unusually high tobacco usage rate at 27.9 %, as do Lesbian, Gay, Bisexual, and Transgender women who smoke at almost triple the rate of women in general. 3)Tobacco-related diseases. Every year, an estimated 443,000 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 DPH, smoking causes ischemic 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. 4)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, 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 ABX2 10 (Bloom) Page 5 of ? 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. 5)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. 6)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. Additionally, the state and local governments in California incur costs for providing: 1) health care for low-income and uninsured persons and 2) health insurance coverage for state and local government employees and retirees. The LAO further reports, since the use of ABX2 10 (Bloom) Page 6 of ? tobacco products has been linked to various adverse health 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. According to the Federal Trade Commission Cigarette Report, since three out of every four smokers expected to quit because of cigarette tax increase are estimated to be low-income, the public health benefits of reduced tobacco-related illnesses from smoking will also be borne by lower-income households. 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. 7)Local Tobacco Fee. The City and County of San Francisco's Cigarette Litter Abatement Fee is a $0.20 per pack of cigarettes fee collected at the point of sale by the retailer. The funds generated by the fee are used to abate cigarette litter through education and removal of cigarette litter. In 2008, the City and County of San Francisco spent over $24,792,558 in public litter clean up, with cigarette related ABX2 10 (Bloom) Page 7 of ? waste alone amounting to approximately $6,098,969 of the City's annual litter removal costs. The fee is estimated to generate $5 million annually. The ordinance has been in effect since 2009. 8)Related legislation. SBX2 5 (Leno) recasts and broadens the definition of "tobacco product" in current law to include electronic cigarettes as specified; extends current restrictions and prohibitions against the use of tobacco products to electronic cigarettes; extends current licensing requirements for manufacturers, importers, distributors, wholesalers, and retailers of tobacco products to electronic cigarettes; requires electronic cigarette cartridges to be child-resistant; and exempts active duty military personnel, as specified, from the requirement of being 21 years of age or older to purchase tobacco products. SBX2 5 is pending on the Senate Floor. SBX2 7 (Hernandez) increases the minimum legal age to purchase or consume tobacco from 18 to 21. SB X2 7 is pending on the Senate Floor. ABX2 7 (Stone) removes many, but not all, exemptions in existing law that allow tobacco smoking in certain indoor workplaces and expands the prohibition on smoking in a place of employment to include owner-operated businesses. ABX2 7 will be heard in this committee on March 7, 2016. ABX2 9 (Thurmond) extends current tobacco use prevention funding eligibility and requirements for county offices of education and school districts to include charter schools; broadens the definition of products containing tobacco and nicotine, as specified, and prohibits their use in specified areas of schools and school districts, regardless of funding; and requires specified signs to be prominently displayed at all entrances to school property. ABX2 9 will be heard in this committee on March 7, 2016. ABX2 10 (Bloom) allows counties to impose a tax on the privilege of distributing cigarettes and tobacco products. ABX2 10 will be heard in this committee on March 7, 2016. ABX2 11 (Nazarian) revises the Cigarette and Tobacco Products Licensing Act of 2003 to change the retailer license fee from a $100 one-time fee to a $265 annual fee, and increase the ABX2 10 (Bloom) Page 8 of ? distributor and wholesaler license fee from $1,000 to $1,200. ABX2 11 will be heard in this committee on March 7, 2016. 9)Prior legislation. SB 653 (Steinberg) of 2011 would have authorized the governing board of any county or city and county, any school district, any community college district, and any county office of education subject to specified constitutional and voter approval requirements, to levy, increase, or extend a local personal income tax, transactions and use tax, vehicle license fee, and excise tax, including, but not limited to, an alcoholic beverages tax, a cigarette and tobacco products tax, a sweetened beverage tax, and an oil severance tax, as provided. SB 653 failed passage on the Senate Floor. AB 1040 (Leno) of 2003 would have, subject to specified requirements, authorized the board of supervisors of a county to impose a tax, in addition to other local taxes, on the privilege of selling cigarette and tobacco products at retail within its boundaries, whether or not within an incorporated city. Among other things, the tax would be subject to approval by a majority vote of the board of supervisors and by a two-thirds vote of the qualified voters of the county and would be imposed at an unspecified rate in increments of 1/8%. The ordinance levying the tax would, among other things, require the county to contract with the State Board of Equalization with respect to the administration of the tax, as provided. AB 1040 was held in the Assembly Committee on Revenue and Taxation. 10)Support. The American Cancer Society Cancer Action Network (ACS CAN) 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 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 ABX2 10 (Bloom) Page 9 of ? points out for every 10% increase in the price of cigarettes; there is a 4% reduction in overall cigarette consumption and a .5% reduction in youth consumption. 11)Opposition. 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. SUPPORT AND OPPOSITION : Support: American Cancer Society Cancer Action Network (sponsor) American Heart Association/American Stroke Association American Lung Association in California Association of Northern California Oncologists California Black Health Network California Chronic Care Coalition California Dental Association California Medical Association California Optometric Association California Pan-Ethnic Health Network California Primary Care Association California Society of Addiction Medicine Community Action Fund of Planned Parenthood of Orange and San Bernardino Counties Health Access California Medical Oncology Association of Southern California, Inc. Planned Parenthood Advocacy Project Los Angeles County Planned Parenthood Affiliates of California Planned Parenthood Mar Monte Planned Parenthood Northern California Action Fund Planned Parenthood Action Fund of the Pacific Southwest Oppose: California Chamber of Commerce California Distributor Association CalTax Howard Jarvis Taxpayers Association -- END -- ABX2 10 (Bloom) Page 10 of ?