BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:   April 21, 2015


                            ASSEMBLY COMMITTEE ON HEALTH


                                  Rob Bonta, Chair


          AB 1396  
          (Bonta) - As Amended April 16, 2015


          SUBJECT:  Public health finance.


          SUMMARY:  Allocates the revenues generated by SB 591 (Pan), the  
          California Tobacco Tax Act of 2015 (Tobacco Tax Act), to various  
          state funds, as specified.  Specifically, this bill:


          1)Makes this bill contingent upon enactment of SB 591.


          2)Requires the Board of Equalization (BOE) to:


             a)   Calculate the adverse impact the tax proposed by SB 591  
               has on the revenues collected by existing tobacco taxes and  
               their specific purpose; and,


             b)   Determine the fiscal effect that any resulting decrease  
               in tobacco consumption has on the Cigarette and Tobacco  
               Products Surtax Fund, the Breast Cancer Fund, the  
               California Children and Families Trust Fund, and the  
               General Fund (GF) and then transfer revenues to offset the  
               revenue decrease directly resulting from imposition of  
               additional taxes.








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          3)Creates the California Tobacco Tax Act Fund as a trust fund,  
            established solely to carry out the purposes set forth in this  
            bill.


          4)Requires the Controller to allocate the moneys remaining in as  
            yet unspecified percentages to the following accounts and  
            purposes:


             a)   The Tobacco Prevention and Education Account to be used  
               by the Department of Public Health (DPH), Department of  
               Education (DOE), and the University of California (UC).


             a)   The Tobacco Disease Related Health Care Account to be  
               used by the Department of Health Care Services (DHCS) to  
               improve existing programs to provide quality and access to  
               health care programs for families and children.


             b)   The Tobacco Law Enforcement Account to be used by BOE,  
               DPH, and the Department of Justice (DOJ) for enforcing laws  
               that regulate the distribution and sale of cigarettes and  
               other tobacco products, including 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.


          5)Requires that no more than 2% of the funds received from the  
            Tobacco Tax Act Fund to be used by any department for  
            administrative costs.


          6)Requires agencies receiving funds, except the BOE, to publish  








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            annually on their respective Internet Websites an accounting  
            of moneys received from the Tobacco Tax Act and how the moneys  
            were spent.


          


          EXISTING LAW:


          1)Imposes a tax on distributors of cigarettes and tobacco  
            products, set at $.87 cents 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)Requires BOE to administer tobacco tax provisions, including  
            collecting the tax.  



          3)Requires 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 retailers of cigarettes and tobacco products to be  
            licensed by BOE.  



          5)Grants responsibility for public health programs, including  
            tobacco control to various state entities, including DPH, DOE,  








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            and UC.


          6)Grants responsibility for enforcing compliance with tobacco  
            laws to various state entities, including BOE, DOJ, and DPH.


          7)Establishes DHCS which administer Medi-Cal, which, among other  
            things, treats patients with tobacco related illnesses.


          8)Provides, under existing federal law, a $1.01 tax per pack of  
            20 cigarettes with the majority of the funds being used to  
            fund children's health programs.


          FISCAL EFFECT:  This bill has not been analyzed by a fiscal  
          committee.


          COMMENTS:  


          1)PURPOSE OF THIS BILL.  According to the author, this bill will  
            ensure that tobacco tax revenues generated by SB 591 are used  
            to provide efficiency, economy, and quality of care to all  
            patients regardless of economic circumstance.  The author  
            states the revenue allocations in this bill would provide  
            critical stability to health care provider networks and ensure  
            access to healthcare services for people receiving services in  
            the Medi-Cal program.  The author estimates $1.5 billion to be  
            raised will help the states cope with the dramatic expansion  
            of enrollment in California's Medi-Cal program, according to  
            the author, in particular helping to increase Medi-Cal rates.



          California already pays its Medi-Cal providers some of the  
            lowest rates in the entire country (for primary care and  








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            obstetric care, California ranked 48th among all states in  
            2012, and overall, Medi-Cal compensated physicians at only 51%  
            of Medicare levels).  The author states that having expanded  
            Medi-Cal under the Patient Protection and Affordable Care Act  
            (ACA), California needs to ensure that Medi-Cal provider rates  
            provide sufficient access to Medi-Cal beneficiaries.  The  
            author concludes, in order for the expansion of Medi-Cal  
            program to result in access to care, an adequate number of  
            health care providers must be available to provide care to  
            Medi-Cal patients.
          2)TOBACCO TAXATION IN CALIFORNIA.  According to BOE, there are  
            two types of excise taxes for cigarettes and tobacco products  
            distributed in California:  a) the cigarette tax; and, b) the  
            cigarette and tobacco products surtax.  While cigarettes are  
            subject to both the cigarette tax and the cigarette and  
            tobacco products surtax, tobacco products are subject only to  
            the cigarette and tobacco products surtax.  Tobacco products  
            include all forms of cigars, smoking tobacco, chewing tobacco,  
            and snuff, as well as other products containing at least 50%  
            tobacco.  The tax and the surtax are paid by distributers  
            through the use of tax stamps which are purchased from BOE and  
            affixed to each packet of cigarettes before distribution.  In  
            the 1960's the Legislature passed a $0.10 cigarette tax that  
            was allocated to the GF.  The Legislature and voters have  
            adopted the following three additional tobacco tax measures  
            since 1988:

             a)   AB 478 (Friedman), Chapter 660, Statutes of 1993, and AB  
               2055 (Friedman), Chapter 661, Statutes of 1993, added a  
               cigarette excise tax of $0.02 per package of 20 cigarettes  
               for breast cancer research and early detection services.

             b)   Proposition 99, from the November 1988 ballot, was  
               passed and imposed a cigarette and tobacco product surtax  
               of $0.25 per package of 20 cigarettes and is used for the  
               following purposes:  tobacco-related health education  
               programs and disease research; medical and hospital care  
               and treatment of patients who cannot afford those services,  
               and for whom payment will not be made by any private  








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               coverage or federal program; programs for fire prevention,  
               environmental conservation, protection, restoration,  
               enhancement, and maintenance of fish, waterfowl, and  
               wildlife habitat areas; and, enhancement of state and local  
               parks and recreation.

             c)   Proposition 10, passed November 3, 1998, imposed an  
               additional cigarette and tobacco product surtax of $0.50  
               per package of 20 cigarettes and is used for programs that  
               encourage proper childhood development, including:  the  
               development of professional and parental education and  
               training; informed selection of childcare; development and  
               education of childcare providers; and, research into best  
               practices and standards for all programs and services  
               relating to early childhood development. 

          3)Smoking prevalence in California.  According to the 2012  
            Surgeon General's Report, nearly 90% of smokers in the U.S.  
            started smoking by the age of 18, and 99% started by age 26.   
            In California, 64% of smokers started by the age of 18 and 96%  
            started by age 26.  According to DPH in 2010, 36.8% of high  
            school students had smoked a whole cigarette by 13 or 14 years  
            of age and, in 2012, illegal tobacco sales to minors rose from  
            5.6% in 2011 to 8.7%.  

          According to DPH, the state's adult smoking rate has hit a  
            record low.  In 2010, 11.9% of California adults smoked, down  
            from 13.1% in from 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% 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.









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          4)Tobacco-related diseases in California.  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.

          5)California Tobacco Control Program.  The California Tobacco  
            Control Program (CTCP) is a program administered by DPH.   
            Established in 1990 through the passage of Proposition 99,  
            CTCP funds and coordinates the efforts of local communities in  
            California to create smoke-free environments, prevent illegal  
            sales of tobacco to youth, counter the aggressive marketing  
            practices of the tobacco industry, and help smokers to quit.   
            To ensure that federal, state, and local laws are followed,  
            CTCP works closely with law enforcement agencies.  CTCP  
            currently works in all 58 counties in partnership with many  
            non-profit community-based organizations around the state.  A  
            key component of CTCP's comprehensive approach is its focus on  
            changing social norms rather than a frontal attack designed to  
            market cessation services directly to tobacco users.   
            According to a recent study conducted by UC San Francisco,  
            while CTCP has cost $2.4 billion over the span of the over 20  
            years of the program's existence, CTCP has reduced health care  
            costs by $134 billion.








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          6)Tobacco taxes and other states.  California's tobacco tax rate  
            ranks 33rd when compared to the rates of other states.  The  
            national mean cigarette excise tax is $1.48 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.

          7)Impacts of higher cigarette prices.  According to the  
            Legislative Analyst's Office (LAO), most revenue estimates  
            assume that an increased excise tax on cigarettes would raise  
            the retail prices of cigarettes and other tobacco products 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:  a) healthcare for  
            low-income and uninsured persons; and, b) health insurance  
            coverage for state and local government employees and  
            retirees.  Consequently, changes in state law, such as the  
            2014 Tobacco Act tax that affects the health of the general  
            population and low-income and uninsured persons and public  
            employees in particular, could affect publicly-funded health  
            care costs.  The LAO further reports, since the use of tobacco  
            products has been linked to various adverse health effects, an  
            increase in a cigarette excise 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  








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            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 is precisely 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  
            establishes a comprehensive licensing program for retailers,  
            manufacturers, distributors and importers of cigarettes and  
            tobacco products.  According to BOE, the California Cigarette  
            and Tobacco Licensing Act of 2003 has been successful in  
            reducing illegal sales.
          
          8)SUPPORT.  According to supporters, this bill, together with SB  
            591, will prevent kids from smoking, improve access to health  
            care services, fund prevention and education efforts, and help  
            tobacco users quit.  Tobacco related diseases are the leading  
            cause of preventable death in California, claiming more than  
            40,000 lives each year and costing the state of California  
            over $13 billion in healthcare costs annually.  Over $3.5  
            billion are taxpayer dollars used to treat Medi-Cal patients  
            with tobacco-related illnesses.  The best way to offset these  
            costs and protect millions of California residents is through  
            investment in the California Tobacco Control Program, which  
            has successfully reduced smoking rates and cigarette  








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            consumption in our state.  This program, since its inception  
            in 1989, has saved the state of California $139 billion  
            dollars.  This bill would generate over $151 billion in  
            revenues that will be used to fund proven and effective  
            tobacco prevention and cessation programs, as well as improved  
            access to health care for low-income families.


          9)POSSIBLE AMENDMENT.  This does not specify the percentages to  
            be allocated to the DPH, DOE, and UC from the Tobacco  
            Prevention and Education Account.  Additionally, SB 591 does  
            not specify the percentages to be assigned from the Tobacco  
            Tax Act Fund to the Tobacco Prevention and Education Account,  
            the Tobacco Disease Related Health Care Account, and the  
            Tobacco Law Enforcement Account.  The Committee may want to  
            ask the author about plans and timing of amendments for the  
            likely levels of funding in the various programs.


          10)RELATED LEGISLATION.  SB 591 imposes an additional tax on the  
            distribution of cigarettes at the rate of $2.00 per pack and  
            provides that the revenues collected from the additional tax  
            be deposited in the Tobacco Tax Act Fund.  SB 591 is pending  
            in the Senate Governance and Finance Committee.


          11)PRIOR LEGISLATION.


             a)   SB 768 (De León) of 2014, would have enacted the  
               California Tobacco Act of 2014 which would have imposed an  
               additional cigarette tax at a rate of $2.00 per package of  
               20 cigarettes.   SB 768 was held on the Senate  
               Appropriations Committee suspense file.


             b)   SB 600 (Padilla) of 2009, would have imposed an  
               additional excise tax of $1.50 per package of 20  
               cigarettes, adjusted annually by the consumer price index,  








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               and indirectly increased the tax on other tobacco products.  
                SB 600 was held on the Senate Appropriations Committee  
               suspense file.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          American Lung Association (cosponsor)


          California Medical Association (cosponsor)


          American Cancer Society Cancer Action Network


          California Black Health Network


          Campaign For Tobacco-Free Kids


          Health Access California


          Planned Parenthood Affiliates of California




          Opposition










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          None on file.




          Analysis Prepared by:Rylan Gervase / HEALTH / (916) 319-2097