BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SBX2 14 (Hernandez) - Tobacco: electronic cigarettes: taxes:
managed care organization provider tax: in-home supportive
services.
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|Version: September 10, 2015 |Policy Vote: HEALTH 9-4 |
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|Urgency: No |Mandate: Yes |
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|Hearing Date: September 10, |Consultant: Brendan McCarthy |
|2015 | |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB X2 14 would increase the current tobacco tax by
$2.00 per package of cigarettes and dedicate the resulting
revenues for specified purposes. The bill would revise and
extend the current Managed Care Organization Tax and dedicate
the resulting revenues for specified purposes. The bill would
eliminate an existing reduction in the number of hours for which
IHSS beneficiaries are eligible.
Fiscal
Impact:
Tobacco Tax Revenues. Estimated total annual revenue increase
of $1.3 billion per year from taxes paid on cigarettes and
other tobacco products ($1.2 billion per year) and electronic
cigarettes ($100 million per year ) (General Fund).
Tobacco Tax Expenditures. The bill specifies that revenues
resulting from the increased tobacco tax will be spent as
SBX2 14 (Hernandez) Page 1 of
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follows:
o Ongoing costs of about $100 million per year to
backfill existing programs supported with tobacco tax
revenues (General Fund). Under current law, existing
tobacco tax revenues are used to support Breast Cancer
Research, programs supported by Proposition 99 (including
public health and environmental protection programs), and
programs supported by Proposition 10 (for early childhood
education). The bill requires that reductions in existing
tobacco tax revenues for those programs (due to declining
tobacco use resulting from higher overall taxes) would be
backfilled with revenue from the additional tobacco tax
imposed by the bill. (Note that the bill does not require
new tobacco tax revenues to be used to backfill the
portion of the tobacco tax that is deposited in the
General Fund.)
o Ongoing costs up to $12 million per year for
administration and enforcement by the Board of
Equalization (General Fund). The bill authorizes the
Board of Equalization to use up to 1% of new tax revenues
(after backfilling existing programs) for administration
and enforcement.
o Annual costs of $400,000 per year for required
audits of tobacco tax revenues by the Bureau of State
Audits (General Fund).
o Annual costs of $40 million per year to support
physician training programs within the University of
California System (General Fund).
o Annual costs of $48 million per year for enforcement
programs at the local level, the Board of Equalization,
the Department of Public Health, and the Attorney
General's Office (General Fund).
o Annual costs up to about $900 million per year for
SBX2 14 (Hernandez) Page 2 of
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increased payments to Medi-Cal providers (General Fund).
The bill provides that 82% new tobacco tax revenues
(after accounting for the above expenditures) shall be
used by the Department of Health Care Services to augment
payments to Medi-Cal providers. The General Fund monies
allocated in the bill would be augmented with federal
matching funds, more than doubling the actual amount of
payments made to Medi-Cal providers.
o Annual costs up to about $140 million per year for
tobacco prevention and control programs by the Department
of Public Health and the Department of Education (General
Fund).
o Annual costs up to about $55 million per year for
research on tobacco-related diseases by the University of
California (General Fund). Similar to the increase in
Medi-Cal provider payments, the actual amount of funding
that would be available will be reduced by any backfill
of existing programs.
Managed Care Organization Tax Revenues. Annual revenues of
$1.939 billion per year in tax revenues paid by managed care
organizations, including those providing services under the
Medi-Cal program and those managed care plans that do not
contract with the Medi-Cal program (General Fund).
Managed Care Organization Tax Expenditures. The bill would
allocate the resulting revenues as follows:
o Annual costs of $1.645 billion to provide increased
capitation payments to Medi-Cal managed care plans ($576
million from the Managed Care Organization Tax revenues
and $1.069 billion in matching federal funds).
o Annual costs of $230 million per year to increase
provider rates in the regional center system for services
provided to individuals with developmental disabilities
and increases in regional center operational budgets.
SBX2 14 (Hernandez) Page 3 of
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o Annual General Fund revenues of $1.133 billion used
to offset current expenditures in the Medi-Cal program
(General Fund).
Other state costs. In addition to the dedication of new
revenues for specific expenditures, the may impose other
direct costs on the state.
o Potential increased Proposition 98 funding
obligation. The bill may result in additional state
funding obligations for education (General Fund). The
state constitution generally requires the state to make
payments for K-14 education equal to about 50% of annual
General Fund revenues. (The actual funding formulas for
Proposition 98 are complex and vary from year to year
based on economic conditions and state budgeting.)
Historically, the state has not counted revenues from the
existing Managed Care Organization Tax towards the
Proposition 98 funding requirement. However, because this
measure imposes new taxes, the resulting revenues may be
subject to the requirements of Proposition 98. The state
could therefore be obligated to increase payments for
education on average by about 50% of the resulting
revenues - in this case about $650 million per year due
to the increased tobacco tax and $970 million per year
due to the Managed Care Organization Tax.
o IHHS restoration. Ongoing annual costs of $275
million (General Fund only) to restore an existing 7%
reduction in In-Home Supportive Services hours.
o Cost to the state through CalPERS managed care
plans. Annual costs to the state of about $11 million per
year, due to the cost of the Managed Care Organization
Tax on CalPERS plans (General Fund and special funds).
CalPERS health care plans would be subject to the tax as
commercial managed care plans. Presumably those
contracting managed care plans would pass along the
increased tax cost to the state through higher premiums.
SBX2 14 (Hernandez) Page 4 of
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o Ongoing reduction in General Fund tobacco tax
revenue. By increasing tobacco taxes, the bill will
reduce overall consumption of tobacco products, reducing
revenues from the existing tobacco taxes. Based on the
projected reduction in consumption, the bill will result
in an annual reduction of about $14 million per year in
tobacco tax revenue that is deposited in the General
Fund. Unlike the other programs supported by existing
tobacco tax revenues, the reduced General Fund revenue
would not be backfilled with new tobacco tax revenue.
Background: Under current law, the state imposes a tax of $0.87 per
package of cigarettes in addition to the existing $1.01 federal
tax on cigarettes. Resulting tobacco tax revenues are allocated
to a variety of programs to support public health, research,
early childhood education, and deposited into the General Fund.
Current law requires the Board of Equalization to assess an
excise tax on non-cigarette tobacco products equal to the tax
levied on cigarettes. Current law does not extend the current
tobacco tax to electronic cigarettes.
The Medi-Cal program provides health care services to low income
individuals and families and other qualified individuals. Over
the last several years, there have been a variety of attempts by
the state to reduce payment rates to Medi-Cal providers, in an
effort to reduce state spending on the program. Many of those
rate reductions have been enjoined by the courts or repealed and
replaced by different budget actions. Since the enactment of the
2013-14 Budget Act, several categories of providers have been
exempted from Medi-Cal rate reductions by statute or
administrative action of the Department.
Under current law, the state imposes a Managed Care Organization
Tax on Medi-Cal managed care plans. The resulting tax revenues
are used to draw down matching federal funds. The state returns
the taxes paid by Medi-Cal managed care plans through the
capitation rates paid by the program (holding the Medi-Cal
managed care plans harmless). The state keeps the remaining
revenues, providing about $1.1 billion per year which is used to
reduce the state's funding obligation for the Medi-Cal program.
The existing tax expires on July 1, 2016.
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Recently, the federal government has indicated that the state's
current Managed Care Organization Tax is not permissible under
federal rules. The federal government has indicated that in
order to be permissible, such a tax cannot be levied solely on
Medi-Cal managed care plans, but must be levied on a broader
base of managed care plans in the state. The federal government
has indicated that the state has until the end of the current
legislative session to replace the existing tax with a tax
structure that meets federal requirements.
Under current law, the In-Home Supportive Services Program
provides qualified individuals with services intended to permit
beneficiaries to remain in their home and avoid the need for
institutional care. Current law (and a legal settlement the
state has entered into) provides for a 7% reduction in the hours
of service to each beneficiary. (However, the 2015 Budget Act
temporarily eliminated the reduction in the 2015-16 budget
year.)
Proposed Law:
SB X2 14 would increase the current tobacco tax by $2.00 per
package of cigarettes and dedicate the resulting revenues for
specified purposes. The bill would revise and extend the current
Managed Care Organization Tax and dedicate the resulting
revenues for specified purposes. The bill would eliminate an
existing reduction in the number of hours for which IHSS
beneficiaries are eligible.
Specific provisions of the bill would:
Impose an additional excise tax of $2.00 per package of
cigarettes and impose a one-time floor tax on existing
supplies of cigarettes held by dealers;
Impose a tax on electronic cigarettes equivalent to
$2.00 per package of cigarettes;
Expand the definition of "tobacco products" to include
electronic cigarettes, for the purposes of licensing and
tax collection;
State that the revenues resulting from the tobacco tax
increase in the bill are not General Fund revenues for the
purposes of Proposition 98;
Continuously appropriate new tobacco tax revenues to:
SBX2 14 (Hernandez) Page 6 of
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(1) backfill existing programs supported by existing
tobacco taxes, (2) pay for administrative costs, (3)
provide $40 million for physician training at the
University of California, (4) provide $48 million for law
enforcement relating to illegal tobacco sales, (5) provide
increased funding for Medi-Cal provider payments (82% of
revenues after making previous allocations), (6) provide
funding for tobacco prevention and control programs (13% of
revenues after making previous allocations), and provide
funding for tobacco-related research at the University of
California (5% of revenues after making previous
allocations);
Repeal the existing 7% reduction in allowable hours
provided by the In-Home Supportive Services program;
Impose a new Managed Care Organization Tax (to replace
the existing tax) on both Medi-Cal managed care plans and
managed care plans that do not contract with the Medi-Cal
program, beginning in the 2016-17 fiscal year;
Establish a rate structure for the new Managed Care
Organization tax including a tiered rate structure based on
enrollment and which imposes differing tax rates at each
tier depending on whether a managed care plan contracts
with the Medi-Cal program (tax rates for non-Medi-Cal
managed care plans would be substantially lower);
Require revenues resulting from the new Managed Care
Organization Tax to be allocated as follows: (1) $230
million per year to be used to provide additional funding
for Regional Center operations and to increase payments to
providers of services to developmentally disabled Regional
Center consumers and (2) require the remaining revenues to
be continuously appropriated to the Department of Health
Care Services for support of the Medi-Cal program.
Staff comments: Proposition 98 impacts. As noted above, the
state constitution requires payments for K-14 education based on
state tax revenues. The bill provides that the tax revenues
resulting from the increased tobacco tax are not to be
considered General Fund revenues for the purposed of Proposition
98. However, because those revenues are the proceeds of taxes,
the bill could be interpreted as increasing in the Proposition
98 funding requirement.
New Managed Care Organization Tax and federal requirements. As
noted above, the federal government has indicated that the
SBX2 14 (Hernandez) Page 7 of
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current tax structure is not permissible under federal
requirements because it is only paid by Medi-Cal managed care
plans rather than all managed care plans. The new tax structure
proposed in this bill does expand the tax to non-Medi-Cal
contracting managed care plans. However, because the structure
of the new tax still places a significantly higher tax burden on
Medi-Cal managed care plans than non-contracting plans, it is
not clear whether the new tax structure will meet federal
requirements.
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