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. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: September 10, 2015 |Policy Vote: HEALTH 9-4 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: September 10, |Consultant: Brendan McCarthy | |2015 | | | | | ----------------------------------------------------------------- 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 ? 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 ? 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 ? 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 ? 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. SBX2 14 (Hernandez) Page 5 of ? 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 ? (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 ? 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. -- END --