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  







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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  








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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.









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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.









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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:  








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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  








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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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