BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 591 |Hearing |4/22/15 |
| | |Date: | |
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|Author: |Pan |Tax Levy: |Yes |
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|Version: |4/16/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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CIGARETTE AND TOBACCO PRODUCTS TAXES: CALIFORNIA TOBACCO TAX
ACT OF 2015
Establishes the California Tobacco Tax Act of 2015, which
imposes an additional cigarette tax at a rate of $2.00 per
package of 20 cigarettes.
Background and Existing Law
The California Cigarette and Tobacco Products Tax Law imposes
two types of excise taxes on cigarette and tobacco products
distributed in the state: 1) the cigarette tax, and 2) the
cigarette and tobacco products surtax. Cigarettes are subject
to both the cigarette tax and the cigarette and tobacco products
surtax. Distributors pay both the tax and surtax through the
use of cigarette indicia, or tax stamps, which are purchased
from the Board of Equalization (BOE) and affixed to a cigarette
package. Currently, each stamp costs $0.87 per pack of 20
cigarettes: $0.12 cents for the cigarette tax and $0.75 for the
combined surtaxes.
A distributor, wholesaler, manufacturer, or importer of
cigarettes or tobacco products is required to register with the
BOE and be licensed. All licensed distributors, wholesalers,
manufacturers, and importers must file returns or reports on or
before the 25th of the month following the reporting period.
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State law defines "cigarette" as any roll for smoking, made
wholly or in part of tobacco, irrespective of size, shape, or
whether the tobacco is flavored, adulterated or mixed with any
other ingredient, where such roll has a wrapper or cover made of
paper or any other material, except where such a wrapper is
wholly or in the greater part made of tobacco and weighs over
three pounds per thousand. "Tobacco products" includes all
forms of cigars, smoking tobacco, chewing tobacco, snuff and any
other articles or products made of, or containing at least 50%
tobacco, but does not include cigarettes.
There are certain transactions that are not subject to the
cigarette tax and the cigarette and tobacco products surtaxes,
like the sales by a distributor to a carrier engaged in
interstate or foreign passenger services, sales to U.S. military
exchanges, or an individual shipment of not more than 400
cigarettes personally transported into the state.
If a consumer purchases cigarettes or tobacco for their own use
from outside the state, either through mail, telephone, or the
internet, without paying the excise tax, they must pay the tax
directly to the BOE. Consumers owe the tax if they physically
bring tobacco products or more than 400 cigarettes into the
state. These purchases are also subject to California's use tax
law.
Since 1998, the Legislature and voters have adopted three
tobacco tax measures:
On the November 1988 ballot, California voters approved
Proposition 99, which imposed a surtax of $0.25 cents per
package of 20 cigarettes, and created an equivalent tax on
tobacco products. Proceeds from the taxes fund health
education, disease research, hospital care, fire
prevention, and environmental conservation.
On November 3, 1998, California voters approved
Proposition 10, which imposed an additional surtax of $0.50
per package of 20 cigarettes, and created a proportionately
larger increase in the tax on tobacco products. The
revenues are used to fund early childhood development
programs, called "First 5."
Assembly Bill 478 (Friedman, 1993) added an excise tax
SB 591 (Pan) 4/16/15 Page 3
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of $0.02 per packet of 20 cigarettes for breast cancer
research and early detection services.
The federal cigarette tax is $1.01 per pack. Current state
taxes and surtaxes are allocated in the following manner:
$0.10 to the state General Fund.
$0.25 to the Cigarette and Tobacco Products Surtax Fund
(Proposition 99, 1988).
$0.02 to the Breast Cancer Fund .
$0.50 to the California Children and Families Trust Fund
(Proposition 10, 1998).
In November 1998, state attorney generals and tobacco companies
entered into the Master Settlement Agreement, whereby, tobacco
companies, agreed to change the way tobacco products were
marketed and agreed to pay, in perpetuity, various annual
payments to compensate for medical costs for caring for person
with smoking-related illnesses. In 2012, California received a
Master Settlement Payment around $735.7 million, which adds an
additional $0.50 tax per pack.
Proposed Law
Senate Bill 591 establishes the California Tobacco Tax Act of
2015, and requires all revenues from the imposed taxes to be
deposited in the California Tobacco Tax Act of 2015 Fund. The
bill specifies:
I. The excise tax rate and the annual cigarette
tax rate adjustment.
II. The floor stock tax rate and cigarette stamp
tax rates.
III. How revenues will be deposited in the Tobacco
Tax Fund.
I. Excise tax. SB 591 imposes an additional one-hundred mills
($0.10) tax for each cigarette, or $2 per pack of 20 cigarettes,
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distributed on or after January 1, 2016.
II. Floor stock tax and cigarette stamp tax. A floor stock tax
imposes a one-time tax on paid fixed stamp cigarettes and
unaffixed tax stamps in a distributor, wholesaler, or retailer's
possession, to equalize the excise tax paid on inventory before
the tax increase and inventory purchased after the effective
date of a tax increase.
To prevent possible windfalls, SB 591 requires every dealer and
wholesaler, for the privilege of holding or storing cigarettes
for sale, use, or consumption, to pay a floor stock tax for each
cigarette in its possession or under its control at 12:01 am on
July 1, 2016.
SB 591 also requires every dealer and wholesaler, on or before
the first day of the first calendar quarter commencing more than
180 days after the effective date of this Act, to file a return
with the BOE, on a form prescribed by the BOE, showing the
number of cigarettes in a dealer and wholesaler's possession or
under its control at 12:01 a.m. on July 1, 2016. The amount of
the tax must be computed and shown on the return.
SB 591 requires every licensed cigarette distributor, for the
privilege of distributing cigarettes and for holding or storing
cigarettes for sale, use, or consumption, to pay a cigarette
indicia adjustment tax for each California cigarette tax stamp
that is affixed to any package of cigarettes, and for each
unaffixed California cigarette tax stamp, at the following
rates:
$2.50 for each stamp bearing the designation "25."
$2.00 for each stamp bearing the designation "20."
$1 for each stamp bearing the designation "10."
SB 591 requires every licensed cigarette distributor to file a
return with BOE on or before July 1, 2016, on a form prescribed
by the board, showing the number of stamps of "25", "20", and
"10." The amount of tax must be computed and shown on the
return.
SB 591 requires the floor stock tax and cigarette indicia
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adjustment tax to be due and paid on July 1, 2016. The bill
requires that payments must be made by remittances payable to
the BOE, and must accompany the required returns and forms.
III. Tobacco Tax Act of 2014 Fund. SB 591 establishes the
California Tobacco Tax Act of 2015 Fund in the State Treasury.
The bill requires that all revenues, less refunds, derived from
the additional taxes imposed by the Act must be deposited into
the Tobacco Tax Act Fund, as follows:
____% to the Tobacco Prevention and Education Account,
which the bill creates in the Tobacco Tax Act Fund.
____% to the Tobacco Disease Related Health Care
Account, which the bill creates in the Tobacco Tax Act
Fund.
____% to the Tobacco Law Enforcement Account, which the
bill creates in the Tobacco Tax Act Fund.
SB 591 authorizes funds in the Tobacco Tax Fund to be placed
into the State Treasurer's Pooled Money Investment Account for
investment only. The bill provides that interest earned must be
credited to the Fund and be deposited, apportioned, and expended
only in accordance with the Act and its expressed purposes.
The bill prohibits taxes imposed by the bill and revenue from
those taxes from being considered part of the state General Fund
and "moneys to be applied by the state for the support of school
districts and community college districts," known as the
Proposition 98 guarantee, which mandates a minimum level of
education spending based on three tests (Proposition 98, 1988).
SB 591 prohibits revenues in the Tobacco Tax Act Fund from being
subject to appropriation, reversion, or transfer by the
Legislature, the Governor, the Director of Finance, or the
Controller for any other purpose. The bill also prohibits funds
from being loaned to the General Fund or any other state or
local government fund.
The bill prohibits revenues in the Tobacco Tax Act Fund to fund
existing levels of service or supplant state or local general
fund moneys for any purpose.
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The bill prohibits that no more than 2% of funds received from
the Tobacco Tax Act Fund be used by any department for
administrative costs.
Also, SB 591 makes several conforming changes to cross section
references in the Cigarette and Tobacco Products Law, and the
bill makes legislative findings and declarations to support its
purpose.
State Revenue Impact
According to the Board of Equalization, the net total cigarette
excise tax revenue is $1.3 billion for fiscal year 2016-16,
which includes a one-time floor stocks tax of $86 million.
Comments
1. Purpose of the bill. According to the author,
"Tobacco-related deaths are the single most preventable cause of
death in California claiming over 40,000 lives per year and
costing taxpayers billions of dollars to treat victims of
tobacco-related diseases. SB 591 will increase the capacity of
proven statewide prevention and education programs that reach
adults and youth alike through the media, schools and workplaces
while restoring California's leadership in smoking prevention
and research to offset the costs of tobacco-related diseases for
taxpayers."
2. Underground market. Taxes increase product prices, and
higher cigarette prices can exacerbate tax evasion and foster
illegal cigarette sales. Tax evasion reduces state revenues
that cigarettes and other tobacco products taxes generate. BOE
staff estimates that cigarette tax evasion in California runs at
a rate of approximately $126 million, along with $88 million in
tax on other tobacco products. These illegal activities include
smuggling of cigarettes and tobacco products into California,
and the sale of counterfeit cigarette stamps and products. The
California Cigarette and Tobacco Products Licensing Act of 2003
(AB 71, Horton, 2003) was enacted to address the concerns of
illegal sales. This Act established a comprehensive licensing
program for retailers, manufacturers, distributors and importers
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of cigarettes and tobacco products. According to BOE, the Act
has been successful in reducing illegal sales of cigarettes, but
such a substantial increase in price may incentive tax evasion.
3. Indirect tobacco products and sales tax increase. This
measure does not directly increase the tobacco products tax;
however, existing law triggers an automatic tobacco products tax
increase whenever the cigarette tax is increased. Specifically,
Section 30123(b), as added by Proposition 99, requires BOE to
annually determine the tobacco products tax rate at a rate
equivalent to the combined rate of all taxes imposed on
cigarettes. Additionally, because the cigarette tax increase
and indirect tobacco products tax will be included in the total
sales price, the bill will increase sales tax revenues.
4. Missing something? SB 591 does not specify allocation
percentages to be deposited in the Tobacco Prevention and
Education Account, the Tobacco Disease Related Health Care
Account, and the Tobacco Law Enforcement Account. The author
intends to continue working with stakeholders to determine the
appropriate allocation amounts.
5. A shrinking base. According to BOE, each year there is a 3%
decrease in cigarette tax revenue. Although it is the intent of
the bill to encourage smokers to quit and others to never start
by making the habit cost prohibitive, it also makes this a
declining revenue source for the programs that benefit from the
tax.
6. Matching states. Across the 50 states and U.S. territories,
the median tax rate on cigarettes is $1.34 per pack. California
is one of three states, with Missouri and North Dakota, which
have not increased their cigarette tax since 1998. Some local
governments have their own cigarette taxes, such as Chicago
(68[), Cook County, IL ($3.00), New York City ($1.50), and
Anchorage, AK ($2.206).
7. Program administration funding. Uncodified language in AB 71
(Horton, Chapter 890, Statutes of 2003) states that "All
revenues and expenses generated by this act with respect to the
taxes imposed under the Cigarette and Tobacco Products Tax Law
(Part 13 (commencing with Section 30001) of Division 2 of the
Revenue and Taxation Code), shall be allocated in the same
manner as those revenues and expenses are allocated under the
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Cigarette and Tobacco Products Tax Law as that law read on the
effective date of this act." It appears that the tax revenues
generated by this bill could not be used to reimburse the BOE's
Licensing Act administrative costs because the tax proposed in
this bill was not effective on the date of the Licensing Act.
The Committee may wish to consider amending the language so that
BOE can be reimbursed for Licensing Act administrative costs.
8. Recent amendments. SB 591 recently deleted language that
would have done the following:
Require BOE to annually determine the effect of
additional taxes imposed on cigarettes and the resulting
increase on tobacco products' tax have on the consumption
of cigarettes and tobacco products in the state.
To the extent BOE determines a decrease in consumption
to be a direct result of the additional tax imposed by this
Act or state law, BOE must determine the fiscal effect the
decrease in consumption has on the Cigarette and Tobacco
Products Surtax Fund (Proposition 99, 1988), Breast Cancer
Fund, California Children and Families Trust Fund
(Proposition 10, 1998), and State General Fund.
Require the Controller to allocate money from the
accounts in the California Tobacco Tax Act of 2015 Fund to
various other accounts.
Establish the California Tobacco Tax Act of 2015 Fund as
a trust fund.
The provisions above will be amended into AB 1396 (Bonta), and
the two bills will contain contingency language.
9. Double-referral. The Senate Rules Committee ordered a
double-referral of SB 591 to the Senate Governance and Finance
Committee, which will consider the bills' excise tax provisions,
and to the Senate Health Committee, which has jurisdiction over
public health measures. The bill is set to be heard in Senate
Health Committee on April 29, 2015.
10. Related legislation.
SB 768 (de León, 2013) imposed a $2.00 increase per one
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pack of 20 cigarettes. The bill passed the Senate Health
and Senate Governance and Finance. It was held on the
Senate Appropriations Committee's suspense file.
SB 600 (Padilla, 2009) imposed a $1.50 increase per one
pack of 20 cigarettes. The bill passed the Senate Health,
Senate Revenue and Taxation, and Senate Appropriations
Committee. It was held in Senate Rules.
AB 89 (Torklakson, 2009) imposed an additional tax, at a
rate of $2.10 per one pack of 20 cigarettes, and deposited
revenues into a Tobacco Excise Tax Account. The bill was
not heard in the Assembly Governmental Organization
Committee.
SB 564 (Torlakson, 2004) imposed an additional tax on
the distribution of cigarettes at the rate of $2.00 per
each package of cigarettes. This bill was held on the
Senate Revenue and Taxation Committee.
AB 35 (Vargas, 2003) imposed an additional tax on the
distribution of cigarettes at the rate of $1.50 per each
package of cigarettes. The bill was later amended to a
different subject.
SB 1890 (Ortiz, 2002) increased the cigarette tax by 65
cents per package with the proceeds to have been used for
health-related programs. The bill was held on the Senate
Revenue and Taxation Committee's suspense file.
Support and
Opposition (4/16/15)
Support : American Cancer Society Cancer Action Network (ACS
CAN); American Heart Association; American Lung Association;
Association of Northern California Oncologists (ANCO);
California Academy of Family Physicians; California Black Health
Network; California Chapter of the American College of Emergency
Physicians (California ACEP); California Medical Association;
California Primary Care Association (CPCA); California Tax
Reform Association; Campaign for Tobacco-Free Kids; Health
Access; Health Officers Association of California (HOAC); Kaiser
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Permanente; Medical Oncology Association of Southern California,
Inc. (MOSAC); Planned Parenthood Action Fund of Orange County
and San Bernardino Counties; Planned Parenthood Action Fund of
Santa Barbara, Ventura, and San Luis Obispo Counties; Planned
Parenthood Action Fund of the Pacific Southwest; Planned
Parenthood Affiliates of California; Planned Parenthood Mar
Monte; Planned Parenthood Northern California Action Fund;
Planned Parenthood Pasadena and San Gabriel Valley; Santa Clara
County Board of Supervisors; Service Employees International
Union (SEIU).
Opposition : California Chamber of Commerce (CalChamber);
California Taxpayers Association (CalTax); Howard Jarvis
Taxpayers Association; National Federation of Independent
Business (NFIB).
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