BILL ANALYSIS Ó SENATE COMMITTEE ON HEALTH Senator Ed Hernandez, O.D., Chair BILL NO: SB 591 --------------------------------------------------------------- |AUTHOR: |Pan | |---------------+-----------------------------------------------| |VERSION: |April 16, 2015 | --------------------------------------------------------------- --------------------------------------------------------------- |HEARING DATE: |April 29, 2015 | | | | | | | | --------------------------------------------------------------- --------------------------------------------------------------- |CONSULTANT: |Reyes Diaz | --------------------------------------------------------------- SUBJECT : Cigarette and tobacco products taxes: California Tobacco Tax Act of 2015 SUMMARY : Imposes an additional cigarette tax at a rate of $2.00 per package of 20 cigarettes, and a corresponding rate for a cigarette tax stamp. Imposes a floor stock tax on dealers and wholesalers for cigarettes in their possession or under their control on January 1, 2016. Establishes in the State Treasury the California Tobacco Tax Act of 2015 Fund into which revenues of the additional cigarette tax will be deposited to be transferred into specified existing and newly created accounts for specified purposes. Existing law: 1.Imposes a tax on distributors of cigarettes and tobacco products, set at $0.87 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.Establishes the Board of Equalization (BOE) and requires the BOE to administer the tobacco tax provisions, including collecting the tax. 3.Requires the 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 a distributor, wholesaler, manufacturer, or importer of cigarettes or tobacco products to register with and be SB 591 (Pan) Page 2 of ? licensed by the BOE. 5.Establishes the Department of Public Health (DPH) and grants it responsibility for public health programs, including tobacco control. This bill: California Tobacco Tax Act of 2015 1.Enacts the California Tobacco Tax Act of 2015, which imposes an additional cigarette tax at a rate of $0.10 per cigarette, or $2.00 per package of 20 cigarettes. 2.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 in this state at 12:01 a.m. on January 1, 2016, at the rate of $0.10 for each cigarette. Requires every dealer and wholesaler to file a return with the BOE on or before July 1, 2016, on a form prescribed by the BOE, showing the number of cigarettes in its possession or under its control in this state at 12:01 a.m. on January 1, 2016. Requires the amount of the tax to be computed and shown on the return. 3.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 in its possession or under its control at 12:01 a.m. on January 1, 2016, at the following rates: a. $2.50 for each stamp bearing the designation "25." b. $2.00 for each stamp bearing the designation "20." c. $1.00 for each stamp bearing the designation "10." 4.Requires every licensed cigarette distributor to file a return with the BOE on or before July 1, 2016, on a form prescribed by the BOE, showing the number of the stamps described in (3 above. Requires the amount of the tax to be computed and shown on the return. SB 591 (Pan) Page 3 of ? California Tobacco Tax Act of 2015 Fund 5.Establishes in the State Treasury the California Tobacco Tax Act of 2015 Fund (the Fund) into which all revenues (except for those required to be deposited into the Cigarette and Tobacco Products Surtax Fund, the Breast Cancer Fund, the California Children and Families Trust Fund, and the General Fund) will be deposited to be transferred in unspecified percentages to the following accounts created by this bill: a. Tobacco Prevention and Education Account; b. Tobacco Disease Related Health Care Account; and, c. Tobacco Law Enforcement Account. 6.Allows funds deposited into the Fund to be placed in the Pooled Money Investment Account for investment only. Requires interest earned to be credited to the Fund and deposited, apportioned, and expended only in accordance with the purposes of this bill. 7.Prohibits taxes imposed by this bill and the revenue derived therefrom, including investment interest, from being considered part of the State General Fund (SGF), or from being moneys to be applied by the state for the support of school districts and community college districts. 8.Requires revenues deposited into the Fund and any interest earned by the Fund to be used for the specific purposes required in this bill. Prohibits the Legislature, Governor, Director of Finance, or the Controller from subjecting revenues deposited into the Fund to appropriation, reversion, or transfer for any other purpose or from being loaned to the SGF or any other state or any local government fund. 9.Requires revenues deposited into the Fund to be expended only for purposes expressed in this bill and to be used to supplement existing levels of service, not to fund existing levels of service. Prohibits moneys in the Fund from being used to supplant the SGF or local general fund moneys for any purpose. 10.Provides that this bill becomes operative only if Assembly Bill 1396 (Bonta), is also enacted and takes effect on or before January 1, 2016. SB 591 (Pan) Page 4 of ? FISCAL EFFECT : This bill has not been analyzed by a fiscal committee. COMMENTS : 1.Author's statement. According to the author, tobacco-related deaths are the single most preventable cause of death in California, claiming more than 40,000 lives per year and costing taxpayers billions of dollars to treat victims of tobacco-related diseases. SB 591 will increase the tobacco tax by $2 per pack. This bill will raise $1.5 billion that will, through allocations made by AB 1396, increase access to care for Medi-Cal patients, support existing statewide programs to prevent youth from using tobacco, and stop illegal sales of tobacco. These two bills together will reduce tobacco use in California while restoring California's leadership in smoking prevention and research to offset the costs of tobacco-related diseases for taxpayers. 2.Tobacco taxation in California. According to the BOE, there are two types of excise taxes for cigarettes and tobacco products distributed in California: 1) the cigarette tax; and, 2) 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 percent tobacco. The tax and the surtax are paid by distributers through the use of tax stamps which are purchased from the 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 SGF. The Legislature and voters have adopted the following three additional tobacco tax measures since 1988: a. Proposition 99, from the November 1988 ballot, imposed a cigarette and tobacco product surtax of $0.25 per package of 20 cigarettes and the resulting revenue 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 coverage or federal program; programs for SB 591 (Pan) Page 5 of ? fire prevention, environmental conservation, protection, restoration, enhancement, as well as maintenance of fish, waterfowl, and wildlife habitat areas; and enhancement of state and local parks and recreation b. Assembly Bill 478 (Friedman), Chapter 660, Statutes of 1993, and Assembly Bill 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. c. Proposition 10, from the November 3, 1998 ballot, 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 related to early childhood development. 3.Smoking prevalence. According to the 2012 Surgeon General's Report, nearly 90 percent of smokers in the United States started smoking by the age of 18, and 99 percent started by age 26. In California, 64 percent of smokers start by the age of 18 and 96 percent start by age 26. According to DPH in 2010, 36.8 percent of high school students had smoked a whole cigarette by age 13 or 14, and in 2012, illegal tobacco sales to minors rose to 8.7 percent from 5.6 percent in 2011. According to DPH, the state's adult smoking rate has hit a record low. In 2010, 11.9 percent of the state's adults smoked, down from 13.1 percent in 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 percent. 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 percent and 17.1 percent respectively, followed by white men at 17.2 percent and Latino men at 16 percent. The ALA reports that Korean men have an unusually high tobacco usage rate at 27.9 percent, as do Lesbian, Gay, Bisexual, and Transgender women who smoke at almost triple the rate of women in general. SB 591 (Pan) Page 6 of ? 4.Tobacco-related diseases. 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 percent from 22.7 percent to 13.3 percent 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 nonprofit, 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 more than 20 years of the program's existence, CTCP has reduced health care costs by $134 billion. 6.Tobacco taxes and other states. California's tobacco tax rate ($0.87) ranks 33rd when compared to the rates of other states. The national median cigarette tax rate is $1.54 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 SB 591 (Pan) Page 7 of ? 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: 1) health care for low-income and uninsured persons and 2) health insurance coverage for state and local government employees and retirees. Consequently, changes in state law, such as this bill that could affect 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 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. SB 591 (Pan) Page 8 of ? 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 was 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 established a comprehensive licensing program for retailers, manufacturers, distributors, and importers of cigarettes and tobacco products. According to the BOE, the California Cigarette and Tobacco Licensing Act of 2003 has been successful in reducing illegal sales. 8.Double referral. This bill was heard in the Senate Governance and Finance Committee on April 22, 2015, and passed with a vote of 5-2. 9.Related legislation. AB 1396 (Bonta) requires moneys collected from an additional tax to be imposed on the distribution of cigarettes, a related floor stock tax, and a cigarette indicia adjustment tax deposited into the California Tobacco Tax Act of 2015 Fund, and transferred from that fund to specified funds. AB 1396 continuously appropriates funds in the California Tobacco Tax Act of 2015 Fund to DPH, the Department of Justice, the Department of Education, and the Department of Health Care Services, and the University of California (UC), and requires the state departments, and requests of the Regents of the UC, to annually publish an accounting of moneys received from the Fund on their respective Internet Web sites. AB 1396 becomes operative only if this bill is also enacted and takes effect on or before January 1, 2016. AB 1396 is pending in the Assembly Appropriations Committee. 10.Prior legislation. SB 768 (de León), of 2013, was substantially similar to this bill. SB 768 held under submission in the Senate Appropriations Committee. SB 330 (Padilla), of 2011, would have increased the tobacco tax by $1.50 per pack and dedicated 85 percent of revenue to the SGF and 15 percent to tobacco control and lung cancer efforts. The tobacco tax provisions were amended out of SB 330 before hearing in Senate Health Committee. SB 600 (Padilla), of 2009, was substantially similar to SB SB 591 (Pan) Page 9 of ? 330. SB 600 was held in the Senate Rules Committee. AB 89 (Torlakson), of 2009, would have increased the tobacco tax by $2.10 per pack. Revenues would have been directed to education, children's health care, cessation services, lung cancer research, and general health care. AB 89 was never heard and died in the Assembly Governmental Organization Committee. SB 564 (Torlakson), of 2004, would have imposed an additional tax on the distribution of cigarettes at the rate of $2.00 per package of cigarettes. SB 564 was held in the Senate Revenue and Taxation Committee. AB 35 (Vargas), of 2003, would have imposed an additional tax on the distribution of cigarettes at the rate of $1.50 per package of cigarettes. AB 35 was subsequently amended to a different subject. SB 1890 (Ortiz), of 2002, would have increased cigarette tax by $0.65 per package with the proceeds being used for health-related programs. SB 1890 was held in the Senate Revenue and Taxation Committee. 11.Support. The sponsors and supporters of this bill, generally comprised of health care professionals, consumer advocates, local governments, and labor groups, argue that this bill will help dissuade people from smoking, which causes various smoking-related diseases and is the single-largest preventable cause of death-killing more people than alcohol, AIDS, car crashes, illegal drugs, murders, and suicide combined. Supporters also cite the strains that tobacco-related illness cause on the state's health care system, which is estimated at $13.29 billion a year. Supporters argue that the burdens of smoking are disproportionately felt by underserved, low-income, and minority groups, and that an increased cigarette tax will further fund programs that currently exist to support these communities. 12.Support if Amended. The California Chapter of the American College of Emergency Physicians supports this bill for the same reasons as other supporters but would like to see an amendment that allocates a portion of the Fund revenues to the Maddy Emergency Medical Services Fund, which is dramatically underfunded and is the only source of reimbursement to SB 591 (Pan) Page 10 of ? emergency physicians and call panelists who provide care to the uninsured. 13.Opposition. Opponents of the bill, generally representing large and small businesses and taxpayers, argue that this bill taxes an industry that already has declining sales, which will further decrease revenues in the various programs that currently benefit from cigarette taxes. Opponents also state that an increased tax would result in the black market profiting from counterfeit cigarettes, and that Californians already pay the highest sales, income, and gas taxes in the nation. 14.Policy comment. While the author intends to continue working with stakeholders to determine appropriate allocation amounts of revenues in the Fund, this bill currently leaves the percentage allocations for the newly created accounts unspecified. SUPPORT AND OPPOSITION : Support: American Cancer Society Cancer Action Network (co-sponsor) American Lung Association in California (co-sponsor) California Medical Association (co-sponsor) SEIU California (co-sponsor) Association of Northern California Oncologists California Academy of Family Physicians California Black Health Network California Chronic Care Coalition California Pan-Ethnic Health Network California Pharmacists Association California Primary Care Association California Tax Reform Association Community Action Fund of Planned Parenthood of Orange and San Bernardino Counties Health Officers Association of California Kaiser Permanente March of Dimes California Chapter Medical Oncology Association of Southern California, Inc. Planned Parenthood Action Fund of the Pacific Southwest Planned Parenthood Action Fund of Santa Barbara, Ventura and San Luis Obispo Counties, Inc. Planned Parenthood Mar Monte SB 591 (Pan) Page 11 of ? Planned Parenthood Northern California Action Fund Planned Parenthood Pasadena and San Gabriel Valley Santa Clara County Board of Supervisors Oppose: California Chamber of Commerce California Taxpayers Association Howard Jarvis Taxpayers Association National Federation of Independent Business -- END --