BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON HEALTH
                          Senator Ed Hernandez, O.D., Chair

          BILL NO:                    SB 591    
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          |AUTHOR:        |Pan                                            |
          |---------------+-----------------------------------------------|
          |VERSION:       |April 16, 2015                                 |
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          |HEARING DATE:  |April 29, 2015 |               |               |
          |               |               |               |               |
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          |CONSULTANT:    |Reyes Diaz                                     |
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           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  







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            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.








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          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.








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           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  








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                 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.








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          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  








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            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.  








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            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  








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            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  








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            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








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                    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



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