BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 591 (Pan) - Cigarette and tobacco products taxes: California
Tobacco Tax Act of 2015.
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|Version: April 16, 2015 |Policy Vote: GOV. & F. 5 - 2, |
| | HEALTH 6 - 2 |
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|Urgency: No |Mandate: Yes |
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|Hearing Date: May 11, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 591 would impose an additional excise tax of
$2.00 per package of 20 cigarettes. The bill also would (1)
impose an equivalent one-time "floor stock tax" on the
cigarettes held or stored by dealers and wholesalers, and (2)
indirectly increase the tobacco products tax.
Fiscal Impact: The Board of Equalization (BOE) estimates that
this bill would result in a net cigarette tax revenue gain
(nearly all of which would be special funds) of $665 million in
2015-16 (a half-year effect), and $1.3 billion in 2016-17. In
addition, the higher excise tax would lead to increased sales
and use tax revenue. For example, 2016-17 sales and use tax
revenues would increase by $39 million. The associated floor
stock tax would raise an estimated $86 million.
Additionally, though this measure does not directly increase the
tobacco products tax, current law triggers an automatic tobacco
products tax increase whenever the tax imposed on cigarettes is
increased. Specifically, current law requires BOE to annually
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determine the tobacco products tax rate at a rate equivalent to
the combined rate of all taxes imposed on cigarettes. Thus, when
the cigarette tax is increased, the tobacco products tax rate
increases as well. BOE estimates the increase associated with
this bill to be $96 million (special funds) in 2016-17.
BOE administrative costs related to this bill are substantial,
likely about $10 million annually. These costs include: taxpayer
notification, tax return design, computer programming, cigarette
tax stamp design and denomination changes, and compliance and
audit efforts to ensure proper reporting, and floor stock tax
administration. Furthermore, the bill requires enhanced efforts
to ensure proper floor stock tax reporting and collection,
greater compliance efforts for additional billings and
delinquencies, and an increase in BOE program, audit and
investigative staff presence related to increased tax evasion.
Background: Existing federal law imposes a tax of $1.01 per pack
of 20 cigarettes with the majority of the funds being used to
fund children's health programs. The federal cigarette tax rose
by 62 cents in 2009 to fund the "S-Chip" federal children's
health programs. Existing state law imposes a tax on
distributors of cigarettes and tobacco products which 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. The excise
tax on cigarettes is imposed at a total rate of 87 cents per
pack of 20 cigarettes, allocated as follows:
10 cents to the General Fund.
25 cents to the Cigarette and Tobacco Products Surtax
Fund (created by Proposition 99 in 1988).
2 cents to the Breast Cancer Fund (created by AB 478,
Chapter 660 of 1993).
50 cents to the California Children and Families Trust
Fund (created by Proposition 10 in 1998).
The tobacco products tax is imposed at a rate that is based on
the combined rate of tax imposed on cigarettes, as determined by
BOE. The 2014-15 tobacco products rate is 28.95 percent.
Revenue from the tax imposed on tobacco products is split
between the Proposition 99 and Proposition 10 funds.
California tax-paid cigarette distributions have decreased
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dramatically over the past 30 years, both before and after
passage of Proposition 10. Consequently, revenues for all funds
supported by cigarette taxes have declined as well. Based on
outcomes from similar tax increases, there is strong evidence
that the Proposition 10 tax increase results in greater declines
in annual cigarette and tobacco sales than would have been the
case had the Proposition not passed. Current law, as added by
Proposition 10, requires BOE to determine the effect of
Proposition 10 on the consumption of cigarettes and tobacco
products and directs that a transfer of funds to Proposition 99
and Breast Cancer programs be made to backfill for revenue
losses to those programs resulting from consumption changes
triggered by Proposition 10. The intent of the backfill is to
keep the funding levels of certain Proposition 99 and breast
cancer programs from declining any more than they would have
decreased without the Proposition 10 tax increase. These
determinations do not affect the amount of taxes paid by
taxpayers. The Proposition 10 backfill determination is strictly
an issue of the magnitude of funds allocation from one set of
funds to another.
Proposed Law: SB 591 would (1) impose an additional excise tax
of $2.00 per package of 20 cigarettes, and (2) indirectly
increase the tax on other tobacco products. The bill would also
impose a one-time "floor stock tax" on the cigarettes held or
stored by dealers and wholesalers. Except for payment of
refunds and backfill transfers, the bill would require BOE to
deposit all revenues into the Tobacco Tax Act Fund, which this
bill would create. The bill would require the Tobacco Tax Act
Fund monies to be transferred in unspecified percentages to
three subaccounts: (1) the Tobacco Prevention and Education
Account, (2) the Tobacco Disease Related Health Care Account,
and (3) the Tobacco Law Enforcement Account. The bill would only
become operative if AB 1396 (Bonta) is also enacted.
AB 1396 would require BOE to determine the effect of the
additional cigarette tax and indirect tobacco products tax on
cigarette and tobacco products consumption and to backfill the
existing cigarette tax funds to offset the revenue decrease
resulting from this measure's additional cigarette and indirect
tobacco products tax increase. That bill also includes revenue
allocation provisions, which currently are not specified.
Related Legislation: SB 768 (de León, 2013) would have imposed a
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$2.00 increase per one pack of 20 cigarettes. The bill was held
on this committee's suspense file.
Staff Comments: According to BOE estimates, this bill is
expected to raise total of
approximately $1.4 billion in revenues related to the excise tax
increase of $2.00 per pack of cigarettes. The assumed increase
in the retail price of cigarettes and tobacco products as a
result of this bill would also have an impact on sales and use
tax revenues. State and local sales and use tax revenues are
expected to increase by $39 million in 2016-17, of which $20
million is General Fund.
Furthermore, SB 591 would impose a one-time "floor stock" tax on
existing inventories of cigarette dealers, wholesalers, and
distributors in an amount equal to the difference between the
old tax rate and the new tax rate. This is intended to equalize
the excise tax paid by these entities on their inventory (which
was purchased before the effective date of the tax increase) and
those products purchased after the effective date. The floor
stock tax mitigates the windfall profits that would occur
otherwise. The floor stock tax would generate about $86 million.
BOE would incur additional administrative costs associated with
the administration and enforcement of the floor stock tax, but
these costs would be offset by the proceeds from the tax.
BOE would incur non-absorbable costs related to the
administration and collection of the additional cigarette and
tobacco products tax proposed by this measure. These costs
would be related to notifying taxpayers, developing returns,
programming computers, developing and carrying out compliance
and audit efforts to ensure proper reporting, and administering
a floor stock tax. BOE identified preliminary costs associated
with a similar measure in 2009 to be estimated at $11.4 million
for fiscal year 2009-10 and $8.8 million for fiscal year
2010-11, and each fiscal year thereafter. The bill imposes the
new tax on January 1st, 2016. Consequently, BOE would need to
implement and administer the bill in 2015-16. However, current
2015-16 budget proposals for BOE do not contain funding for
administrative expenses associated with this bill's start-up
costs. Typically, BOE seeks administrative cost reimbursement
from the account or fund into which tax proceeds are deposited.
However, this fund this bill would create lacks funding to
reimburse the BOE prior to collection of the tax. Upfront BOE
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implementation costs would need to be addressed, most likely as
a loan from another eligible state fund.
BOE (1) indicates that 871 million tax-paid cigarettes packs
were distributed in 2013-14, and forecasts that a long seen
3-percent rate of decline in cigarette consumption will
continue, suggesting that consumption could decline to 795
million packs by 2016-17. The decline reflects both the
long-term decline in cigarette consumption that has occurred
over the last 30 years, and well as reduced demand in response
to this bill's $2.00 per pack increase. Finally, BOE research
suggests that a tax rate increase as large as the one imposed by
this bill is likely to cause both a decrease in actual
consumption and an increase in tax evasion. BOE staff recently
estimated an annual revenue loss of $126 million stemming from
evasion. Evasion losses would likely increase, given the bill's
proposed excise tax increase; however, the magnitude is unknown.
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