BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 600
S
AUTHOR: Padilla and Steinberg
B
AMENDED: April 13, 2009
HEARING DATE: April 15, 2009
6
REFERRAL: Revenue and Taxation
0
CONSULTANT:
0
Dunstan/cjt
SUBJECT
Cigarette and Tobacco Products: Tax and Health Protection
Fund
SUMMARY
Imposes a $1.50 tax on cigarettes and, indirectly, an
equivalent tax on tobacco products. Provides that 85
percent of the funds resulting from the tax will be
deposited into the General Fund and 15 percent into the
Tobacco Tax and Health Protection Fund, which is created by
the bill, for tobacco control, tobacco disease research and
lung cancer research.
CHANGES TO EXISTING LAW
Existing federal law:
Existing federal law provides for a $1.00 tax per pack of
20 cigarettes with the majority of the funds being used to
fund children's health programs.
Existing state law:
Existing state law imposes a tax on distributors of
cigarettes and tobacco products, with the cigarette tax set
at 87 cents per pack of 20 cigarettes. Existing law
provides that the taxes on cigarette and tobacco products
Continued---
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 2
shall 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 existing taxes are allocated in the
following manner:
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 in
1993).
50 cents to the California Children and Families Trust
Fund (created by Proposition 10 in 1998).
The Board of Equalization (BOE) is required to administer
the tobacco tax provisions, including collecting the tax.
Existing law also directs that BOE determine an appropriate
equivalent tax on tobacco products that is based on the
combined rate of all taxes on cigarettes. Retailers of
cigarettes and tobacco products are required by law to be
licensed by BOE.
Existing law establishes the Department of Public Health
(DPH) and grants it responsibility for public health
programs, including tobacco control.
This bill:
This bill imposes an additional tax equal to $1.50 per pack
of cigarettes and, indirectly, an equivalent amount on
tobacco products. This bill creates the Tobacco Tax and
Health Protection Fund for the purposes of funding the
tobacco control provisions of this bill. This bill also
requires BOE to adjust the tax rate to reflect any changes
in the California Consumer Price Index (CCPI).
This bill provides that 85 percent of the revenues from the
tax shall be deposited into the General Fund and 15 percent
into the Tobacco Tax and Health Protection Fund. This bill
requires BOE to determine annually the reduction in tax
revenues for existing programs that results from the
imposition of the new $1.50 tax and requires the transfers
of funds for "backfill" from the newly created Tobacco Tax
and Health Protection Fund to the Cigarette and Tobacco
Products Surtax Fund (Prop 99), Breast Cancer Fund and
California Children and Families Trust Fund (Prop 10).
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 3
This bill requires that 15 percent of the total funds
raised be deposited in the Tobacco Tax and Health
Protection Fund and divides these monies between the
Department of Public Health, Department of Education and
the University of California. The bill provides that the
Department of Public Health shall receive 65 percent of the
fund balance, and shall use the funds for tobacco
prevention and control programs, including tobacco
cessation, public relations programs, disease prevention,
and grants to locals for tobacco control, and oversight and
evaluation of programs. The Department of Education is to
receive 15 percent of the revenues in the Tobacco Tax and
Health Protection Fund, to be used solely for programs to
prevent or reduce the use of tobacco products. The
University of California would receive 20 percent under the
bill, 10 percent of the proceeds going for the creation of
an early detection program for lung cancer and ten percent
for research on tobacco control and the on prevention,
causes and treatment of tobacco-related disease.
This bill requires that the funds deposited in the Tobacco
Tax and Health Protection Fund be used to supplement
existing levels of service and shall not be used to
supplant state or local General Fund money. This bill
provides that it would take effect immediately as a tax
levy.
FISCAL IMPACT
According to BOE, this bill would raise about $1.2 billion
annually.
BACKGROUND AND DISCUSSION
According to the author, the revenues generated by SB 600
would benefit the state in two ways. Eighty-five percent
of the revenues will be directed to the General Fund,
generating a significant amount of revenue for the state to
address deficits and fund programs impacted by last year's
budget compromise. More importantly, the remaining 15
percent will be used to advance California's tobacco
prevention, enforcement, cessation and lung cancer research
programs.
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 4
The author also notes that California has not increased its
tobacco tax for over a decade. The last two times
California voters approved a tobacco tax (1988 and later
1998), the author points out, that smoking rates in the
state dropped significantly. The author notes that studies
confirm that increasing the price of tobacco products
lowers smoking rates, especially among youth, and that this
bill would not only generate revenue for the state, fund
tobacco prevention and lung cancer research, but by
default, will also lower smoking rates and improve overall
public health in the state The author states that after
voters approved the tax increases in 1988 (Prop 99) and in
1998 (Prop 10), essential tobacco prevention and
anti-tobacco marketing programs resulted in California
having the second lowest adult smoking rate.
Background
According to the Surgeon General, tobacco use remains the
number one cause of preventable disease and death in the
United States. Each year more than one million young
people become regular smokers and almost 400,000 adults die
from tobacco-related diseases. According to DPH, cigarette
smoking continues to be the leading cause of preventable
death in California.
The overall smoking rate among adults in California is
about 14 percent, but the rate varies by gender, race,
ethnicity and income. In 2005, 20 percent of low-income
adults smoked. Despite California's relatively low smoking
prevalence, the federal Centers for Disease Control and
Prevention (CDC) estimated that smoking caused the deaths
of over 37,000 Californians age 35 years and older.
Smokers incur $17,500 more in health care costs than
non-smokers. A 2004 UC study estimated the annual cost of
smoking, without considering the cost of tobacco, is $3,331
per smoker, including $1,810 in medical costs and $1,521 in
lost productivity costs.
Impacts of higher cigarette prices
Consumers respond to higher cigarette prices by reducing
consumption, either through quitting or smoking less.
There are secondary benefits as smokers smoke less in terms
of improved health and reduced health care costs.
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 5
Higher cigarette prices through tax or fee increases can
exacerbate tax evasion and foster illegal cigarette sales.
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
is precisely this concern regarding illegal sales that led
to the enactment of the California Cigarette and Tobacco
Products Licensing Act of 2003 (AB 71, J. Horton, Chapter
890 of 2003). This act establishes a comprehensive
licensing program for retailers, manufacturers,
distributors and importers of cigarettes and tobacco
products. According to BOE, the act has been successful in
reducing illegal sales.
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 6
Tobacco cessation services
The Centers for Prevention and Disease Control (CDC) report
that smoking cessation treatments which are programs to
help smokers stop smoking, have been found to be safe and
effective. The California Health Benefits Review Program
(CHBRP) conducted a comprehensive review of tobacco
cessation studies, and reported that tobacco cessation
services increase the likelihood of abstaining from
smoking. CHBRP also reported that studies examining the
effects of reductions in tobacco use generally find that
smoking cessation is cost-effective. Two studies,
published in November 2007, and conducted by Kaiser
Permanente's Center for Health Research (Kaiser), show that
providing nicotine replacement therapy with counseling
nearly doubles the quit rates when compared with counseling
alone.
Tobacco taxation
Legislature and voters have adopted three tobacco tax
measures since 1988:
Proposition 10, passed November 3, 1998, effective
January 1, 1999, imposed an additional surtax of 50
cents per package of 20 cigarettes and also created a
proportionately larger increase in the tax on tobacco
products. The revenues are used to fund early
childhood development programs.
Assembly Bill 478 (B. Friedman) Chapter 660,
Statutes of 1993 and Assembly Bill 2055 (B. Friedman)
Chapter 661, Statutes of 1993, effective January 1,
1994, added an excise tax of 2 cents per package of 20
cigarettes for breast cancer research and early
detection services.
Proposition 99, from the November 1988 ballot, was
passed and became effective January 1, 1989. It
imposed a surtax of 25 cents per package of 20
cigarettes, and also created an equivalent tax on
tobacco products. Proceeds from the taxes fund health
education, disease research, hospital care, fire
prevention, and environmental conservation
California's tobacco tax rate ranks 31st when compared to
the rates of other states. The highest is Rhode Island
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 7
with $3.46 per pack and the lowest is South Carolina at
seven cents per pack. Some local governments, such as New
York City, have their own tax in addition to the state tax.
Prior legislation
SB 564 (Torlakson, 2004) would have imposed an additional
tax on the distribution of cigarettes at the rate of $2.00
per each package of cigarettes. This bill was held in the
Senate Revenue and Taxation Committee.
AB 35 (Vargas, 2003) would have imposed an additional tax
on the distribution of cigarettes at the rate of $1.50 per
each package of cigarettes. The bill was subsequently
amended to a different subject.
SB 1890 (Ortiz, 2002) would have increased cigarette tax by
65 cents per package with the proceeds to have been used
for health-related programs. The bill was held in the
Senate Revenue and Taxation Committee.
Arguments in support
Supporters argue that increasing the tobacco tax has proven
to reduce smoking, especially among youth. They argue that
enacting this measure will save hundreds of thousands of
lives, reduce medical costs and provide needed funding for
the state's general fund. The bill's sponsors argue that
the bill would be particularly effective in driving down
the smoking rate because it will provide much needed
funding for the state's proven tobacco control program.
They note that years of inflation have reduced the buying
power of the existing program and that the tobacco control
program in California is funded at 20 percent of the level
recommended by the U.S. Centers for Disease Control and
Prevention. The California Dental Association supports the
bill arguing that nearly all adult smokers begin this habit
in their early teens and have become addicted by the time
they are an adult and are mature enough to make a different
decision.
The Lung Cancer Alliance supports the bill, but state that
they are concerned about the level of funding for lung
cancer research. They point out that lung cancer is the
leading cancer killer in California and 60 percent of those
diagnosed have quit smoking or have never smoked. They
propose that approximately $100 million of the funds should
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 8
go to lung cancer research.
Arguments in opposition
Opponents argue that an increase in taxes at this time of
economic difficulties will harm the economy and retard
recovery. The California Chamber of Commerce points out
that cigarette taxes are a declining source of revenues,
but that SB 600 creates new government programs and
spending that may become locked into the state budget. The
Association for Los Angeles Deputy Sheriffs argues that an
unintended consequence of a tax increase of this magnitude
is an increase in crime. They are also concerned that the
bill's provisions would violate provisions of the Master
Settlement Agreement between the states and tobacco
companies, thereby jeopardizing revenues for state and
local governments.
The California Taxpayers Association states that part of
their reason for opposing the bill is the regressive nature
of tobacco taxes, meaning that a greater burden in paying
the tax is borne by lower-income individuals. The
California Distributors Association argues that the
proposal to vest discretion in the BOE to increase taxes by
the CCPI is a significant flaw and that the setting of tax
should not be disconnected from the economics of tobacco
pricing. They also argue that it is unconstitutional as
raising taxes is solely a matter for the Legislature to act
upon, hence any tax increase would require an annual 2/3
vote of the Legislature.
COMMENTS
1. The majority of funds raised by the tax would go for
the general fund. The author notes that this bill would
provide for a means to address the state's deficit and fund
programs that have been impacted by the budget. The
committee may want to consider if the bill should provide
intent for how those funds are to be used, including
directing that the first priority be for health programs
impacted by the budget decisions made for the 2008-09 and
2009-10 fiscal years.
POSITIONS
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 9
Support: American Cancer Society (co-sponsor)
American Heart Association (co-sponsor)
American Lung Association (co-sponsor)
American Dental Association
Asian & Pacific Islander American Health Forum
Breathe California
California Chapter of the American College of
Cardiology
California Dental Association
California Emergency Nurses Association
California Medical Association
California Thoracic Society
MAGNA Systems Incorporated
The Lung Cancer Alliance-California
One individual
Oppose: Asian Business Council
Association for Los Angeles Deputy Sheriffs
California Black Chamber of Commerce
California Chamber of Commerce
California Distributors Association
California Grocers Association
California Independent Grocers Association
California Licensed Beverage Association
California Manufacturers & Technology Association
California Taxpayers Association
Commonwealth Brands, Inc.
Neighborhood Market Association
Regional Black Chamber of Commerce of San Fernando
Valley
One individual
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