BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 600
S
AUTHOR: Padilla and Steinberg
B
AMENDED: June 9, 2009
HEARING DATE: June 17, 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:
Establishes 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:
Imposes a tax on distributors of cigarettes and tobacco
products, with the cigarette tax set at 87 cents per pack
of 20 cigarettes.
Continued---
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 2
Provides that the taxes on cigarette and tobacco products
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).
Requires the Board of Equalization (BOE) 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.
Requires retailers of cigarettes and tobacco products to be
licensed by BOE.
Establishes the Department of Public Health (DPH) and
grants it responsibility for public health programs,
including tobacco control.
This bill:
Imposes an additional tax equal to $1.50 per pack of
cigarettes and, indirectly, an equivalent amount on tobacco
products. Creates the Tobacco Control and Lung Cancer
Research Account within the Tobacco Tax and Health
Protection Fund, also created by the bill. Creates the
Tobacco Tax General Fund Account within the state's General
Fund.
Requires BOE to adjust the tax rate to reflect any changes
in the California Consumer Price Index (CCPI).
Provides that 85 percent of the revenues from the tax shall
be deposited into the Tobacco Tax General Fund Account and
15 percent into the Tobacco Control and Lung Cancer
Research Account.
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 3
Specifies requirements on licensed cigarette distributors,
dealers and wholesalers related to imposition of the tax.
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 transfer
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).
Requries 15 percent of the total funds raised be deposited
in the Tobacco Control and Lung Cancer Research Account.
Allocates that 15 percent of the monies be shared between
the Department of Public Health, Department of Education,
the University of California and law enforcement efforts.
Provides that the Department of Public Health shall
receive 45 percent of the Tobacco Control and Lung
Cancer Research Account funds, 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.
Directs that 10 percent of the Tobacco Control and
Lung Cancer Research Account funds to the Department
of Education, to be used solely for programs to
prevent or reduce the use of tobacco products.
Provides that the University of California receive
30 percent of the amount deposited into the Tobacco
Control and Lung Cancer Research Account under the
bill, 20 percent of the account proceeds going for the
creation of an early detection program for lung
cancer, and 10 percent for research on tobacco control
and on prevention, causes and treatment of
tobacco-related disease.
Provides that 15 percent of the amount deposited
into the Tobacco Control and Lung Cancer Research
Account to reduce cigarette smuggling, tobacco tax
evasion, tobacco products counterfeiting, reduce
illegal sales of tobacco products to minors, to
enforce legal settlement provisions, and conduct law
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 4
enforcement training and technical assistance
activities for tobacco-related statutes. Provides that
this 15 percent shall be allocated in the following
manner:
o Forty percent to BOE for tobacco tax law
enforcement.
o Forty percent to DPH for reducing illegal
sales to minors and provides that DPH may grant
funds to local law enforcement agencies.
o Twenty percent to the Attorny General for
enforcement of tobacco tax and sales laws.
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, lung cancer research
programs and enforcement of tobacco law.
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
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 5
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 of all the
states.
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.
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
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 6
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.
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
The 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
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 7
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 32nd when compared to
the rates of other states. The highest is Rhode Island
with $3.46 per pack and the lowest is South Carolina at 7
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 the 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 American Lung Association, one of the bill's
co-sponsors, argues that this bill, by increasing the tax
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 8
on cigarettes, is investing in prevention in the single
most effective strategy to reduce teen smoking and will
prevent thousands of children from smoking. Another
co-sponsor, the American Cancer Society argues that the
increase is long overdue and since California's last
tobacco tax increase, 44 states have increased their
tobacco taxes. The American Heart Association, also a
co-sponsor, argues that this bill will help reduce heart
disease, which is the number one killer in the United
States.
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
states 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 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.
Reynolds American, Inc opposes the bill because, when
combined with the recent $.62 increase in federal cigarette
taxes, it creates a thriving environment in the state for
tobacco counterfeiting, smuggling and tax evasion. They
reference a recent study which cites that increasing
tobacco tax revenues may become increasingly difficult to
achieve given the likely growth in cigarette smuggling.
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 9
They also argue that this bill could reverse the gains made
against illegal cigarette sales through enactment of a
comprehensive tobacco licensing scheme in California in
2001.
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
2/3rds vote of the Legislature.
POSITIONS
Support: American Cancer Society (co-sponsor)
American Heart Association (co-sponsor)
American Lung Association (co-sponsor)
Alameda County Board of Supervisors
American Dental Association
America Federation of State, County and Municipal
Employees, (AFSCME)
Asian & Pacific Islander American Health Forum
Breathe California
California Chapter of the American College of
Cardiology
California Dental Association
California Emergency Nurses Association
California Hospital Association
California Medical Association
California Thoracic Society
Consumer Attorneys of California
Los Angeles County Office of Education
MAGNA Systems Incorporated
Marin County Board of Supervisors
The Lung Cancer Alliance-California
One individual
STAFF ANALYSIS OF SENATE BILL SB 600 (Padilla &
Steinberg)Page 10
Oppose: Asian Business Council
Association for Los Angeles Deputy Sheriffs
Brawley Chamber of Commerce
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 and Technology Association
California Retailers Association
California Statewide Law Enforcement Association
California Taxpayers Association
Cigar Association of America
Commonwealth Brands, Inc.
El Centro Chamber of Commerce
Garden Grove Chamber of Commerce
Lake Elsinore Valley Chamber of Commerce
Long Beach Area Chamber of Commerce
Menifee Chamber of Commerce
Murrieta Chamber of Commerce
Neighborhood Market Association
Redondo Beach Chamber of Commerce & Visitor's Bureau
Regional Black Chamber of Commerce of San Fernando
Valley
Reynolds American, Inc.
Southwest California Legislative Council
Temecula Valley Chamber of Commerce
West Covina Chamber of Commerce
Wildomar Chamber of Commerce
One individual
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