BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 600 - Padilla
Amended: June 9, 2009
Hearing: July 8, 2009 Fiscal: Yes
SUBJECT: Imposes a $1.50 tax increase on each pack of
cigarettes sold.
EXISTING LAW
Existing federal law: Establishes a $1.01 tax per pack of
20 cigarettes with the majority of the funds being used to
fund children's health programs. 62 cents of this increase
was effective on April 1st of this year to fund the
"S-Chip" federal 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.
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).
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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 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.
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.
Specifies requirements on licensed cigarette
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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).
Requires 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
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illegal sales of tobacco products to minors, to
enforce legal settlement provisions, and conduct law
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 Attorney 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 EFFECT:
According to BOE, this bill would raise about $1.2
billion annually. Please see comment B in this analysis for
a further discussion of the fiscal effect.
COMMENTS:
A. Purpose of the Bill
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
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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 of all the
states.
B. SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer,
Heart Disease, Emphysema, And May Complicate Pregnancy
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.
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C. Economics 101: cigarette tax increases decrease demand
but do they also increase evasion?
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 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 of cigarettes. BOE
notes, however, that existing revenues are not sufficient
to pay for the licensing program. Fifteen percent of the
revenue from this tax increase per year would go to law
enforcement to deter smuggling and illegal tobacco sales to
minors
Opponents of this bill state that the goal of
decreasing consumption and increasing revenue may become
increasingly difficult to achieve, especially because this
$1.50 increase would come immediately after the federal 62
cent increase to fund the S-CHIP program.
These increases, the opponents note, have
likely furthered the growth of two types of
cigarette smuggling: 'casual' smuggling in
which individual consumers save money by
buying their cigarettes in low-tax states
or countries, and 'commercial' smuggling,
in which larger-scale operators buy
cigarettes in bulk in a low tax area and
sell them tax free in high tax areas. This
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smuggling undermines both the revenue and
health goals of higher cigarette taxes<1>.
The proponents of this measure respond to the
smuggling argument as follows<2>:
The fact is that criminal enterprises will exploit
the tobacco tax for their gain. But, California has
one of the most aggressive enforcement programs,
enacted by legislation six years ago. California
introduced a new high-tech tax stamp and saw its
cigarette tax revenues go up by roughly $100 million
in the following 20 months (with no rate increase).
The smuggling/tax avoidance problem is a lot
smaller than the cigarette companies and their allies
say. Smuggling and tax evasion are worst in those
jurisdictions with the highest state-local cigarette
tax rates and the most established smuggling and tax
evasion infrastructures and customs (e.g., Chicago and
New York City). In comparison, the vast majority of
states - with lower actual or proposed cigarette tax
rates and much less established smuggling
infrastructures or tax evasion patterns - have little
to worry about. But even in Chicago and New York City,
smuggling and tax evasion account for only a
relatively small minority of cigarette sales; and each
has gained substantial new revenues from their
cigarette tax increases.
There are simple, low-cost, steps a
state can take to minimize any revenue
reductions from cigarette smuggling or
smoker tax evasion. One particularly useful
strategy already adopted by California is
to implement high-tech tax stamps that
cannot be counterfeited and enable
enforcement officials to readily identify
smuggled cigarettes.
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<1> Letter from Reynolds American, Inc. citing a study by
the Mackinac Center for Pubic Policy, Cigarette Taxes and
Smuggling: A Statistical Analysis and Historical Review.
<2> American Cancer Society Q&A
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D. Might as well face it: I'm addicted to revenue
Because a cigarette tax increase is a declining
revenue source, the various propositions that are supported
by cigarette tax increases will also decline. This bill
provides a backfill for those funds. Since the tax
increase will have the benefit of fewer cigarettes sold,
some ask why it is necessary to backfill these funds since
that is their intent as well. The proponents of this
measure note that the cessation programs provided by the
funds have been invaluable in stopping cigarette smoking.
First, they argue that they have been incredibly
successful: California has the 2nd lowest smoking rate in
the nation and the 32nd ranked tobacco tax. Furthermore,
the proponents state, tobacco companies spend approximately
$1.5 billion in marketing and advertising in California,
based on Federal Trade Commission studies, therefore,
California needs a robust marketing campaign to combat
those dollars. The Tobacco Education & Research Oversight
Committee (TEROC) is a legislatively mandated oversight
committee that monitors the use of Proposition 99 tobacco
tax revenue; TEROC notes that "California's tobacco control
movement has become threatened by funding declines and
increased costs creating an "endangered investment" that
threatens past achievements and future progress in
addressing the nearly four million youth and adult smokers
in California.
E. Is There Another Way
The ultimate goal of this bill is to decrease
cigarette consumption through a tax increase. While policy
goals are often achieved through the tax code, there may be
more efficient ways to make these changes; for example, the
state could increase the smoking age to 21 which would also
result in decreased cigarette consumption. TEROC notes
that "tobacco excise tax increases are the most powerful
intervention available to decrease cigarette consumption
and smoking prevalence.
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F. The State of tobacco taxes
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
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.
G. Prior legislation
SB 76 & AB 194 (Committees on Budget) would
have imposed a $1.50 increase on tobacco. These bills on
third reading in their respective houses.
SB 564 (Torlakson, 2004) would have imposed an
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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.
Support and Opposition
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
Tobacco Education & Research Oversight Committee (TEROC)
One individual
Oppose: Asian Business Council
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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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Consultant: Gayle Miller