BILL ANALYSIS
SUSPENSE - FOR VOTE ONLY
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 600 - Padilla
Amended: June 9, 2009
Hearing: August 26, 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 distributors,
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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 illegal sales of tobacco
products to minors, to enforce legal settlement provisions,
and conduct law enforcement training and technical
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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 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
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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.
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
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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 smuggling undermines both the revenue and
health goals of higher cigarette taxes<1>.
-------------------
<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.
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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.
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
---------------------------
<2> American Cancer Society Q&A
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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.
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
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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
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
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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
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
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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