BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
600 (Padilla)
Hearing Date: 08/27/2009 Amended: 06/09/2009
Consultant: Mark McKenzie Policy Vote: Rev&Tax 5-3
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BILL SUMMARY: SB 600 would impose an additional excise tax of
$1.50 per package of 20 cigarettes, adjusted annually by the
consumer price index, and 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.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
BOE administration $11,400 $8,800 $8,800 General
(reimbursed from new excise/floor stock
tax revenues)
Excise tax revenue gains ($512,400)
($1,002,400)($1,002,400)General
($90,400) ($176,900) ($81,400) Special*
Floor stock tax revenue gain ($60,350) General
($10,650) Special*
Sales/Use tax revenue gain ($16,000) ($32,900)
($32,900) General
($700) ($1,400) ($1,400)
Special**
($7,200) ($15,100) ($15,100) Local
Existing fund impact
Breast Cancer Fund $1,400 $1,300 $0
Special***
Proposition 99 Fund $17,700 ($32,900) ($49,500)
Special****
Proposition 10 Fund $35,400 $39,100 $2,900
Special*****
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* Tobacco Tax and Health Protection Fund (15% of new excise tax
revenues)
** Fiscal Recovery Fund
*** Breast Cancer Fund
**** Cigarette and Tobacco Products Surtax Fund (Proposition 99)
***** California Children and Families Trust Fund (Proposition
10)
NOTE: figures in parentheses represent revenue gains
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
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. 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 which fund a
variety of programs and services including: health education,
research, hospital care, fire prevention, environmental
conservation, breast cancer research and
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SB 600 (Padilla)
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. Revenues from the tax imposed on tobacco products is split
between the Proposition 99 and Proposition 10 funds.
SB 600 would impose an additional excise tax of $1.50 per
package of 20 cigarettes, adjusted annually by the consumer
price index, and 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. After reimbursing the Board of Equalization (BOE)
for costs incurred in the administration and collection of this
tax, the net proceed would be deposited into the new Tobacco Tax
and Health Protection Fund to be divided as follows: 85 percent
of the new revenues would be deposited into a new account in the
General Fund, and 15 percent would be deposited into the new
Tobacco Control and Lung Cancer Research Account for allocation,
upon appropriation, to the following:
45% to the Department of Public Health (DPH) Tobacco Control
Program for carrying out tobacco prevention and control
programs.
10% to the Department of Education to be used solely to
prevent or reduce the use of tobacco products.
10% to the University of California (UC) to supplement the
Cigarette and Tobacco Products Surtax Medical Research
Program.
20% to UC for the establishment and administration of a Lung
Cancer Early Detection and Treatment Research Program.
15% to support law enforcement efforts as follows:
o 40% to BOE to reduce cigarette and tobacco tax
evasion.
o 40% to DPH to reduce illegal sales of tobacco
products to minors.
o 20% to the Attorney General to enforce legal
settlement provisions and conduct law enforcement
training.
Furthermore, the bill provides for transfers of excise tax
revenues to specified existing tobacco tax funds and accounts to
offset revenue decreases to those funds to the extent that a
decrease in consumption is a direct result of the additional
excise tax.
According to BOE estimates, this bill is expected to raise
approximately $1.179 billion in revenues related to the excise
tax increase of $1.50 per pack of cigarettes. Of this amount
approximately $1 billion would be deposited into the General
Fund and $176.9 million would be deposited into the Tobacco
Control and Lung Cancer Research Account and allocated as
specified above. In addition to this amount, there would be an
indirect increase in the tax on other tobacco products of
approximately $49.5 million.
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SB 600 (Padilla)
The proceeds from the resulting tobacco products tax increase
would not be deposited into the Tobacco Tax and Health
Protection Fund, created by this bill. Pursuant to Proposition
99, these revenues would be deposited into the Cigarette and
Tobacco Products Surtax Fund to fund health education, disease
research, hospital care, fire prevention, and environmental
conservation. 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
$49.4 million in 2010-11, of which $32.9 million is General
Fund.
Furthermore, SB 600 would impose a one-time "floor stocks" 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 is estimated to generate
approximately $71 million that would be deposited into the
Tobacco Tax and Health Protection Fund. Staff notes that BOE
would incur substantial 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 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. These costs would be
reimbursed from excise tax revenues prior to depositing any
proceeds into the General Fund and the Tobacco Control and Lung
Cancer Research Account.
BOE would also receive a portion of the revenues deposited into
the Tobacco Control and Lung Cancer Research Account as
specified above. These revenues would be available, upon
appropriation by the Legislature, to enforce laws that regulate
the distribution and retail sale of cigarettes and other tobacco
products, such as laws that prohibit untaxed cigarette and
tobacco products smuggling and counterfeiting and sales of
cigarette and tobacco products without a proper license. This
provision is expected to generate approximately $11 million.
Staff notes that the current cigarette and tobacco licensing
structure raises about $1 million annually, but the costs to
administer the enforcement efforts exceed $9 million annually.
This bill would fully fund BOE's enforcement efforts.
The Attorney General (AG) receives limited funding to enforce
the Master Settlement Agreement. SB 600 would generate $5.5
million annually to be allocated to the AG to enhance their
ability to enforce laws that, among other things, prohibit
cigarette smuggling, counterfeiting, selling untaxed tobacco,
and selling tobacco to minors. The AG could use the revenues to
increase legal and audit staff for enforcement efforts.
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SB 600 (Padilla)
This bill would also provide approximately $82.5 million in
revenues to the Department of Health Tobacco Control Program
(TCP) to fund tobacco control at a level closer to that
recommended by the Centers for Disease Control. Revenues
generated by SB 600 would allow to further address
tobacco-related health inequities among various demographic
populations in the state. Additionally, there are approximately
$11 million in new resources provided by the bill to support DPH
law enforcement efforts. This funding will enable TCP to
provide grants to local law enforcement agencies to provide
training and funding for the enforcement of state and local laws
related to the illegal sales of tobacco to minors. It will also
enable the DPH, Food and Drug Branch to increase investigative
activities, compliance checks, and other appropriate activities
to reduce illegal sales of tobacco products to minors under the
Stop Tobacco Access to Kids Enforcement (STAKE) Act.
SB 600 would also provide approximately $18.3 million for the
Department of Education for efforts to prevent or reduce the use
of tobacco products, and $55 million to the University of
California to supplement the Cigarette and Tobacco Products
Surtax Medical Research Program and for the establishment and
administration of a Lung Cancer Early Detection and Treatment
Research Program.
This bill requires BOE to annually determine the effects of its
provisions on the consumption of cigarettes and tobacco products
and determine the extent to which there has been a decrease in
consumption as a direct result of the additional tax imposed.
If there is a negative impact, SB 600 would require a transfer
of funds to the California Children and Families First Trust
Fund (Proposition 10), the Breast Cancer Fund and certain
specified accounts in the Cigarette and Tobacco Products Surtax
Fund (Proposition 99). The specific accounts that would be
backfilled in a subsequent fiscal year, which account for about
70 percent of the Proposition 99 fund, include the Hospital
Services Account, the Physician Services Account, the Public
Resources Account, and the Unallocated Account.
SB 600 also requires that the excise tax imposed by this bill be
adjusted annually by BOE by an inflationary factor tied to the
consumer price index (CPI). Any increases due to inflation are
expected to be offset by the historical annual decreases in tax
paid distributions. BOE indicates that the sales of cigarettes
have declined by an average of 3 percent per year, which is
roughly equivalent to the average CPI over the last ten years.
Finally, staff notes that 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 estimates an averal decrease of 15 percent in
tax paid distributions. Staff notes, however, that the bill
also provides revenue for increased enforcement efforts, which
should partially mitigate the decreases due to tax evasion.