BILL ANALYSIS Ó
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 768
AUTHOR: De León
AMENDED: May 1, 2013
HEARING DATE: May 8, 2013
CONSULTANT: Robinson-Taylor
SUBJECT : Cigarette and tobacco product taxes: California
Tobacco Tax Act of 2014 (Tax Levy).
SUMMARY : Enacts the California Tobacco Act of 2014 (2014
Tobacco Act) which imposes an additional cigarette tax at a rate
of $2.00 per package of 20 cigarettes.
Existing federal law. Provides for a $1.01 tax per pack of 20
cigarettes with the majority of the funds being used to fund
children's health programs.
Existing state law:
1.Imposes a tax on distributors of cigarettes and tobacco
products, set at 87 cents per pack of 20 cigarettes. Requires
the taxes on cigarette and tobacco products to 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.
2.Establishes the Board of Equalization (BOE) and requires BOE
to administer the tobacco tax provisions, including collecting
the tax.
3.Requires BOE to annually set a tax on other tobacco products,
such as cigars and chewing tobacco, at an amount equivalent to
the tax on cigarettes.
4.Requires retailers of cigarettes and tobacco products to be
licensed by BOE.
5.Establishes the Department of Public Health (DPH) and grants
it responsibility for public health programs, including
tobacco control.
This bill:
Cigarette Tax Increase and Annual Adjustment
Continued---
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1.Enacts the 2014 Tobacco Act which imposes an additional
cigarette tax at a rate of $2.00 per package.
2.Requires BOE, in order to offset the effects of inflation, to
calculate, on or before March 1 of each year, the percentage
increase from the preceding calendar year based on the
California Consumer Price Index. Requires BOE to adjust the
2014 Tobacco Act tax to reflect the percentage increase.
Requires the adjusted tax be effective during the state's next
fiscal year. Prohibits the adjusted tax from ever being less
than the rate imposed pursuant to the Tobacco Act of $2.00 per
package of cigarettes.
3.Requires BOE to deposit all revenues in the newly created
Tobacco Tax Fund, which this measure creates in the State
Treasury. Establishes the Tobacco Tax Fund as a trust fund.
Requires Tobacco Tax Fund moneys to be transferred in
unspecified percentages to the:
a. Tobacco Prevention and Education Account for
transfer to DPH, State Department of Education, and
the University of California;
b. Tobacco Disease Related Health Care Account
for transfer to the State Department of Health Care
Services to improve quality and access to specified
health care programs; and,
c. Tobacco Law Enforcement Account for transfer
to BOE, the Department of Justice, and DPH for the
purpose of supplementing funding for the enforcement
of laws that regulate the distribution and sale of
cigarettes and other tobacco products, including, but
not limited to, laws that prohibit cigarette
smuggling, counterfeiting, selling untaxed tobacco,
selling tobacco without a proper license, selling
tobacco to minors, and enforcing tobacco-related laws,
court judgments, and settlements.
4.Prohibits more than 2 percent of the 2014 Tobacco Act tax from
being used to fund any department's administrative costs.
Cigarette and Tobacco Products Tax
5.Amends several sections within the Cigarette and Tobacco
Products Law to add conforming and necessary code section
references that allow the BOE to properly administer the
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surtax in a manner consistent with the existing cigarette and
tobacco products tax.
Floor Stock Tax
6.Imposes a compensating floor stock tax on every dealer and
wholesaler, for the privilege of holding or storing cigarettes
for sale, use, or consumption. Requires the dealer or
wholesaler to pay for each cigarette in his or her possession
or control at 12:01 a.m. on the operative date of the 2014
Tobacco Act tax. Imposes, in addition, upon every licensed
distributor a cigarette indicia adjustment tax on affixed and
unaffixed cigarette tax stamp inventory at 12:01 a.m. on the
operative date of the 2014 Tobacco Act tax. Requires that the
floor stock tax return and taxes be paid to BOE on or before
the first day of the first calendar quarter commencing more
than 180 days after the effective date of the 2014 Tobacco
Act.
Backfill Provisions
7.Requires BOE to determine, within one year of passage and
annually thereafter, the effect that the 2014 Tobacco Act tax
and the resulting indirect tobacco products tax increase has
had on cigarette and tobacco products consumption in the
state.
8.Requires BOE, if results from 7) above show a decrease, to
determine the fiscal effect the consumption decrease has had
on the California Children and Families Trust Fund, the
Cigarette and Tobacco Products Surtax Fund, the Breast Cancer
Fund, and the General Fund.
9.Requires BOE to transfer money from the Tobacco Tax Fund to
the California Children and Families Trust Fund, the Hospital
Services Account, the Physician Services Account, the
Cigarette and Tobacco Products Surtax Fund, the Breast Cancer
Fund, and the General Fund, to offset the revenue decrease
that directly results from the 2014 Tobacco Act tax and
indirect tobacco products tax.
Operative Date
10.Contains an urgency clause that will make this bill effective
upon enactment.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee.
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COMMENTS :
1.Author's statement. The treatment of cancer, heart disease
and stroke, lung disease, diabetes, and other tobacco-related
diseases imposes a significant burden on California's
overstressed health care system. The impacts are staggering -
diseases related to smoking cost our state roughly $9.1
billion in medical expenses each year, and the cost of lost
productivity due to tobacco use is an estimated $8.5 billion
annually. The author maintains that tobacco use is the single
most preventable cause of death and disease in California,
claiming the lives of more than 36,000 people every year.
California has approximately 3.4 million adult smokers and
200,000 youth smokers.
The author argues that increasing the tobacco tax will have an
immediate effect on smoking and is the most appropriate
mechanism to fund services to prevent tobacco use, help people
quit smoking, mitigate the impacts and health care costs of
tobacco-related diseases, and discourage many people from
taking up smoking. According to the author, SB 768, the 2014
Tobacco Act, will save lives and reduce health care costs by
decreasing smoking rates, raise needed resources to improve
and expand access to health care, and also advance
California's tobacco prevention and control programs.
2.Tobacco taxation in California. According to BOE, there are
two types of excise taxes for cigarettes and tobacco products
distributed in California: 1) the cigarette tax; and, 2) the
cigarette and tobacco products surtax. While cigarettes are
subject to both the cigarette tax and the cigarette and
tobacco products surtax, tobacco products are subject only to
the cigarette and tobacco products surtax. Tobacco products
include all forms of cigars, smoking tobacco, chewing tobacco,
and snuff, as well as other products containing at least 50
percent tobacco. The tax and the surtax are paid by
distributers through the use of tax stamps which are purchased
from BOE and affixed to each packet of cigarettes before
distribution. In the 1960's the Legislature passed a 10 cent
cigarette tax that was allocated to the General Fund. The
Legislature and voters have adopted the following three
additional tobacco tax measures since 1988:
a. Assembly Bill 478 (B. Friedman) Chapter 660,
Statutes of 1993 and Assembly Bill 2055 (B. Friedman)
Chapter 661, Statutes of 1993, added an cigarette excise
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tax of 2 cents per package of 20 cigarettes for breast
cancer research and early detection services;
b. Proposition 99, from the November 1988 ballot, was
passed and imposed a cigarette and tobacco product surtax
of 25 cents per package of 20 cigarettes and is used for
the following purposes: Tobacco-related health education
programs and disease research; Medical and hospital care
and treatment of patients who cannot afford those
services, and for whom payment will not be made by any
private coverage or federal program; programs for fire
prevention, environmental conservation, protection,
restoration, enhancement, and maintenance of fish,
waterfowl, and wildlife habitat areas; and, enhancement
of state and local parks and recreation; and,
c. Proposition 10, passed November 3, 1998, imposed an
additional cigarette and tobacco product surtax of 50
cents per package of 20 cigarettes and is used for
programs that encourage proper childhood development,
including: the development of professional and parental
education and training; informed selection of childcare;
development and education of childcare providers; and,
research into best practices and standards for all
programs and services relating to early childhood
development.
3.Smoking prevalence in California. According to the 2012
Surgeon General's Report, nearly 90 percent of smokers in the
United States started smoking by the age of 18, and 99 percent
started by age 26. In California, 64 percent of smokers start
by the age of 18 and 96 percent start by age 26. According to
DPH in 2010, 36.8 percent of high school students had smoked a
whole cigarette by 13 or 14 years of age and, in 2012, illegal
tobacco sales to minors rose from 5.6 percent in 2011 to 8.7
percent.
According to DPH, the state's adult smoking rate has hit a
record low. In 2010, 11.9 percent of the state's adults
smoked, down from 13.1 percent in 2009, making California one
of only two states to reach the federal Healthy People 2020
target of reducing the adult smoking prevalence rate to 12
percent. However, research highlights that the burdens of
smoking do not fall evenly across the state. According to the
American Lung Association (ALA), African-American men and
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women have the highest smoking usage rate at 21.3 percent and
17.1 percent respectively, followed by white men at 17.2
percent and Latino men at 16 percent. The ALA reports that
Korean men have an unusually high tobacco usage rate at 27.9
percent as do Lesbian, Gay, Bisexual and Transgender women who
smoke at almost triple the rate of women in general.
4.Tobacco-related diseases in California. Every year, an
estimated 443,000 people in the United States die from tobacco
and smoking-related illnesses or exposure to secondhand smoke,
according to the Centers for Disease Control and Prevention
(CDC). The CDC also reports that another 8.6 million people
suffer from serious smoking-related illnesses. According to
DPH, smoking causes ischemic heart disease, cancer, stroke,
and chronic lower respiratory diseases which are the leading
causes of death and disability among adults in California.
Smoking-attributed diseases are an economic burden due not
only to health care expenses, but also productivity losses
related to disability or early death. DPH asserts, since the
1988 passage of Proposition 99 in California, adult smoking
rates declined by more than 40 percent from 22.7 percent to
13.3 percent in 2008. As smoking rates declined, mortality
and morbidity rates for diseases related to smoking also
declined. This parallel trend, according to DPH, supports
causal association between these conditions and smoking.
5.California Tobacco Control Program. The California Tobacco
Control Program (CTCP) is a program administered by DPH.
Established in 1990 through the passage of Proposition 99,
CTCP funds and coordinates the efforts of local communities in
California to create smoke-free environments, prevent illegal
sales of tobacco to youth, counter the aggressive marketing
practices of the tobacco industry, and help smokers to quit.
To ensure that federal, state, and local laws are followed,
CTCP works closely with law enforcement agencies. CTCP
currently works in all 58 counties in partnership with many
non-profit community-based organization around the state. A
key component of CTCP's comprehensive approach is its focus on
changing social norms rather than a frontal attack designed to
market cessation services directly to tobacco users.
According to a recent study conducted by UC San Francisco,
while CTCP has cost $2.4 billion over the span of the over 20
years of the program's existence, CTCP has reduced health care
costs by $134 billion.
6.Tobacco taxes and other states. California's tobacco tax rate
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ranks 33rd when compared to the rates of other states. The
national mean cigarette excise tax is $1.48 per pack. The
highest tobacco tax rate is in New York at $4.35 per pack and
the lowest is Virginia at $0.30 per pack. Some local
governments, such as New York City ($5.85 per pack total tax
rate) and Chicago ($5.66 per pack total tax rate), have their
own tax in addition to the state tax. California has not
raised its cigarette excise tax since 1998. According to the
Campaign for Tobacco-Free Kids, the average price for a pack
of cigarettes in California is $5.44 with all taxes included.
7.Impacts of higher cigarette prices. According to the
Legislative Analyst's Office (LAO), most revenue estimates
assume that an increased excise tax on cigarettes would raise
the retail prices of cigarettes and other tobacco products to
include the new cost. This could potentially result in
consumers reducing the quantity of taxable products they
consume. Additionally, the state and local governments in
California incur costs for providing: 1) healthcare for
low-income and uninsured persons; and, 2) health insurance
coverage for state and local government employees and
retirees. Consequently, changes in state law, such as the
2014 Tobacco Act tax that affect the health of the general
population and low-income and uninsured persons and public
employees in particular, could affect publicly-funded health
care costs. The LAO further reports, since the use of tobacco
products has been linked to various adverse health effects, an
increase in a cigarette excise tax could reduce state and
local government health-care spending on tobacco-related
diseases over the long-term.
DPH maintains that higher taxes are particularly effective in
reducing smoking among vulnerable populations, such as youth,
pregnant women, and low-income smokers. Increases in tobacco
prices affect the behavior of the young and low-income, who
tend to be more responsive to price changes, than older and
wealthier individuals. Higher tobacco taxes could encourage
more low-income smokers to quit. According to the Federal
Trade Commission Cigarette Report, since three out of every
four smokers expected to quit because of cigarette tax
increase are estimated to be low-income, the public health
benefits of reduced tobacco-related illnesses from smoking
will also be borne by lower-income households. However, if
individuals considered to be low-income do not quit, the
tobacco tax increase could be considered a regressive tax
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because these populations would be spending more of their
income on the product.
Higher cigarette prices through tax or fee increases can also
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, Statutes of 2003) which
establishes a comprehensive licensing program for retailers,
manufacturers, distributors and importers of cigarettes and
tobacco products. According to BOE, the California Cigarette
and Tobacco Licensing Act of 2003 has been successful in
reducing illegal sales.
8.Double referral. This bill will be heard in the Senate
Governance and Finance Committee on May 8, 2013.
9.Prior legislation.
a. SB 330 (Padilla) of 2011 would have increased the
tobacco tax by $1.50 per pack and dedicated 85 percent of
revenue to the general Fund and 15 percent to tobacco
control and lung cancer efforts. The tobacco tax
provisions were amended out of SB 330 before hearing in
Senate Health Committee.
b. SB 600 (Padilla) of 2009 was substantially similar
to SB 330. SB 600 was held in the Senate Rules
Committee.
c. AB 89 (Torlakson) of 2009 would have increased the
tobacco tax by $2.10 per pack. Revenues would have been
directed to education, children's health care, cessation
services, lung cancer research and general health care.
AB 89 was never heard and died in the Assembly
Governmental Organization Committee.
d. SB 564 (Torlakson) of 2004 would have imposed an
additional tax on the distribution of cigarettes at the
rate of $2.00 per package of cigarettes. This bill was
held in the Senate Revenue and Taxation Committee.
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e. AB 35 (Vargas) of 2003 would have imposed an
additional tax on the distribution of cigarettes at the
rate of $1.50 per package of cigarettes. The bill was
subsequently amended to a different subject.
f. SB 1890 (Ortiz) of 2002 would have increased
cigarette tax by 65 cents per package with the proceeds
being used for health-related programs. The bill was
held in the Senate Revenue and Taxation Committee.
10.Support. The American Cancer Society Action Network, the
American Heart Association, ALA, Health Access California, and
SEIU California, co-sponsors of this legislation, write in
support that the best way to reduce the wasteful spending
related to tobacco and to protect millions of California
residents is through investing in the California Tobacco
Control Program, which has successfully reduced smoking rates
and cigarette consumption in our state. The sponsors maintain
that SB 768 will generate $1.2 billion in revenues that will
be used to fund proven and effective tobacco prevention and
cessation programs, as well as improved access to health care
for low-income families.
The Health and Social Policy Institute (HASPI) writes in support
that studies have shown that every 10 percent increase in the
cost of cigarettes reduces smoking rates by 4 percent among
adults and 7 percent among youth. The California Black Health
Network (CBHN) writes in support that we know the rates of
disease among lower income and ethnic communities tend to be
higher because of high uninsured rates and lack of consistent
access to health care. CBHN maintains that an increase in the
tobacco tax, which has not been increased since 1998, will
improve access to health care services, tobacco prevention and
cessation programs and enforcement of laws that relate to the
distribution and sale of cigarettes and other tobacco
products.
11.Opposition. The California Chamber (CalChamber) writes in
opposition that according to the Governor's 2013 proposed
budget, the consumption of tobacco products has continued to
decline. Accordingly, CalChamber asserts, imposing an
additional excise tax on cigarettes will only accelerate this
decline, which will simultaneously decrease the revenues the
various programs set forth in this legislation are to receive.
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CalChamber argues that this decrease in revenue will place
more pressure on the General Fund to support these existing
programs. Reynolds American, Inc. also writes in opposition
that higher cigarette prices through tax or fee increases can
exacerbate tax evasion and foster illegal cigarette sale.
Reynolds American, Inc. also points out in opposition that it
is not significant that California voters expressed their
opposition to proposed increases to a state excise tax when
the voters defeated Proposition 29 in 2012 and Proposition 86
in 2006.
12.Policy Concerns.
a. The higher revenue levels obtained by a cigarette
tax increase have shown to decline over time as smoking
rates continue to go down. While this bill allows for
the 2014 Tobacco Act tax to be adjusted based on the rate
of inflation according to the Consumer Price Index to
offset this decline, there is still some concern
regarding the potential impact to funded programs.
b. This bill currently leaves the percentages for the
allocated funding streams unspecified. While the bill
generally indicates the intended uses for the 2014
Tobacco Act tax revenues, the lack of specificity for the
actual use of revenues, at this time, is uncertain.
SUPPORT AND OPPOSITION :
Support: American Cancer Society Cancer Action Network
(co-sponsor)
American Heart Association (co-sponsor)
American Lung Association in California (co-sponsor)
Health Access California (co-sponsor)
SEIU California (co-sponsor)
African American Tobacco Control Leadership Council
Association of Northern California Oncologists
California Black Health Network
California Primary Care Association
California Public Health Association-North
ChangeLab Solutions
Coalition for a Tobacco-Free San Bernardino County
Coalition for a Tobacco-Free Sonoma County
Communities Against Substance Abuse
ConsumersUnion
Health and Social Policy Institute - HAPSI
March of Dimes California Chapter
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Medical Oncology Association of Southern California,
Inc.
Operation Samahan
Pasadena Tobacco Prevention Coalition
Petaluma Coalition to Prevent Alcohol, Tobacco and
Other Drug Problems
San Diego Regional Asthma Coalition
San Luis Obispo County Tobacco Control Coalition
Smoking & Tobacco Outreach/Prevention Program
SUNSET Russian Tobacco Education Project
1 individual
Oppose: California Chamber of Commerce
Reynolds American, Inc.
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