January 15, 2010
Pursuant to Elections Code Section 9005, we have
reviewed the proposed initiative (File No. 09‑0097). This measure would
increase excise taxes on cigarettes and use these revenues to fund
various health research and tobacco-related programs.
Existing Tax Rate. Current state
law imposes excise taxes on cigarettes and other tobacco products. The
state's cigarette tax is currently 87 cents per pack (with an equivalent
tax on other types of tobacco products) and is levied on cigarette
distributors who supply cigarettes to retail stores. The proceeds are
used for both General Fund and certain special fund purposes.
The total 87 cents per pack tax is made up of the
Fifty cents per pack pursuant to the California
Children and Families First Act of 1998. This measure, enacted by
the voters that year as Proposition 10, supports early childhood
Twenty-five cents per pack pursuant to the
Tobacco Tax and Health Protection Act. This initiative, enacted by
the voters as Proposition 99 in 1988, increased the cigarette tax by
25 cents per pack, and provided that the tax on other tobacco
products be raised commensurately with this and any future tax on
cigarettes. These revenues are allocated to tobacco education and
prevention efforts, tobacco-related disease research programs, and
health care services for low-income uninsured persons, as well as
for environmental protection and recreational resources.
Ten cents per pack for the state General Fund.
Two cents per pack enacted through a separate
measure approved by the Legislature and Governor in 1993 to create
the Breast Cancer Fund, which supports research efforts related to
breast cancer and of breast cancer screening programs for uninsured
Sales of cigarettes and other tobacco products
also are subject to the sales and use tax, which is imposed on their
price including excise taxes.
Existing Backfill Provisions. Part
of the Proposition 10 revenues are used to "backfill" or offset any
revenue losses experienced by Proposition 99's health-related education
and research programs and the Breast Cancer Fund due to decreased
consumption of tobacco products resulting from Proposition 10's tax
increase. (Revenue reductions to Proposition 99 health care and
resources programs were not backfilled under the provisions of
Proposition 10.) The revenue reductions occur because an increase in the
price of cigarettes generally reduces cigarette consumption and results
in more sales for which taxes are not collected, such as smuggled
products and out-of-state sales.
New State Tobacco Tax Revenues
The average retail price of a pack of cigarettes
currently is roughly $5 in California, including all taxes. This measure
increases the existing excise tax on cigarettes by $1 per pack effective
90 days after its passage. Existing state law requires the Board of
Equalization (BOE) to increase taxes on other tobacco products—such as
loose tobacco and snuff—in an amount equivalent to any increase in the
tax on cigarettes. Thus, this measure would also result in a comparable
increase in the excise tax on other tobacco products. The measure does
not specify how revenues from increased excise taxes on other tobacco
products would be used. Under current law, those revenues would be
deposited in the Cigarette and Tobacco Products Surtax Fund and used to
support Proposition 99 programs.
How Additional Tobacco Revenues Would Be Spent
Receipts from the tobacco tax increases would be
deposited in a new special fund created by the measure called the
California Cancer Research and Life Sciences Innovation Trust Fund.
After compensating existing tobacco tax programs for any losses due to
the imposition of the new tax, the monies would be distributed from the
trust fund among five funds as follows:
Research Fund. Sixty percent of the funds would be used to
provide grants and loans to support research on prevention,
diagnosis, treatment, and potential cures for tobacco-related
diseases such as cancer and heart disease.
Facilities Fund. Fifteen percent would be used to provide
grants and loans to build and lease facilities and provide capital
equipment for research on tobacco-related diseases.
Smoking Cessation Fund. Twenty percent would be used for
tobacco prevention and cessation programs administered by the
California Department of Public Health (DPH) and the California
Department of Education.
Hope 2010 Law
Enforcement Fund. Three percent would be allocated to state
agencies to support law enforcement efforts to reduce smuggling,
tobacco tax evasion, illegal sales of tobacco to minors, and to
otherwise improve enforcement of existing law.
Committee Account. Two percent would be deposited into an
account that would be used to pay the costs of tax collection and
expenses of administering the measure.
Committee Established to Administer Trust Fund
The trust fund would be overseen by a nine-member
Cancer Research Citizen's Oversight Committee established by the
measure. The committee would be composed of four members appointed by
the Governor, three of whom are directors of designated cancer centers;
two members appointed by DPH; and three chancellors from certain
University of California campuses where biomedical scientific research
Authority Granted to the Committee.
The measure gives the committee the authority to develop a long-term
financial plan including an annual budget and to establish a process for
soliciting, reviewing, and awarding grants and loans for researchers and
facilities. The committee would have the authority to appoint a chief
executive officer and other employees. The committee also would have the
authority to make final decisions on awards of loans and grants and to
establish policies regarding intellectual property rights arising from
research funded by this measure.
Tax Collection and Administrative Costs.
The committee would be authorized by this measure to reimburse BOE from
the Hope 2010 Committee Account for the cost of collecting the new tax
levy. This account would also be used to pay for any expenses of
administering the act, such as hiring employees.
Accountability Measures. The
measure would require the committee to issue an annual report to the
public that included information on its administrative expenses, the
number and amount of grants and loans provided, and a summary of
research findings. The committee would also be required to commission an
independent financial audit that would be provided each year to the
State Controller, who would then review the audit and publicly report on
the review. The State Controller would also provide the committee with
reports that set forth the allowable costs for general administration of
the trust fund.
The measure includes conflict-of-interest
provisions that govern the conduct of committee members, and includes
specific criminal penalties for anyone convicted for the misuse of trust
Other Expenditure Rules
Committee Administers Trust Fund.
Under this measure, the committee would be authorized to administer the
trust fund. The funds allocated under this measure would not be subject
to appropriation by the Legislature through the annual state budget act,
and thus, amounts would not be subject to change by actions of the
Legislature and Governor.
Transfers Permitted From Facilities Fund.
In the event the committee determined that there was a surplus in the
Hope 2010 Facilities Fund, the measure authorizes the committee to
transfer those monies to the Hope 2010 Research Fund, the Hope 2010
Smoking Cessation Fund, or the Hope 2010 Law Enforcement Fund.
New Backfill Provisions. The
measure requires the transfer of monies from the trust fund to backfill
any losses that occur to the Cigarette and Tobacco Products Surtax Fund
(Proposition 99), the California Children and Families First Fund
(Proposition 10), the Breast Cancer Fund, and the General Fund that
directly result from imposition of the additional tax.
This measure is likely to have a number of fiscal
effects on state and local governments.
Impacts on State and Local Revenues
Revenues Will Be Affected by Consumer
Response. Our revenue estimates assume that the distributors of
tobacco products, who actually remit the excise tax, largely pass along
the excise tax increase of $1 per pack to consumers. In other words, we
assume that the prices of tobacco products would be raised to include
the excise tax increase. This would result in various consumer
responses. The price increase is likely to result in consumers reducing
the quantity of taxable tobacco products they purchase. Consumers could
also change the way they acquire tobacco products so that fewer
transactions are taxed, such as through Internet purchases or purchases
of out-of-state products.
The magnitude of these consumer responses is
uncertain given the size of the proposed tax increase. There is
substantial evidence regarding the response of consumers to small and
moderate tax increases on tobacco products in terms of reduced tobacco
consumption. However, the increase in taxes proposed in this measure is
greater than experienced previously in the state. A reasonable
projection of consumer response is incorporated into our revenue
estimates, but these estimates are still subject to uncertainty given a
variety of factors, including the large tax change involved.
New Excise Tax Revenues. Estimated
revenues from current excise taxes on cigarettes and other tobacco
products are about $850 million a year. We estimate that the increase in
excise taxes required by this measure would raise about $450 million in
2010‑11 (partial-year effect from January 1 through June 30, 2010) and
about $855 million in 2011‑12 (the first full-year impact). Our estimate
of the allocation of new excise tax revenues is shown in Figure 1 below.
The excise tax increase would raise somewhat less revenue each year
thereafter, due to the well-established trend of declining per capita
cigarette consumption in the state. The higher tax also would reduce
revenues from the existing excise tax, as discussed further below.
Allocation of New
Tobacco Tax Revenues
2011-12 Funding (Full Year)
Backfill of Proposition 99,
General Fund, and Breast Cancer Account
To be determined by BOE
60 percent of remaining funds
15 percent of remaining funds
Smoking Cessation Fund
20 percent of remaining funds
Law Enforcement Fund
3 percent of remaining funds
2 percent of remaining funds
Total Tobacco Tax Funding Allocations
BOE = Board
Effects on Existing Tobacco Excise Tax
Revenues. The decline in consumption of tobacco products
caused by this measure would similarly reduce revenues from the existing
tobacco taxes. The measure ensures that revenues for the existing
tobacco taxes do not decline due to lower cigarette consumption caused
by the new excise tax. We estimate that this allocation of backfill
funding would initially amount to about $75 million annually.
In addition to its allocation of backfill
funding, Proposition 99 programs would receive additional revenues
because of the existing provision in state law under which any cigarette
tax increase triggers an the automatic increase in the taxes collected
on other tobacco products. We estimate that this factor would result in
a revenue gain for Proposition 99 programs of about $45 million
Effects on Excise Tax Collection.
As discussed above, the measure would deposit 3 percent of total
revenues into a Law Enforcement Fund to support law enforcement efforts.
These funds would be used to support increased enforcement efforts to
reduce tax evasion, counterfeiting, smuggling, and the unlicensed sales
of cigarette tobacco products; increased enforcement of existing laws;
and efforts to reduce sales of tobacco products to minors. These
activities would probably have a minor impact on the amount of revenues
collected through the excise tax.
Effect on State Sales Tax Revenues.
Sales taxes are levied on the final price of cigarettes and other
tobacco products, including all excise taxes. The higher price of
cigarettes resulting from the new excise tax, therefore, would increase
state General Fund revenues. We estimate that the state's General Fund
sales tax revenues would increase by about $22 million annually.
Effects on Local Revenues. Local
governments would likely experience an annual increase in sales tax
revenues of approximately $10 million.
Impact on State and Local Government Costs
The state and local governments incur costs for
providing (1) health care for low-income persons and (2) health
insurance coverage for state and local government employees.
Consequently, changes in state law that affect the health of the general
populace—and low-income persons and public employees in particular—would
affect publicly funded health care costs.
The use of tobacco products has been linked to
various adverse health effects by federal health authorities and
numerous scientific studies. This measure is likely to result in a
decrease in the consumption of tobacco products because of its
provisions increasing the cost of these products and curbing tobacco
use. To the extent that these changes affect publicly funded health care
programs, they are likely to reduce state and local government health
care spending on tobacco-related diseases.
However, this measure may have other fiscal
effects that may partially or fully offset these cost savings. For
example, the state and local governments may incur future costs for the
provision of health care and social services that may otherwise not have
occurred, such as long-term care for individuals who avoid
tobacco-related diseases and live longer. Thus, the net fiscal impact of
this measure on state and local government costs is unknown.
The measure would have the following major
Increase in new
cigarette tax revenues of about $855 million annually by 2011‑12,
declining slightly annually thereafter, for various health research
and tobacco-related programs.
Increase of about
$45 million annually to existing health, natural resources, and
research programs funded by existing tobacco taxes.
Increase in state
and local sales taxes of about $32 million annually.
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