Repeal of Proposition 10 Tobacco Surtax. Initiative Statute.
	Analysis by the Legislative Analyst

Background

This measure repeals the excise tax imposed on cigarettes and other tobacco products by Proposition 10, adopted by the voters in November 1998. The measure also indirectly affects other programs funded by existing tobacco taxes--specifically, programs funded by Proposition 99 of 1988.

Proposition 10 created the California Children and Families First Program, in order to fund early childhood development programs and related activities. The program is funded by revenues generated by an increase in the excise taxes on cigarettes and other tobacco products.

Proposition 10 increased the excise tax on cigarettes by 50 cents per pack beginning January 1, 1999, bringing the total state excise tax on this product to 87 cents per pack. The measure also increased the excise tax on other tobacco products, such as cigars, chewing tobacco, pipe tobacco, and snuff, in two ways:

• It imposed a new excise tax on these products equivalent (in terms of the wholesale costs of these items) to the 50 cents per pack tax on cigarettes, effective January 1, 1999.
• It increased the preexisting excise tax on these products by the equivalent of a 50 cents per pack increase in the tax on cigarettes, effective July 1, 1999.

Thus, the measure ultimately increased the total excise tax on other tobacco products by the equivalent of a $1 per pack increase in the tax on cigarettes.

Proposition 10 required that the revenues generated by the new excise taxes on cigarettes and other tobacco products be placed in a new special fund--the California Children and Families First Trust Fund. These revenues primarily fund early childhood development programs. In addition, small amounts are used to offset revenue losses to Proposition 99 health education and research programs and Breast Cancer Fund resulting from the Proposition 10 excise tax.

The revenues generated by the increase in the preexisting excise tax on other tobacco products are directed to the Cigarette and Tobacco Products Surtax Fund (for Proposition 99 programs).

Proposition 10 programs are carried out by state and county commissions.

Proposal

This measure eliminates certain provisions of Proposition 10. Specifically, it eliminates the California Children and Families First Trust Fund, once all previously collected taxes under Proposition 10 are appropriated and expended. It also eliminates the 50 cents per pack excise tax on cigarettes and the equivalent tax on other tobacco products imposed by Proposition 10, which were effective January 1, 1999. Finally, the measure would have the effect of eliminating the increase in the preexisting excise tax imposed on other tobacco products which took effect July 1, 1999. The measure does not specifically eliminate the state and county commissions authorized by Proposition 10, although it does eliminate their source of funding.

Fiscal Effect

By repealing the provisions of Proposition 10, this proposition will eliminate the cigarette and other tobacco product excise taxes used to fund the California Children and Families First Program. The measure may also lead to changes in revenues for Proposition 99 programs, the state's General Fund, and local governments. Below, we discuss these fiscal effects.

Effect on California Children and Families First Trust Fund. We estimate that Proposition 10 will raise revenues of approximately $680 million in 1999-00, and declining amounts thereafter, to fund early childhood development programs and activities. Thus, assuming this measure repealing Proposition 10 becomes effective the day following its passage, it would result in an estimated revenue reduction of approximately $215 million for 1999-00 (a partial-year effect). The estimated revenue reduction for 2000-01 is approximately $670 million, with declining annual amounts thereafter. There is some uncertainty surrounding these estimates, due to the difficulty of predicting the effects of recent increases in excise taxes, price increases for cigarettes, and the excise tax reduction being proposed.

Effect on Cigarette and Tobacco Products Surtax Fund Revenues. This measure would have the overall effect of increasing revenues for Proposition 99 programs by a few million dollars annually. This revenue effect is due to an increase in the sale of cigarettes and other tobacco products caused by the price reduction in these products.

Effect on Breast Cancer Fund Revenues. This measure would not lead to any change in revenues going to the Breast Cancer Fund. This is because the revenue increase generated by increased consumption stemming from the decline in the price of cigarettes and other tobacco products is approximately equal to the offset amounts estimated to be provided under Proposition 10, which will no longer occur under this measure.

Effect on the State General Fund and Local Tax Revenues. This measure would result in a state General Fund revenue loss of approximately $3 million in 1999-00 (partial year) and annual losses thereafter of about $7 million. For local governments, the estimated sales tax revenue reductions are estimated to be $2 million in 1999-00 (partial year) and approximately $6 million annually thereafter. In general, these reductions occur because the increase in the General Fund's excise tax revenues (due to the increased sale of tobacco products) is not sufficient to compensate for the decline in sales tax revenue (due to the decline in the price of tobacco products).

Other Potential Fiscal Effects. We identified two types of potential unknown long-term savings from the passage of Proposition 10. First, to the extent that Proposition 10 results in a decrease in the consumption of tobacco products, it will probably reduce state and local health care costs by an unknown amount over the long term. Second, the additional expenditures on early childhood development programs could result in state and local savings, over the long run, of unknown amounts in programs such as special education. Thus, this measure to repeal Proposition 10 would result in not realizing these potential savings.

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