BACKGROUND
Tobacco Taxes
Current state law imposes certain taxes directly on
cigarettes and other tobacco products that are known
as excise taxes. Excise taxes are taxes collected on
selected goods or services. Currently, the excise taxes
total 87 cents per pack of cigarettes (with a similar
tax on other types of tobacco products). The total tax
of 87 cents per pack consists of:
- 50 cents to support early childhood development
programs, enacted by the voters as Proposition 10
in 1998.
- 25 cents to support tobacco education and
prevention efforts, tobacco-related disease research
programs, health care services for low-income
uninsured persons, and environmental protection
and recreational programs, enacted by the voters
as Proposition 99 in 1988.
- 10 cents for the state General Fund.
- 2 cents to support research related to breast cancer
and breast cancer screening programs for uninsured
women.
Current taxes on cigarettes and other tobacco products are estimated to raise about $1.1 billion in 2006–07.
Children’s Health Care Coverage
Medi-Cal. The Medi-Cal Program (the federal
Medicaid Program in California) provides health care
services to low-income persons, including eligible
children (depending on the age of the child). Families
with incomes up to 133 percent of the federal poverty
level (FPL) (about $27,000 per year for a family of
four) are generally eligible for coverage. The program
is administered by the state Department of Health
Services (DHS).
Under the Medicaid Program, matching federal
funds are available for the support of comprehensive
medical services for United States citizens and to
“qualified aliens”—that is, immigrants who are
permanent residents, refugees, or a member of
certain other groups granted the legal right to remain
in the United States. Federal matching funds are
also available for nonqualified aliens, but only for
emergency medical services.
The Medi-Cal Program currently serves about 3.2
million adults and 3.2 million children.
Healthy Families. The Healthy Families Program
(HFP) offers health insurance to eligible children
in families who generally have incomes below 250
percent of FPL (about $50,000 per year for a family
of four) who do not qualify for Medi-Cal. (Children in
some families with higher incomes are also eligible.)
Funding is generally on a two-to-one federal/state
matching basis. Children in HFP must be eligible
United States citizens or qualified aliens. The HFP is
administered by the Managed Risk Medical Insurance
Board (MRMIB).
The HFP provides medical coverage for about
781,000 children.
Local Health Coverage Programs. The County
Health Initiative Matching (CHIM) Fund program,
which is administered by MRMIB and counties,
provides health coverage for children in families with
an income between 250 percent and 300 percent of
FPL (between $50,000 and $60,000 per year for a
family of four). The CHIM program relies on county
funds as the match required to draw down federal
funds to pay for this health coverage. This program
has a caseload of about 3,000 children.
In addition to the CHIM program, some counties
have established their own health coverage programs
for children that are ineligible for Medi-Cal or
HFP. These programs are primarily supported with
local funding. These programs serve about 69,000
children.
PROPOSAL
This measure increases excise taxes on cigarettes
(and, as discussed below, indirectly on other tobacco
products) to provide funding for hospitals for
emergency services as well as programs to increase
access to health insurance for children, expand
nursing education, support various new and existing
health and education activities, curb tobacco use
and regulate tobacco sales. Major provisions of the
measure are described below.
New State Tobacco Tax Revenues
A pack of cigarettes now costs roughly $4.00
in California, including 87 cents in excise taxes.
This measure increases the existing excise
tax on cigarettes by $2.60 per pack effective
January 2007. 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. All of the additional tobacco
revenues (including those on other tobacco products)
would be used to support various new and existing
programs specified in this measure.
How Additional Tobacco Revenues Would Be
Spent
Revenues from the excise tax increase would
generally be deposited in a new fund called the
Tobacco Tax of 2006 Trust Fund and would be
allocated for various specified purposes, as shown in
Figure 1 later in this analysis.
Backfill of Proposition 10 Programs. An
unspecified amount of the additional excise tax
revenues would be used to fully backfill Proposition
10 programs for early childhood development for a
loss of funding that would result from the enactment
of the new tax measure. This is because the tax
increases contained in this measure are (1) likely
to result in reduced sales of tobacco products and
(2) could result in more sales of tobacco products
for which taxes would not be collected, such as for
smuggled products and out-of-state sales. This, in
turn, would reduce the amount of revenues collected
through the excise taxes imposed under Proposition
10. The amount of backfill payments needed to offset
any loss of funding for the Proposition 10 program
would be determined by BOE.
Health Treatment and Services Account. Under
the measure, 52.75 percent of the funds that remain
after providing the Proposition 10 backfill funding
would be allocated to a Health Treatment and Services
Account. This funding would be used for the purposes
outlined below:
- Hospital Funding. Nearly three-fourths of the
funds in this account would be allocated to hospitals
to pay their unreimbursed costs for emergency
services and to improve or expand emergency
services, facilities, or equipment. Allocations
would be based largely on the number of persons
that hospitals treat in their emergency departments
and their costs for providing health care for
patients who are poor. Private hospitals and certain
public hospitals, including those licensed to the
University of California (UC), would be eligible to
receive funding. Hospitals licensed to other state
agencies or the federal government would not be
eligible for funding.
- Nursing Education Programs. These funds would
be used to expand nursing education programs
in UC, California State University, community
college, and privately operated nursing education
programs.
- Additional Allocations. Funding would be
allocated for the support of nonprofit community
clinics; to help pay for uncompensated health care
for uninsured persons provided by physicians; for
college loan repayments to encourage physicians
to provide medical services to low-income persons
in communities with insufficient physicians; to
provide prostate cancer treatment services; and for
services to assist individuals to quit smoking.
Health Maintenance and Disease Prevention
Account. Under the measure, 42.25 percent of the
funds that remained after providing the Proposition 10
backfill funding would be allocated to a Health
Maintenance and Disease Prevention Account. This
funding would be used for the purposes outlined below:
- Children’s Health Coverage Expansion. Almost
one-half of these funds would be allocated to
expand the HFP to provide health coverage to
include (1) children from families with incomes
between 250 percent and 300 percent of the FPL
and (2) children from families with incomes up
to 300 percent of the FPL who are undocumented
immigrants or legal immigrants not now eligible
for HFP. This measure requires MRMIB and
DHS to simplify the procedures for enrolling and
keeping children in HFP and Medi-Cal coverage
and creates a pilot project to provide coverage for
uninsured children in families with incomes above
300 percent of the FPL.
- Tobacco-Related Programs. These funds would
support media advertising and public relations
campaigns, grants to local health departments and
other local organizations, and education programs
for school children to prevent and reduce smoking.
Funding would also go to state and local agencies
for enforcing laws and court settlements which
regulate and tax the sale of tobacco products.
Also, some funds would be used to evaluate the
effectiveness of these tobacco control programs.
- Health and Education Programs. Part of these
funds would be set aside for various new or existing health programs related to certain diseases
or conditions, including colorectal, breast, and
cervical cancer; heart disease and stroke; obesity;
and asthma.
Health and Disease Research Account. Under
the measure, 5 percent of the funds that remained
after providing the backfill funding discussed above
would be allocated to a Health and Disease Research
Account. This funding would be used to support
medical research relating to cancer in general and
breast and lung cancer in particular. In addition, it
would support research into tobacco-related diseases,
as well as the effectiveness of tobacco control efforts.
Part of these funds would be used to support a
statewide cancer registry, a state program that collects
data on cancer cases.
Other Major Provisions
In addition to the provisions that raise tobacco
excise taxes and spend these same revenues, this
measure contains a number of other significant
provisions, which are described below.
Existing Funding for Physician Payments
Continued. In recent years, the state has spent almost
$25 million per year in Proposition 99 funds for
allocations to counties to reimburse physicians for
uncompensated medical care for persons who are
poor. This measure requires that this same level of
Proposition 99 funds be allocated annually in the
future for this purpose.
Expenditure Rules. The funds allocated under
this measure would not be appropriated through the
annual state budget act and thus would not be subject
to change by actions of the Legislature and Governor.
The additional revenues would generally have to be
used for the services noted above and could not take
the place of existing state or local spending. The state
and counties could not borrow these new revenues to
use for other purposes, but they could be used to draw
down additional federal funds. Contracts to implement
some of the new programs funded by this measure
would be exempted from state contracting rules for the
first five years.
Oversight Provisions. This measure requires DHS
to prepare an annual report describing the programs
that received additional excise tax funding and how
that funding was used. This information would be
made available to the public by DHS on its Web site.
Programs receiving these funds would be subject to
audit. New state committees would be established to
oversee the expansion of children’s health coverage
and antiobesity programs.
Hospital Charges and Bill Collections. Hospitals
that are allocated funds under this measure for
emergency and trauma care services would be subject
to limits on what they could charge to certain patients
in families with incomes at or below 350 percent of
the FPL. These hospitals would also have to adopt
written policies on their bill collection practices and,
under certain circumstances, could not send unpaid
bills to collection agencies, garnish wages, or place
liens on the homes of patients as a means of collecting
unpaid hospital bills.
Coordination of Medical Services by Hospitals. Subject to the approval of certain local officials,
hospitals receiving funding under this measure would
be allowed to coordinate certain medical services,
including emergency services, with other hospitals.
For example, hospitals would be permitted to jointly
share the costs of ensuring the availability of on-call physicians who provide emergency services.
The measure seeks to exempt such coordination of
emergency services from antitrust laws that might
limit or prohibit such coordination efforts.
FISCAL EFFECTS
This measure would have a number of fiscal effects
on state and local governments. The major fiscal
effects we have identified are discussed below.
Impacts on State and Local Revenues
Revenues Affected by Consumer Response. Our
revenue estimates assume that the excise tax increase
of $2.60 per pack is passed along to consumers by
the distributors of tobacco products who actually pay
the excise tax. 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 that they purchase. Consumers
could also shift their purchases so that taxes would
not be collected on tobacco products, such as
through Internet purchases or purchases of smuggled
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. As a result, for small-to-moderate
increases in price, the revenue impacts can be estimated
with a reasonable degree of confidence. However,
the increase in taxes proposed in this measure is
substantially greater than that experienced previously.
As a result, we believe that revenue estimates based
on traditional assumptions regarding this consumer
response would likely be overstated. Therefore, our
revenue estimates below assume a greater consumer
response in terms of reduced tobacco consumption to
this tax increase than has traditionally been the case.
These estimates are subject to uncertainty, however,
given a variety of factors, including the large tax
changes involved.
Revenues From Tax Increase on Tobacco
Products. We estimate that the increase in excise
taxes would raise about $1.2 billion in 2006–07 (one-half
year effect from January through June 2007). It
would raise about $2.1 billion in 2007–08 (first full-year impact). This excise tax increase would raise
slightly declining amounts of revenues thereafter.
Effects on State General Fund Revenues. The
measure’s increase in the excise tax would have
offsetting effects on state General Fund revenues.
On the one hand, the higher price and the ensuing
decline in consumption of tobacco products would
reduce state General Fund revenues from the existing
excise taxes. On the other hand, the state’s General
Fund sales tax revenues would increase because the
sales tax is based on the price of the tobacco product
plus the excise tax. The decreases in revenues would
approximately equal the increases in revenues.
Effects on Local Revenues. Local governments
would likely experience an annual increase in sales
tax revenues of as much as $10 million.
Effects on Existing Tobacco Excise Tax Revenues. The decline in consumption of tobacco products
caused by this measure would similarly reduce the
excise tax revenues that would be generated for
Proposition 99 and 10 programs and for the Breast
Cancer Fund. We estimate that the initial annual
revenue losses are likely to be about $180 million for
Proposition 10, about $90 million for Proposition 99,
and less than $10 million for the Breast Cancer Fund.
However, these losses would be more than offset in
most cases by additional tax revenues generated by
this measure, as discussed below.
Impacts of New Programs on State and Local
Expenditures
State and local government expenditures for the
administration and operation of various programs
supported through this measure would generally
increase in line with the proposed increase in excise
tax revenues. Figure 1 shows the
main purpose of the accounts established by the
initiative, the percentage of funds allocated to each
purpose, and our estimate of the funding that would
be available for each account in the first full year
of tax collection. These allocations would probably
decline in subsequent years as excise tax revenues
also declined, potentially resulting in a corresponding
decrease in state and local expenditures for these new
programs.
The state administrative costs associated with the
tax provisions of this measure would be minor.
Impacts on Other Tobacco Tax-Funded
Programs
This measure would have a number of significant
fiscal effects on the three existing programs
supported by tobacco excise taxes—Proposition 99
(which supports various health and public resources
programs), Proposition 10 (which supports early
childhood development programs), and the Breast
Cancer Fund (which supports breast and cervical
cancer screening and breast cancer research
programs).
Proposition 99. This measure does not directly
backfill any Proposition 99 accounts for the loss of
revenues that would be likely to occur as a result of
the excise tax increase proposed in this measure.
Specifically, we estimate that this measure would
initially result in an annual funding reduction of
about $5 million for the public resources account and
initially almost $25 million for an account that can be
used to support any program eligible for Proposition
99 funding.
However, while this measure would reduce
revenues for other Proposition 99 accounts, it would
also initially provide significant increases in funding
in the new accounts created under this measure for
activities comparable to those now funded through
Proposition 99. This includes health education and
tobacco research, hospital services, and physician
services. In the aggregate, these activities could
initially experience a net gain in funding of almost
$950 million if this measure were enacted.
Proposition 10. Proposition 10 would receive full
backfill funding under the terms of this measure. We
estimate that this backfill would initially amount to
about $180 million annually.
Breast Cancer Fund. No backfill funding would
be provided for the Breast Cancer Fund to offset
the loss of revenues resulting from the tax increases
proposed in this measure. However, this measure
would allocate a set portion of the new tax revenues
for breast cancer research and breast cancer early
detection services, with the result that these activities
initially would likely experience a net gain of about
$80 million annually.
Revenues and Costs From Provisions
Affecting Public Hospitals
Some of the hospital emergency services funding
provided under this measure could be allocated to
public hospitals licensed to state and local agencies,
such as those run by UC, counties, cities, and health
care districts. This and certain other provisions of the
measure could potentially result in increased revenues
and expenditures for support of these hospital
operations. The magnitude of the fiscal effects of all
of these provisions is unknown, but is likely to result
in a net financial gain for hospitals operated by state
and local government agencies up to the low hundreds
of millions of dollars annually on a statewide basis.
Fiscal Impact on State and Counties From
Children’s Coverage Provisions
Long-Term Increase in State Costs for Increased
HFP Enrollment. In the short term, the revenues
allocated by this measure to expand HFP would
probably exceed the costs to make additional children
eligible for health coverage. This would particularly
be the case in the early years as enrollment gradually
increased. Any excess revenues for expanding
children’s health coverage would be reserved to
support this same purpose in future years.
Over time, however, as the excise tax revenues
allocated for this purpose declined (for the reasons
mentioned above) and the number of children enrolled
in HFP grew, the costs of the expanded HFP could
eventually exceed the available revenues. Current
state law would permit MRMIB to limit enrollment in the program to prevent this from occurring. If
actions were not taken to offset program costs at that
point, however, additional state financial support for
the program would be necessary. These potential
long-term state costs are unknown but could be
significant.
State and County Savings From Shift in
Children’s Coverage. This measure allows some
children now receiving health coverage in local health
coverage programs, such as CHIM, to instead be
enrolled in the expanded HFP. Also, some children
in low-income families receiving health care from
counties without local health initiatives would be
likely to become enrolled in HFP. These changes
would likely result in unknown, but potentially
significant, savings on a statewide basis to local
governments, particularly for counties.
The Medi-Cal Program could also experience
some state savings for emergency services as some
children would instead receive their coverage for
these and other services through HFP. These savings
to the state could reach the tens of millions of dollars
annually unless the state decided, as this measure
permits, to have these children continue to receive
emergency services through Medi-Cal.
Net Increase in State Costs From Pilot Projects
and Simplified Enrollment. This measure requires
MRMIB and DHS to simplify the procedures for
enrolling and keeping children in HFP and Medi-Cal
coverage. For example, among other changes, these
provisions could allow applicants to “self-certify”
their income and assets on their applications for
coverage without immediately providing employer or
tax documents to verify their financial status. From
an administrative perspective, some changes that
simplified enrollment rules would reduce state costs,
while others, such as changes in computer systems
for enrollment activities, would likely increase state
costs. As regards caseloads, these changes are likely
to increase program enrollment and, therefore, costs
for the state. This would occur because children who
are eligible for, but not enrolled in, Medi-Cal and
HFP would be signed up for medical benefits and
existing enrollees would continue to be served in
these programs.
As noted earlier, this measure also directs the state
to establish a pilot project to provide health coverage
for uninsured children in families with incomes above
300 percent of the FPL. This would also increase state
caseload costs.
The net fiscal effect of these provisions is an
increase in state costs that could exceed $100 million
annually after a few years. Some of these costs
could be paid for using the new excise tax revenues
generated under this measure.
Potential State and Local Savings on Public
Health Costs
Currently, 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 would affect publicly funded health
care costs. Because this measure is likely to result in
a decrease in the consumption of tobacco products
which have been linked to various adverse health
effects, it would probably reduce state and local health
care costs over the long term.
Some of the health programs funded in this
measure are intended to prevent individuals from
experiencing serious health problems that could be
costly to treat. To the extent that these prevention
efforts are successful and affect publicly funded
health care programs, they are likely to reduce state
and local government health care costs over time. In
addition, the proposed expansion of these state health
programs could reduce county costs for providing
health care for adults and children in low-income
families.
The magnitude of state and local savings from these
factors is unknown but would likely be significant.
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