Proposition 29

ANALYSIS BY THE LEGISLATIVE ANALYST

BACKGROUND

Tobacco Taxes Existing State Excise Taxes. Current state law imposes excise taxes on the distribution of cigarettes and other tobacco products, such as cigars and chewing tobacco. Tobacco excise taxes are paid by distributors who supply cigarettes and other tobacco products to retail stores. These taxes are typically passed on to consumers as higher cigarette and other tobacco product prices.

The state's cigarette excise tax is currently 87 cents per pack. Figure 1 describes the different components of the per-pack tax. As the figure shows, two voter-approved measures—Proposition 99 in 1988 and Proposition 10 in 1998—are responsible for generating the vast majority of tobacco excise tax revenues. As Figure 1 indicates, total state revenues from existing excise taxes on cigarettes and other tobacco products were just over $900 million in 2010–11.

Revenues from existing excise taxes on other tobacco products support Propositions 10 and 99 purposes. Under current law, any increase in cigarette taxes automatically triggers an equivalent increase in excise taxes on other tobacco products, with the revenues going to support Proposition 99 purposes.

Existing Federal Excise Tax. The federal government also imposes an excise tax on cigarettes and other tobacco products. In 2009, this tax was increased by 62 cents per pack (to a total of $1.01 per pack) to help fund the Children's Health Insurance Program, which provides subsidized health insurance coverage to children in low-income families.

Existing State and Local Sales and Use Taxes. Sales of cigarettes and other tobacco products are also subject to state and local sales and use taxes. These taxes are imposed on the retail price of a product, which includes excise taxes that have generally been passed along from distributors. The average retail price of a pack of cigarettes in California currently is over $5. More than $400 million in annual revenues from sales and use taxes on cigarettes and other tobacco products go to the state and local governments.

Figure 1

Existing State Tobacco Excise Taxes

(Dollars in Millions)

Description

Cents Per Pack

of Cigarettes

Estimated

2010–11 Net

Revenue a

State General Fund: Initially enacted by the Legislature in 1959 for general support of the state budget. 10¢ $96

Proposition 99: Enacted by the voters in 1988 for the purposes of supporting tobacco education and prevention efforts, tobacco-related disease research programs, health care services for low-income persons, and environmental protection and recreational resources. Some Proposition 99 revenues are used to support programs that also receive support from the state General Fund. 25 298 b

Breast Cancer Fund: Enacted by the Legislature in 1993 for the purposes of supporting breast cancer screening programs for uninsured women and research related to breast cancer. 2 23

Proposition 10: Enacted by the voters in 1998 for the purposes of supporting early childhood development programs. 50 489 b

Totals 87¢ $905 c

a Accounts for payments from Proposition 10 to other funds in order to maintain pre-Proposition 10 revenue levels.

b Total includes excise tax revenue from other types of tobacco products, such as cigars and chewing tobacco.

c Does not total due to rounding.

Current Health Research and Tobacco Cessation Activities Across the country, substantial amounts of money are spent on research related to cancer and tobacco-related diseases, such as heart disease. For example, the federal National Institutes of Health provide several billion dollars annually for grants and research in these areas. Private entities and nonprofits also provide funds for such research. In California, the University of California (UC) is one of the primary recipients of these research dollars. In addition, UC uses some state funds for this purpose.

Tobacco prevention and cessation programs are currently conducted by public entities, health insurers, and various other organizations. For example, approximately $50 million a year from Proposition 99 revenues is used to fund tobacco prevention and cessation programs in California.

PROPOSAL

This measure increases excise taxes on the distribution of cigarettes and other tobacco products. It uses the additional revenues raised for research on cancer and tobacco-related diseases (such as heart disease and emphysema), as well as for other specified purposes. The major provisions of the measure are described below.

New State Tobacco Tax Revenues This measure increases—effective October 2012—the existing state excise tax on cigarettes by $1 per pack. The total state excise tax, therefore, would be $1.87 per pack. The measure also creates a one-time "floor tax" on the majority of cigarettes that are stored by businesses at the time the new excise tax is levied. Floor taxes are typically used to prevent businesses from avoiding taxes by stockpiling products before a tax goes into effect.

Existing state law requires the Board of Equalization (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. Accordingly, this measure would also result in a comparable increase in the excise tax on other tobacco products, with the revenues supporting Proposition 99 purposes.

How New Cigarette Tax Revenues Would Be Spent Revenues from the cigarette excise tax increase would be deposited in a new special fund, called the California Cancer Research Life Sciences Innovation Trust Fund. These revenues would be dedicated to the support of research on cancer and tobacco-related diseases, as well as for other specified purposes. After compensating existing tobacco tax program funds for any losses due to the imposition of the new tax (as described in the next section), the remaining money would be distributed among five funds:

• Hope 2010 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 cancer and tobacco-related diseases. The measure states that all qualified researchers would have an equal opportunity to compete for these research funds.
• Hope 2010 Facilities Fund. Fifteen percent would be used to provide grants and loans to build and lease facilities and provide capital equipment for research on cancer and tobacco-related diseases.
• Hope 2010 Tobacco Prevention and 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 cigarette smuggling, tobacco tax evasion, and illegal sales of tobacco to minors, and to otherwise improve enforcement of existing law.
• Hope 2010 Committee Account. Two percent would be deposited into an account that would be used to pay the costs of administering the measure, most of which would likely be reimbursing BOE for tax collection costs.

Backfill of Existing Tobacco Tax Programs. This measure requires the transfer of some revenues from the trust fund to "backfill," or offset, all revenue losses that are likely to occur to existing state cigarette and tobacco taxes that directly result from the imposition of the additional tax. These revenue losses would occur mainly because an increase in the price of cigarettes and other tobacco products generally reduces consumption and results in more sales for which taxes are not collected, such as Internet purchases and purchases of out-of-state products. This, in turn, would reduce the amount of revenues collected through the existing state excise taxes described above. The amount of backfill payments needed to offset any loss of funding in these areas would be determined by BOE.

Committee Established to Administer Trust Fund The trust fund would be overseen by a newly created Cancer Research Citizen's Oversight Committee. The committee would be composed of the following nine members:

• Four members appointed by the Governor, three of whom are directors of one of the ten designated cancer centers in California.
• Two members appointed by the Director of DPH, at least one of whom has been treated for a tobacco-related illness.
• Three chancellors from UC campuses that are members of the California Institute for Quantitative Biosciences Research. (Currently, three UC campuses—Santa Cruz, Berkeley, and San Francisco—are institute members.)

Authority Granted to the Committee. The measure authorizes the committee to administer the trust fund. The funds would have to be expended solely for the purposes described in the act. The funds would be allocated by the committee. Thus, they would not be subject to appropriation by the Legislature. Furthermore, these funds could not be loaned to other state funds.

The measure gives the committee the authority to:

• Develop short- and long-term financial plans.
• Establish a process for soliciting, reviewing, and awarding grants and loans for researchers and facilities.
• Appoint a chief executive officer and other employees.
• Establish policies regarding intellectual property rights arising from research funded by this measure.

Other Major Provisions Transfers Permitted From Facilities Fund. In the event the committee determines that there is a surplus in the Hope 2010 Facilities Fund, the measure would authorize the committee to transfer the surplus money to the Hope 2010 Research Fund, the Hope 2010 Tobacco Prevention and Cessation Fund, or the Hope 2010 Law Enforcement Fund.

Accountability Measures. The measure requires the committee to issue an annual report to the public that includes information on its administrative expenses, the number and amount of grants provided, and a summary of research accomplishments. The committee would also be required to have an independent financial audit each year. 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 fund monies.

FISCAL EFFECTS

This measure would have a number of fiscal effects on state and local governments. The major impacts are discussed below.

Impacts on State and Local Revenues Revenues Would Be Affected by Consumer Response. Our revenue estimates assume that the proposed excise tax increase would be passed along to consumers. In other words, we assume that the retail prices of cigarettes and other tobacco products would be raised to include the excise tax increase. This would result in various consumer responses. The price increase would result in consumers reducing the quantity of taxable tobacco products they consume. 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. While we believe a reasonable projection of consumer response is incorporated into our revenue estimates, they are still subject to some uncertainty.

New Cigarette Excise Tax Revenues. We estimate that the increase in cigarette excise taxes required by this measure would raise about $615 million in 2012–13 (partial-year effect) and about $810 million in 2013–14 (the first full-year impact). Our estimate of the allocation of new cigarette excise tax revenues in 2013–14 is shown in Figure 2 (see next page). After backfilling losses in existing tobacco excise tax revenue (described in more detail later), the new cigarette excise tax would generate an estimated $735 million in net revenue in 2013–14 for the purposes described in the measure. The cigarette excise tax increase would generate somewhat lower amounts of revenue each year thereafter, based on our projections of continued declining cigarette consumption.

Effects on Existing Tobacco Excise Tax Revenues. The decline in consumption of cigarettes and other tobacco products caused by this measure would reduce revenues from the

Figure 2

How Estimated Revenue From New Cigarette Tax

Would Be Allocated

(Dollars in Millions)

Allocation

2013–14 Funding

(Full Year)

Estimated Revenue From New Cigarette Tax

$810

Less backfill to Proposition 99,

Proposition 10, General Fund, and Breast

Cancer Fund — -75 a

Estimated Net Revenue

$735

Allocation of Estimated Net Revenue

Research Fund 60% $441

Facilities Fund 15 110

Tobacco Prevention and Cessation Fund 20 147

Law Enforcement Fund 3 22

Committee Account 2 15

a LAO estimate. Backfill amounts would be determined by the Board of Equalization.

existing excise taxes that go to support Propositions 99 and 10 purposes, the General Fund, and the Breast Cancer Fund. The measure provides for the backfill of these losses from revenues raised by the new excise tax. We estimate that the amount of backfill funding needed to comply with this requirement would be about $75 million annually, as shown in Figure 2.

As noted earlier, this measure would have an additional fiscal effect on excise taxes which go to support Proposition 99 purposes. Under current law, any cigarette tax increase triggers an automatic corresponding increase in the taxes on other tobacco products, with the additional revenues going to support Proposition 99 purposes. We estimate that the higher tax on other tobacco products would result in a full-year Proposition 99 revenue gain of about $50 million, beginning in 2013–14.

Effects on State and Local Sales and Use Tax Revenues. Sales and use taxes are levied on a variety of products, including the retail price of tobacco products. The retail price usually includes the cost of all excise taxes. The higher retail price of tobacco products resulting from the new excise tax, therefore, would increase state and local revenue from the sales and use tax on tobacco products. This effect would be offset somewhat by several factors, including lower spending on other products subject to sales and use taxes. On net, we estimate an increase in revenue of about $10 million to $20 million annually.

Effects on Excise Tax Collection. As discussed earlier, the measure would deposit 3 percent of revenues from the new cigarette tax into a Law Enforcement Fund to support state law enforcement efforts. These funds would be used to support increased enforcement efforts to reduce tax evasion, counterfeiting, smuggling, and the unlicensed sales of cigarettes and other tobacco products. The funds would also be used to support efforts to reduce sales of tobacco products to minors. These activities would have an unknown net impact on the amount of revenues collected through excise taxes.

Impact on State and Local Government

Health Care Costs The state and local governments in California incur costs for providing (1) health care 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 those made by this measure that affect the health of the general population—and low-income and uninsured persons and public employees in particular—would affect publicly funded health care costs.

For example, as discussed earlier, this measure would result in a decrease in the consumption of tobacco products. The use of tobacco products has been linked to various adverse health effects by federal health authorities and numerous scientific studies. Thus, this measure would reduce state and local government health care spending on tobacco-related diseases over the long term. This measure would have other fiscal effects that offset these cost savings. For example, the state and local governments would incur future costs for the provision of health care and social services that otherwise would not have occurred as a result of individuals who avoid tobacco-related diseases living longer. Thus, the net fiscal impact of this measure on state and local government costs is unknown.

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VOTE YES ON 29 TO SUPPORT CANCER RESEARCH AND SAVE LIVES.

Prop. 29, the California Cancer Research Act, is based on a simple but powerful idea. It creates a new $1 tobacco tax—PAID ONLY BY THOSE WHO CHOOSE TO SMOKE.

The American Cancer Society, American Heart Association and American Lung Association sponsored this measure because they know that taxing tobacco saves lives. The tobacco companies oppose this measure for the same reason. Big tobacco knows that ninety percent of smokers start as teens.

YES ON PROP. 29 SUPPORTS CANCER RESEARCH. THE MONEY GOES DIRECTLY TO RESEARCH DOCTORS AND SCIENTISTS—POLITICIANS CAN'T TOUCH IT.

Cancer is the world's most deadly killer—smoking is its leading cause. Cancer has touched every family in our state. California's scientists are at the forefront of life-saving research in the detection, treatment, prevention and cure of cancer, heart disease, and other smoking-related illnesses. They're making great strides, but there's much to be done. Prop. 29 generates nearly $600 million for their research—and continues the search for cures.

YES ON PROP. 29 KEEPS KIDS FROM SMOKING—AND SAVES LIVES.

Tobacco companies still spend millions marketing their products—every year, more than 34,000 California kids start smoking. Prop. 29 helps smokers quit and discourages kids from smoking in the first place. An extra $1 tobacco tax might not sound like much, but to a teenager, it could make starting to smoke more trouble than it's worth. Public health experts estimate Prop. 29 will stop 228,000 kids from smoking. And those same experts estimate Prop. 29 will save the lives of 104,000 smokers who quit, sparing the pain and cost of battling cancer, emphysema or heart disease.

WHO OPPOSES PROP. 29? TOBACCO COMPANIES.

They've hired a legion of high-priced lobbyists and political consultants. They're spending to defeat Prop. 29. Why? To protect their profits. Don't be fooled by scare tactics and campaign smoke screens.

READ PROP. 29 FOR YOURSELF!

You'll see that PROP. 29 includes strict safeguards and real accountability. POLITICIANS WON'T DECIDE WHERE THE MONEY GOES—CALIFORNIA RESEARCH DOCTORS AND SCIENTISTS WILL.

Prop. 29 keeps funding decisions in the hands of an independent panel of California's leading research organizations, trusted public health advocates and cancer survivors themselves. Prop. 29 sets aside funds to prevent cigarette smuggling. Prop. 29 requires audits to ensure all funds are spent properly.

AND REMEMBER, IF YOU DON'T SMOKE, YOU DON'T PAY.

No one can say when we'll find a cure for every cancer, but every dollar for research helps bring that day closer. In the few minutes you've spent reading this, someone new was diagnosed with cancer—someone's mother, father, son or daughter—one more family now looking for hope. Yes on Prop. 29 takes $1 wasted on cigarettes and dedicates it to the search for a cure. It could help save the life of someone you love.

SUPPORT CANCER RESEARCH. SAVE LIVES. VOTE YES ON PROP. 29, THE CALIFORNIA CANCER RESEARCH ACT.

DR. CLIFFORD C. EKE, M.D. , President

American Cancer Society, California Division

JANE WARNER , President

American Lung Association in California

DR. RICHARD J. GRAY, M.D. , President

American Heart Association, Western States Affiliates

Everyone supports cancer research, but Prop. 29 is thirteen pages of fine print, loopholes and flaws. It's a proposition boondoggle like the High Speed "Train to Nowhere" Commission.

Californians across the state—taxpayers, doctors, teachers, law enforcement, small businesses and labor—say NO to Prop. 29:

Check the facts yourself:

• Promoted by a career politician, Prop. 29 is an $735 million annual new tax and spending mandate that creates an unaccountable, government bureaucracy filled with political appointees.
• Doesn't require new tax revenue be spent in California to create jobs. Money can be spent out of state or even out of country.
• Provides no new funds to treat cancer patients.
• Spends $125 million annually on overhead, bureaucracy, buildings and real estate—money that could be used for cancer treatment.
• Permits "conflicts of interest" by allowing organizations represented by Commissioners to receive taxpayer funding.
• Allows for-profit corporations to receive $500+ million in taxpayer dollars annually.
• Duplicates existing programs that already spend $6 billion annually on cancer research.
• Establishes another flawed auto-pilot spending mandate like the High Speed Rail Commission—more waste, no taxpayer accountability.
• Prohibits the Governor and Legislature from making changes to the initiative for 15 years, even in the case of fraud or waste.

It's a bad idea to create another commission and give it $735 million annually with no accountability for how it spends the money.

Check the facts at www.ReadForYourself.org, then join us in voting "NO" on Prop. 29.

MIKE GENEST , Former Director

California Department of Finance

MARCY ZWELLING, M.D. , Past President

Los Angeles County Medical Association

TOM BOGETICH , Executive Director (Retired)

California State Board of Education

Everyone supports cancer research, but Proposition 29 is FLAWED.

READ THE FINE PRINT FOR YOURSELF.

Prop. 29:

RAISES TAXES, BUT DOESN'T CLEAN UP SACRAMENTO'S WASTEFUL SPENDING OR HELP BALANCE OUR BUDGET

• California politicians need to live within their means. Instead, a career politician is promoting Prop. 29 to raise taxes by $735 million a year to create another NEW BUREAUCRACY AND SPECIAL INTEREST SPENDING COMMISSION we can't afford.

- We have a $10+ billion deficit and voters are being threatened with cuts to schools or higher taxes. WE CAN'T FUND EXISTING PROGRAMS, YET PROP. 29 RAISES TAXES TO CREATE A WHOLE NEW GOVERNMENT SPENDING PROGRAM. That doesn't make sense. ALLOWS CALIFORNIA TAX DOLLARS TO BE SPENT OUTSIDE OF CALIFORNIA

• Raises nearly $1 billion in new taxes, but allows tax dollars to be spent outside California, even outside the country (Section 30130.53(d)).

- If we're going to RAISE TAXES ON CALIFORNIANS, IT SHOULD BE SPENT IN CALIFORNIA to help create jobs. NEW BUREAUCRACY, MORE POLITICAL APPOINTEES = MORE WASTE

• The Commission, with 6 political appointees, can spend an estimated $15 million on staff salaries and overhead annually, and saddle taxpayers with more pension and healthcare obligations (Section 30130.53(d)(5)).
• Prop. 29 allows spending $110 million annually on buildings and equipment but doesn't require money to be spent with California universities/hospitals—tax money can be given to huge for-profit corporations (Section 30130.53(d)(2)).

- Like High Speed Rail and other Commissions, this BUREAUCRACY GOES ON AND ON. Prop. 29 EXEMPTS the CEO from hiring/salary requirements (Section 30130.54(d)(2)) so the CEO can be paid hundreds of thousands a year and has the power to hire a huge staff. DUPLICATES EXISTING PROGRAMS

- Each year, the federal government spends $6 billion on cancer research and California spends $70 million on tobacco control programs. Prop. 29 duplicates these existing programs. NO ACCOUNTABILITY

• Prop. 29 requires a so-called "annual report," but it's WRITTEN BY THE COMMISSION ITSELF and doesn't require grant money to produce results (Section 30130.54(i)).

- In fact, not even the Governor, Legislature or State Auditor has authority to make changes to the initiative for 15 years, even in the case of fraud or waste (Section 6(b)). THAT'S NOT ACCOUNTABILITY! NOTHING FOR CANCER TREATMENT

- Supporters claim it will help save billions in healthcare costs, but the measure provides NO NEW FUNDING FOR TREATING CANCER PATIENTS (Section 30130.53). CIRCUMVENTS VOTER-APPROVED INITIATIVE, HURTS SCHOOLS

• A California voter-approved Constitutional amendment requires that any new taxes help pay for education, but Prop. 29 exempts itself from this requirement, shortchanging our schools by $300+ million per year (Section 30130.50(c)).
• We shouldn't let a career politician use a loophole to thwart voter-approved initiatives.

"Cancer research is important, but if we're going to spend $735 million a year, we need to have strict controls and make sure our tax dollars are spent in California. Prop. 29 is flawed and deserves a "no" vote." —Marcy Zwelling, M.D. Past President, Los Angeles County Medical Association

Visit: ReadForYourself.org

Vote NO on Proposition 29

TERESA CASAZZA , President

California Taxpayers Association

LA DONNA R. PORTER, M.D. , Former President

Golden State Medical Association

JULIAN CANETE , President

California Hispanic Chambers of Commerce

Every word you just read was from a campaign bought and paid for by the tobacco companies. Check the official state website—the tobacco companies are the ONLY ones spending millions to defeat Prop. 29:

http://cal-access.sos.ca.gov/Campaign/Measures

The tobacco companies declined to sign their message above—but that's not all they're hiding from you. The truth is Prop. 29 works; it gets people to stop smoking, and that hurts Big Tobacco's profits. Please, read Prop. 29 for yourself.

PROP. 29 SAVES LIVES—The American Cancer Society, American Lung Association and American Heart Association wrote Prop. 29 because this $1 per pack tobacco tax saves 104,000 lives.

PROP. 29 HELPS CALIFORNIA RESEARCH CENTERS—The University of California and the California Medical Association support Prop. 29 because it raises $585 million per year for research and will help California's best research institutions find cures to cancer, heart and lung disease.

PROP. 29 PROTECTS SCHOOLS AND KIDS—California's Superintendent of Public Instruction and the California State Parent Teachers Association support Prop. 29 because it stops over 200,000 children from ever becoming smokers.

PROP. 29 REQUIRES STRONG FISCAL ACCOUNTABILITY—A Citizens Oversight Committee ensures funds go directly to doctors and scientists. Strict accountability laws prohibit conflicts of interest, require annual independent audits, and cap administrative costs at less than 2% (Section 30130.54). These accountability laws are backed up by stiff criminal penalties for violations (Section 30130.56).

THE TRUTH IS PROP. 29 SAVES LIVES, BUT ONLY WITH A YES VOTE.

www.CaliforniansForACure.org

DR. BETH Y. KARLAN, M.D. , Director

Women's Cancer Program, Oschin Comprehensive Cancer

Institute, Cedars-Sinai Medical Center

ELIZABETH BLACKBURN, PH.D ,

Nobel Laureate in Medicine

DR. BALAZS "ERNIE" BODAI, M.D.

Founder of the Breast Cancer Stamp

Arguments printed on this page are the opinions of the authors and have not been checked for accuracy by any official agency.

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