McGeorge School of Law

Proposition 86

Proposition 86:
Tax on Cigarettes

By

Nancy Williamson
JD, McGeorge School of Law, University of the Pacific
to be conferred December, 2006
MPA, California State University San Jose, Public Administration, 2002
B.A., California State University, Social Work, 1991

 

Copyright © 2006 by University of the McGeorge School of Law


Table of Contents

I. Executive Summary
II. The Law
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion


I. Executive Summary

Traditionally, in the United States, cigarettes and tobacco products have been subject to excise taxes. These taxes are traditionally known as “sin taxes” because they are designed to reduce consumption of harmful products that pose a cost to society as a result of their use.

California has instituted tobacco taxes in the past; however, Proposition 86 will dramatically increase the cost of cigarettes and tobacco products in California. Cigarettes are currently taxed at 87 cents per pack, as a result of the passage of Proposition 99 and Proposition 10. However, Proposition 86 will impose a 13 cent tax on each cigarette sold in California, which will increase the amount of tax on a pack of cigarettes to $2.60. This will increase the total amount of tax paid on a pack of cigarettes to $3.47 per package. As a result, an average pack of cigarettes will cost approximately $6.55, and a carton will cost over $50.00. If approved, this tax will be levied commencing January 2007. Additionally, other tobacco products, such as, cigars, chewing tobacco, pipe tobacco, and, snuff will also be subject to a tax that is proportionate to the tax levied on cigarettes. The funds raised will be placed in the Tobacco Tax Fund of 2006. It is estimated that approximately 2.1 billion dollars will be raised by fiscal year 2007-2008. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006).

The majority of the funds raised by Proposition 86 will be used to provide emergency health care for uninsured patients, health insurance coverage for children, and, tobacco control research. Additionally, a portion of the funds will be used to conduct research on cancer-related diseases, heart disease, stroke, asthma, and obesity.

II. The Law

A. Existing Law

In 1988, the voters approved Proposition 99 which instituted Part 13, Article 2 of the Revenue and Taxation Code. This Proposition created the Cigarette and Tobacco Products Surtax Fund, which imposed a 37 cent tax on each pack of cigarettes. The taxes raised by this Proposition were used to treat tobacco-related diseases, and fund tobacco-related health and education programs.

In 1998, the voters approved Proposition 10 which instituted Revenue and Taxation Code 30131, which levied a tax of 50 cents per pack of cigarettes. Additionally, Health and Safety Code Section 130100 created the California Children and Families Act of 1998, and mandated the creation of the California Children and Families First Trust Fund. The purpose of this program was to implement programs that would reduce the use of tobacco, particularly among teenagers and young adults. As a result, commissions in each county were created to provide services to children. The goal was to prevent children from using tobacco, educate pregnant women about the dangers of secondhand smoke to children, provide tobacco prevention services, and, conduct research on early childhood development.

As a result of two previous tobacco taxes, a pack of cigarettes are currently taxed at a rate of 87 cents per pack. Currently, of that 87 cents per pack of cigarettes sold in California, 50 cents is used for early child development as mandated by Proposition 10 and 25 cents is used for tobacco education, prevention, tobacco disease research, and health care services for uninsured persons. Additionally, 10 cents is put in the general fund, and 2 cents is used to fund research of breast cancer and provide breast cancer screening for uninsured women. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006)

B. Effects of Proposition 86

Proposition 86 would amend the State Constitution, mandate allocation of the revenues raised, and amend sections of the Health and Safety Code, Revenue and Taxation Code, and, the Insurance Code.

1. The Constitutional Effects of Proposition 86

The enactment of Proposition 86 would add Section 14 to Article XIII B of the Constitution. This provision of the Constitution would state that “[t]he tax created by the Tobacco Tax Act of 2006 and the revenue derived therefrom shall not be considered General Fund Revenues for the purposes of Section 8 of Article XVI.” This Constitutional amendment exempts any funds generated by the tobacco tax from being diverted to the general fund. Therefore, this fund would be separate from the general fund and earmarked for use in the accounts and sub-accounts as specified in Figure 1 attached to the report prepared by the Legislative Analyst. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006).

2. Proposition 86 amends sections of the Revenue and Taxation Code, Health and Safety Code, and, Insurance Code

Chapter 2 of Part 13 of Division 2 of the Revenue and Taxation Code will be enacted and entitled The Tobacco Tax of 2006 Trust Fund (hereinafter “Tobacco Trust Fund”). This tax will go into effect on 12:01 a.m. on January 1, 2007, and will institute an additional tax of thirteen cents per cigarette. Pursuant to section 30132.1(c), each dealer, wholesaler, and, distributor will be required to conduct an inventory, and pay the tax on all cigarettes and tobacco products in their inventory. The State Board of Equalization will enforce the provisions of the tobacco tax, and provide an oversight function to ensure that the taxes raised by the Tobacco Trust Fund are properly allocated. It is estimated that by the end of the first full year of funding in 2007-2008, approximately 2.1 billion dollars will have been raised by this tobacco tax. Id.

The funds deposited into the Tobacco Trust Fund will be allocated to four different accounts. A portion of these funds will be used to backfill the California Children and Families First Trust Fund created by Proposition 10. It is estimated that as a result of Proposition 86 the sale of tobacco products will decrease. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006). As a result in this decrease in sales, the funding that is currently provided for child development programs pursuant to Proposition 10 will decrease. Id. Proposition 86 is designed to ensure that this program receives sufficient funds so that these programs will not be adversely affected. Id. Therefore, there is a provision in Proposition 86 to provide funding for this program. Id. It is estimated that by the full year of funding in 2007-2008, the recipients of Proposition 10 funds, the California Children and Families First Trust Fund will receive approximately $180 million. Id.

The remaining funds will be allocated to three main accounts and numerous sub-accounts. The main accounts are entitled the Health Treatment and Services Account, Health Maintenance and Disease Prevention Account, and, Health and Disease Research Account as specified in Figure 1. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006).

The Health Treatment and Services Account

It is estimated that $1,015 million will be allocated to the Health Treatment and Services Account during the fiscal year 2007-2008. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006). The majority of these funds, approximately $756 million, will be allocated to hospital emergency and trauma care. Id. This accounts for approximately 74.5% of the total funds in this account. Id. The remaining 25.5% or $259 million will be used for nursing education programs, nonprofit community clinics, reimbursement of emergency care physicians, tobacco cessation services, prostate cancer treatment, and college loan repayment program for doctors serving low-income areas or under served communities. Id.

The Health Maintenance and Disease Prevention Account

The Health Maintenance and Disease Prevention Account will receive approximately $810 million during the fiscal year 2007-2008. The majority of those funds, approximately $367 million dollars, which is approximately 45% of the total funds will be used for children’s health care coverage. Id. The remaining funds which comprise approximately 55% or $443 million will be used for heart disease and stroke programs, breast and cervical cancer programs, obesity, diabetes, and chronic diseases programs, tobacco control media campaigns, tobacco control competitive grants programs, asthma programs, colorectal cancer programs, tobacco prevention education programs, tobacco control enforcement activities, and, evaluation of tobacco control programs. Id.

The Health and Disease Research Account

The last account is the Health and Disease Research Account. It is estimated that this account will receive approximately $95 million in fiscal year 2007-2008. Id. Approximately $32 million or 34% of these funds will be used for tobacco control research. Id. The next largest amount will be allocated to breast cancer research which will receive $24 million dollars. Id. The remaining funds consisting of $39 million dollars will be allocated to cancer research, cancer registry, and lung cancer research. Id.

This measure will institute Health and Safety Code § 104195 creating the Colorectal Cancer Prevention program. Uninsured and under insured persons will receive screening for and treatment of this disease. Additionally, this initiative will add section 104142 to the Health and Safety Code which will provide management of programs designed to prevent risk factors for heart disease and stroke, as well as information and treatment for those at risk.

Proposition 86 will also provide additional funding for children who are uninsured in California. Insurance Code § 12693.99 will be enacted to provide all children under the age of nineteen with health insurance if the household income is up to and including 300 percent of the federal poverty level, and residency requirements are met. These children will be enrolled in the Healthy Families program. The Healthy Kids Oversight and Accountability Commission will monitor this program for effectiveness. The Commission will consist of fifteen members who have a health service background, and will represent a broad spectrum ranging from consumers, consumer advocates, health care providers, and, representatives from health care plans.

Article 6 of the Health and Safety Code § 1246 will be added to specify the amount of funds that will be allocated to community clinics. This section will allow funds to be allocated to non-profit clinics which are providing smoking cessation programs and other programs related to education regarding the use of tobacco products.

Funding for hospitals will be implemented using the standards set forth in Health and Safety Code § 1797.300. Each hospital will receive funds according to their needs. Hospitals must submit reports regarding the number of charity care costs incurred, the number of bad-debt costs, and, the number of indigent patients that received services. These hospitals are subject to an audit. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006).

III. Drafting Issues

A. Severability

Proposition 86 contains a severability clause which may be used in the case that Proposition 86 is challenged in court. Specifically, Section 13, of Proposition 86 states: “If any provision of this Act, or part thereof, is for any reason held to be invalid or unconstitutional, the remaining provisions shall not be affected, but shall remain in full force and effect, and to this end the provisions of this Act are severable.”

Severability is determined by implementing a three-part test set forth in the case of People’s Advocate, Inc. v. Superior Court, 181 Cal.App.3d 316 (1986). The first part of the test asks whether the language can be mechanically severable so that “...the valid and invalid parts can be separated by paragraph, sentence, clause, phrase, or even single words.” Id. at 330. The second question is whether after the statute has been severed “...the remainder...is complete in itself...” Id. at 331. The remaining question is whether “...the remainder would have been adopted by the legislative body had [it] foreseen the partial invalidation of the statute.” Id. at 332.

It would be difficult to sever any parts of Proposition 86. Proposition 86 was designed to decrease the number of individuals who smoke, particularly youth smokers. The means by which it seeks to accomplish this goal is by increasing the rate at which tobacco products are taxed. If Proposition 86 is adopted, several code sections will be implemented mandating research and health care services. These programs are all dependent on the funds that are obtained as result of the tobacco tax, which are separate and apart from the general fund. All of the parts of the Proposition are dependent on each other, as funding is mandated from a particular source. Therefore, it would be impossible to sever them, as each depends on the other. Severance would fail the functional test because if one portion of the Proposition were deemed unconstitutional, the other parts would not be able to stand on their own because they are each interconnected.

IV. Constitutional Issues

A. Single-Subject Rule

The California Constitution Article II § 8(d) invalidates any initiative that addresses more than one subject. The court defined this requirement as the “reasonably germane” test as set forth in Senate v. Jones, 21 Cal.4th 1142 (1999). In that case, the Supreme Court stated that the “reasonably germane” test is met when “...the various provisions are reasonably related to a common them or purpose.” Id. at 1157. Additionally, the court found that “...the single-subject provision does not require that each of the provisions of a measure effectively interlock in a functional relationship.” Id. at 1157. However, there must be a common theme or purpose. The rationale for this rule is to decrease the possibility of voter confusion, to only have initiatives on the ballot that deal with one particular issue, and, to ensure that if there are two unrelated matters that they are presented as two different initiatives to the voters so that “log rolling” (the art of coupling a popular issue with a less popular one in an effort to either bolster support for both or find success for the less popular on the coattails of the more popular issue) is prevented.

The two former Propositions which raised the tobacco tax in California were both subject to single-subject rule challenges. It is possible that given the amendments and additions made to various California statutes pursuant to Proposition 86, it too would be subject to such a challenge.

When Proposition 99 was approved by the voters in 1988, there was a single-subject rule challenge. Kennedy Wholesale, Inc. v. State Bd. Of Equalization, 53 Cal.3d 253 (1991). Proposition 99 allocated funds to provide medical care for indigent patients, tobacco-related school and community health programs, fire prevention programs, environmental conservation, and, improvement of recreational areas. Opponents argued that the single-subject rule was violated because “...the measure does not guarantee that every expenditure from the fund will be related to tobacco use.” Id. at 254. It was argued that there was a lack of correlation, as some patients who would receive medical care may not have had smoking-related conditions. The California Supreme Court held that the measure did not violate the single-subject rule because it directed some revenues to tobacco-related programs. As the court stated, “We do not believe the voters’ failure to require even greater precision invalidates the measure, since it is well established that an initiative may have “collateral effects” without violating the single-subject rule.” Id. at. 254.

Similarly, after Proposition 10 was enacted in 1998, there was a legal challenge regarding the single-subject rule. California Association of Retail Tobacconists (“CART”) v. State of California, 109 Cal.App.4th 792 (2003). In that case, plaintiff argued that Proposition 10 violated the single-subject rule because it combined the concern for early childhood development and the use of a tobacco tax. Plaintiffs argued that those two matters are sufficiently dissimilar and do not meet single-subject requirements. However, the Supreme Court found that tobacco use and child development are sufficiently related. The Court explained that the program targeted, among other groups, pregnant women and the effects of secondhand smoke on children. Since the tax decreased the likelihood that pregnant women and parents would smoke, it sought to improve the health and welfare of children by making it is less likely that the children would be exposed to secondhand smoke. Additionally, it also targeted early childhood development and the prevention of children smoking. Therefore, there was a sufficient correlation between its components to justify the implementation of Proposition 10.

Given the case history, it appears more likely than not that opponents will file a single-subject challenge. However, given the precedent of the court which sets a liberal standard in the “reasonably germane” test, it is likely that Proposition 86 will withstand such a challenge. The precedent from the Kennedy court shows that the court is willing to allow an initiative which has collateral effects. Kennedy Wholesale, Inc., 53 Cal.3d 253. Proposition 86 causes collateral effects, such as providing health care coverage, and research and treatment for some non-tobacco related diseases. However, it appears that these are quite arguably tobacco related effects, and probably sufficient to withstand this type of challenge.

Similarly, in the California Association of Retail Tobacconists case, the court found that there was enough of a link between early childhood development and the affects of secondhand smoke. California Association of Retail Tobacconists, 109 Cal.App.4th 792. Moreover, with Proposition 86, while it is arguable that a majority of the funds go to things other than smoking cessation, there are other programs that are directly or indirectly related to tobacco use that will benefit from the tobacco tax. For example, a large portion of the monies go to hospitals treating patients for tobacco-related health problems. Additionally, a substantial portion of these funds will be used to treat cancers related to tobacco use. While there are a variety of programs that will benefit from this measure, there is a sufficient link between improving the health of California’s citizens and the means used to achieve this objective.

V. Public Policy Considerations

A. Proponents’ Argument in Favor of Proposition 86

Proponents cite the study issued by the Tobacco Control Section of the California Department of Health Services (“DHS”) on May 26, 2006. The DHS estimates that tobacco taxes will prevent 180,000 tobacco-related deaths among children, reduce tobacco-related deaths for adults by 120,000, prevent 700,000 children from becoming smokers when they are adults, reduce the number of cigarettes sold each year by 312 million dollars, and, decrease the cost of long-term health care by 16.5 billion dollars. Yes on 86, Stop Big Tobacco, Information and Analysis,http://www.yesprop86.org/pdf/Tax_Impact_Effects.pdf (accessed Oct. 22, 2006).

1. Proposition 86 will result in a reduction in the number of adult and youth smokers

Maria Robles, a spokesperson for the Yes on 86 campaign stresses the importance of stopping our youth from becoming addicted to tobacco in the first place, so that tobacco use does not turn into a lifelong habit resulting in serious medical problems. Telephone Interview with Maria Robles, Yes on 86 Campaign, (October 6, 2006)(Notes on file with the McGeorge School of Law, University of the Pacific Capital Center for Government Law and Policy).

Proponents also cite the fact that youth smokers represent the largest number of smokers in California. In fact, DHS released a report on October 2, 2006 regarding smoking rates among Californians. California Department of Health Services, Tobacco Control Section, August, 2006. In that report, DHS found that there has been an increase in youth smokers. There was an increase in high school smoking from 13.2% in 2004 to 15.4% in 2006. Id. Additionally, middle schools students who smoke have increased from 3.9% in 2004 to 6.1% in 2006. Id. The report also found that illegal sales of tobacco products to minors increased from 10.2% in 2005 to 13.2% in 2006. Id. Proponents argue that this increase is caused by increased advertising in media that is geared to youth, and, the fact that oftentimes youth are able to buy cigarettes at donut shops and convenience stores, even though they are underage. Telephone Interview with Maria Robles, Yes on 86 Campaign.

Proponents of Proposition 86 argue that the best way to prevent minors from smoking is to make it cost prohibitive. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006). One study concluded that when tobacco prices were increased by ten percent that tobacco use decreased by four percent. Tobacco Use: The Impact of Prices, 30 J.L. Med. & Ethics 88 (2002). This same study concluded that a ten percent price increase will decrease the number of teenage and young adult smokers by six or seven percent. Id. at 88.

Proponents assert that taxing tobacco products and making them cost prohibitive are the most effective way to decrease smoking among our youth. Yes on 86, Stop Big Tobacco

2. Proposition 86 will improve our health system and provide health care coverage for minors

Proponents argue that the use of tobacco products causes numerous health problems that burden our medical system. Proponents argue that a tobacco tax is necessary to improve our health care system which is adversely affected by the use of tobacco products. Id.. The number of emergency rooms has been steadily decreasing since 1996, and funds are needed to provide health care services. Id. Proposition 86 requires that hospitals coordinate services. Yes on 86. Hospitals that receive Tobacco Trust funds will be required to establish a regional plan and coordinate services. Id. After the implementation of these regional plans by hospitals, this will ensure that under-served communities will receive greater access to health services because there will be coordination among hospitals. Id. Additionally, a portion of these funds will go towards the Healthy Family Plan which provides health coverage for uninsured children under the age of nineteen. This will provide increased health care coverage of children who have not had access to healthcare coverage in the past. Yes on 86, Stop Big Tobacco, http://www.yesprop86.com/pdf/Improving%20the%20Health%20of%20CA%20Children.pdf.

Proponents assert that this tax will improve our emergency rooms services and health care system, and ensure that all children will have health care coverage.

3. Proposition 86 will provide needed funds for health programs and medical research

Proponents assert that Proposition 86 will decrease smoking because a portion of the tobacco tax will be spent on advertisements regarding the dangers of smoking and tobacco use. Proponents also argue that this measure will provide needed funds to research cancer-related diseases, heart disease, stroke, asthma, obesity, diabetes, and chronic diseases.

4. Major contributors to the Yes on 86 campaign.

The Yes on 86 campaign raised $12,208,512.95 in campaign contributions. California Secretary of State, Cal-Access ( Secretary of State, 2006). The largest contributors to this campaign have been the American Cancer Society, American Heart Association, American Lung Association, and, Tobacco-Free Kids Action Fund. Id. The California Association of Hospital and Health Systems, which represents 500 hospitals and health care programs in California has contributed over $2,000,000.00. Id. The remainder of the funds have been donated by health care clinics located throughout the state, religious organizations, and, other community organizations. Id. According to the Yes on 86 campaign, there are over 400 supporters who have either donated money or volunteered their time. Telephone Interview with Maria Robles, Yes on 86 Campaign, (October 6, 2006).

B. Opponents’ Argument Against Proposition 86

1. Cigarettes and tobacco products will be obtained in other ways which will lead to a thriving black market and increased crime.

Opponents, such as Charles Janigian, President of the California Association of Retail Tobacconists argue that Proposition 86 will not decrease the number of people who smoke. Telephone Interview with Charles Janigian, President of the California Association of Retail Tobacconists (September 11, 2006)(Notes on file with the McGeorge School of Law, University of the Pacific Capital Center for Government Law and Policy). Opponents assert that while this tax may decrease the number of cigarettes sold in stores, it will not decrease the amount of tobacco products sold or consumed because tobacco products will merely be obtained in different ways. Id . Opponents argue that people will buy tobacco products via the internet, make purchases across state lines, or buy tobacco products sold on Native American Indian lands. Id. The opponents argue that this law will have very little to do with decreasing the actual number of adult smokers or youth smokers in California. Id.

Additionally, opponents argue that Proposition 86 will lead to the creation of a thriving black market. No on 86-Stop the $2 Billion Tax Hike. This black market will be created because there will be a demand for cheaper tobacco products outside of the retail stream. Id. This will lead to an underground market selling tobacco products that are not subject to regulatory oversight. Id. Opponents are certain that the amount of crime, corruption, and, gang activity will substantially increase. Id.

2. Proposition 86 will not prevent smoking.

Opponents argue that this Proposition has little to do with preventing people from

smoking, but rather provides funding for numerous programs not related to tobacco use. Opponents argue that this is an unfair tax because it requires a minority of citizens to improve our healthcare systems, as health care systems are slated to receive approximately 52.75% of the total revenue generated by the tobacco tax. California Official Voter Information Guide, Analysis of Proposition 86 ( Secretary of State, 2006). Opponents argue that tobacco users are providing the funds for health care and a number of other types of services, while only a small percentage of tax funds that will be used for tobacco cessation services. No on 86-Stop the $2 Billion Tax Hike. Opponents argue that the main purpose of Proposition 86 is to improve our health care system which is unrelated to the use of tobacco products. Id. However, opponents do not argue that the health care system needs to be improved, but that a tobacco tax is the wrong way to achieve this goal. Opponents opine that the appropriate way to achieve this goal is to introduce an initiative designed to improve our health care system. The opponents argue that Proposition 86 has little to do with decreasing the number of smokers in California, and that the main purpose is to increase hospital funding. Id.

3. Proposition 86 will provide funding for a variety of programs, but there will be very little accountability.

California Association of Retail Tobacconists (“CART”) argues that there will be little accountability if Proposition 86 is approved, and that the same mismanagement that occurred as a result of the passage of Proposition 10 will occur if Proposition 86 is instituted. Telephone Interview with Charles Janigian, President of the California Association of Retail Tobacconists (September 11, 2006). After the passage of Proposition 10, funds were allocated by the State Controller and distributed to each county. However, problems arose when funds were given to different county agencies without sufficient oversight. Id. Mr. Janigian asserts that the Proposition 86 spending will also be too discretionary, and will be spent by counties with very little legislative or executive oversight. Id.

4. Proposition 86 will adversely affect small businesses.

California Association of Retail Tobacconists asserts that the tobacco tax will be disastrous for small businesses. Telephone Interview with Charles Janigian, President of the California Association of Retail Tobacconists (September 11, 2006). If this Proposition is approved by the voters, it will go into effect on January 1, 2007. Pursuant to the Revenue and Taxation Code Section 30132.1(c), all dealers or wholesalers must prepare an accounting of all tobacco products in stock. After a complete inventory has been prepared, the tax on said tobacco products will be due and payable immediately. After speaking with a representative of the State Board of Equalization, it was confirmed that this is the process and that the same procedure occurred after the passage of Proposition 10. CART and other opponents argue that this will pose a tremendous hardship on businesses, and may lead to the demise of numerous small businesses because they will be unable to afford these high taxes. Id.

5. Major contributors to the No on 86 Campaign.

The campaign to defeat Proposition 86 has been funded, in large part, by the two largest cigarette manufacturers in the United States, namely RJ Reynolds and Phillip Morris. RJ Reynolds has contributed $19,950,790.53, and Phillip Morris has contributed $27,603,189.57. Collectively, these corporations have contributed approximately $47,553,980.10. California Secretary of State, Cal-Access ( Secretary of State, 2006). The next largest contributor is the Cigar Association of America, which has contributed $200,000. Id. Additionally, there were large donations from companies that manufacture packaging for consumer products, warehouse stores for retailers, the California Republican Party, match manufacturers, and, manufacturers of smokeless tobacco products. Id. The aforementioned contributors comprise the majority of the funds received by the campaign against Proposition 86; however, there are numerous smaller donations that have been made by small retail establishments that sell cigarettes, cigars, and, smokeless tobacco. Id.

VI. Conclusion

The Tobacco Tax act of 2006 will create an unprecedented increase in the price of cigarettes and tobacco products in California. If this initiative is approved by the voters, California will have the highest tobacco tax in the country. However, as a result of this tax, services that are needed, such as health care for children and medical services for uninsured and indigent individuals will be provided. The voters must decide whether a tobacco tax is the appropriate means to use to provide funding for these crucial programs and services.