Background: Proposition 86
In recent years, tobacco taxes have become enormously popular tools for deterring smoking (they are particularly effective at getting price-sensitive teens to cut back) and boosting state revenues. In the past four years, 41 states, the District of Columbia, and Puerto Rico have increased cigarette taxes.
Rhode Island currently has the highest state tobacco tax in the nation, at a hefty $2.46 per pack of cigarettes. But if California voters approve Proposition 86 on the November ballot, California will surpass Rhode Island and have the nation’s largest state tobacco tax to date: $3.47 per pack, or about $0.17 a cigarette.
What is Proposition 86?
The Tobacco Tax Act of 2006 proposes to raise California’s state cigarette tax by $2.60 per pack and would earmark revenue from the tax for several public health goals, including widespread children’s health insurance, improved emergency care, tobacco prevention programs, and chronic disease research.
If passed, the Act—authored by a diverse group of health care organizations—will go into effect on January 1, 2007 and raise the average price of a pack of cigarettes in California to $6.55. Because state law requires that taxes on all tobacco products be raised following an increase in state cigarette taxes, Prop. 86 will also increase the cost of non-cigarette tobacco products.
Revenue from the tax—projected at roughly $2.1 billion in 2007—will fund a number of specified health objectives in three categories: treatment, prevention, and research. It will also be used to “backfill” Proposition 10 programs. Prop. 10, the California Children and Families First Act, was passed in 1998 and placed a 50-cent per pack tax on cigarettes to fund early childhood development programs. If the current tobacco tax hike passes, Prop. 10 program funding will likely fall short due to declining cigarette sales.
Tobacco taxes in California
California voters have twice approved tobacco tax initiatives in relatively recent history, and the state’s tobacco taxes currently raise about $1 billion per year. Prior to approving Prop. 10, voters enacted Prop. 99, the Tobacco Tax and Health Protection Act, in 1988. Prop. 99 placed a 25-cent per pack tax on cigarettes and earmarked revenue for environmental and health care programs, including the California Department of Health Services Tobacco Control Program.
This program—one of the biggest anti-tobacco interventions worldwide—has been generally successful. Since its passage, smoking rates in California have steadily declined, from close to 23 percent in 1998 to 14 percent today. California now has the second-lowest rate of adult smoking in the nation, following Utah, and one of the lowest rates of youth smoking (roughly 13 percent of California youth smoke; by comparison, 21.7 percent of high school students smoke nationwide). Tobacco-related cancers have also dropped dramatically statewide.
In the wake of recent tobacco tax hikes across the country, California’s tobacco tax, currently 87 cents per pack, now ranks 23rd in the nation. And California taxpayers still shoulder an estimated $8.6 billion annually in smoking-related health costs. Smoking remains the top cause of preventable death and disease in the state, and proponents have concluded that more can, and should, be done.
But while tobacco taxes have been popular in California and nationwide, critics argue that such taxes are inherently unfair. Because they burden smokers—a lower income group compared to nonsmokers—with an entire state’s public health costs, they unfairly target the poor and force smokers to subsidize the needs of nonsmokers.
Opponents argue that tobacco taxes have also been shown to increase crime, by leading to increased internet and black-market sales of cigarettes, as well as widespread smuggling.
How did Prop. 86 come to be?
The Tobacco Tax Act of 2006 began in 2005 as two separate ballot initiatives, one proposed by a group of children’s health advocates and the other by a group of health care associations, including the American Cancer Society, the California Hospital Association, the American Heart Association, and the American Lung Association of California.
Earlier that year, the children’s advocacy groups had worked with State Senator Martha Escutia and Assembly Members Wilma Chan and Dario Frommer to author AB 772, which would have established a program to make health coverage available to all children in California. The bill passed both houses but was vetoed by Governor Schwarzenegger, citing cost concerns, in October 2005.
Frustrated by their legislative failures, the children’s advocacy groups—including Children Now, PICO California, and the Children’s Partnership—decided to join forces with the health care groups, which were already at work on an initiative for a new tobacco tax to increase funds for emergency care, nursing education, chronic disease treatment and research, and tobacco control.
Ultimately, more than a dozen children’s advocacy and health care organizations decided to cooperate, forming the Coalition for a Healthy California.
With Prop. 86, the coalition aims to provide health coverage for all California children, tackle California’s nursing shortage and declining state of emergency care, and provide funds for a host of additional public health aims, from curbing smoking to better detection and treatment of prostate and breast cancer.
The California Hospital Association, the California division of the American Cancer Society, the American Heart Association, and the American Lung Association of California provided the bulk of funding required for the initiative process. The coalition has also depended heavily on volunteers, who spent the spring of 2006 collecting 200,000 signatures, bringing the initiative’s total to 1.1 million signatures, hundreds of thousands more than were necessary to put the measure on the November ballot.
Prop. 86 spokesperson Maria Robles, R.N.,concedes that the initiative does not offer long-term solutions to the problems of providing affordable, comprehensive health care to children or keeping hospital emergency rooms open.
“No one can do that with an initiative,” she says. “But our concern is to improve the health of Californians today, in the short term. It’s about saving lives.”
But opponents argue that the short-term view of the proposition is troubling; because the tax will lead to declining smoking rates, it won’t provide a sustainable source of revenue in the long term.
Jerry Azevedo, a spokesperson for Californians Against Unaccountable Taxes, also says that the proposition is somewhat misleading, in that revenue from the tax goes largely to hospitals—and not to improving smokers’ health directly.
“Less than ten percent of the tax revenue goes to help smokers quit or stop kids from starting” to smoke, Azevedo says.
Opponents add that increased taxes of any sort are bad for the state economy—which is why Governor Arnold Schwarzenegger is also urging voters to reject the proposition, says his campaign spokesperson Julie Soderlund.
Distribution of new tax revenues
Revenue from the tax—projected by the coalition and the Legislative Analyst’s Office to be $2.1 billion in the first year—would be placed in a Tobacco Tax of 2006 Trust Fund. The LAO estimates that the tax would raise “slightly declining amounts of revenues” in subsequent years.
Coalition member Wendy Lazarus, founder and co-president of The Children’s Partnership, predicts that because first-year revenues would far exceed first-year costs, the tax will provide ample funds to expand health care coverage for children for roughly ten years. After that time, the tax would no longer be sufficient to provide coverage as revenue diminished due to decreasing smoking rates, and the number of children requesting coverage increased.
After providing backfill funds for Prop. 10 programs at an estimated cost of roughly $170 million, tax revenues would be divided between treatment, prevention, and research programs. Money from the fund would flow to state agencies, cities, counties, schools and school districts, health departments, and local law enforcement agencies to support qualified programs.
More than half (52.75 percent) of the annual revenue ($1.1 billion) is earmarked for treatment-related concerns. The majority of this budget, $758 million, would go toward improving hospital emergency care services. The remainder would go toward improving nursing education ($92 million); providing funds for emergency physicians ($66 million) and community clinics ($58 million); and providing prostate cancer treatment ($18 million) and smoking cessation services ($18 million).
Slightly over 42 percent of the annual revenue, or $891 million, is earmarked for prevention efforts, including $371 million for children’s health insurance. Funds would also support programs to prevent chronic diseases, including cancer, heart disease, and asthma ($267 million) and improve tobacco education, prevention, and law enforcement ($177 million).
The final 5 percent of revenue ($96.5 million) would be allocated for research on health and disease, including tobacco-related diseases such as heart disease, lung disease, and cancer. Funds would also support a cancer registry to track cancer cases throughout the state.
The Act includes strict clauses to ensure that funds are not used for any purposes other than those specified by the Act. It also calls for the formation of several oversight committees and regular audits, and requires California’s Department of Health to publish a publicly available report detailing programs that received funding through the measure.
The health arguments
Proponents of the Tobacco Tax Act argue that the tax—in addition to providing much-needed funds for public health programs—would curb smoking even further in California, especially among teens.
“The impact of any increase in the cost of cigarettes is strongest among teens,” says Eric Lindblom, director for policy research with the Campaign for Tobacco-Free Kids in Washington, D.C. “A 10 percent increase in price reduces the percentage of kids that smoke by 6-7 percent, and reduces the number of packs smoked by kids by 12-13 percent,” he says.
Proponents argue that over time, the tax would prevent more than 700,000 children from becoming smokers. (Currently, an estimated 50,000 children in California take up smoking each year.)
Tobacco tax hikes have a similar though less profound effect on adults who smoke. Immediately following cigarette tax increases in Montana and Michigan, calls to smoking cessation hotlines increased five- and six-fold respectively. The taxes have been shown to reduce adult smoking by about 1-2 percent on average, although in the year following Washington state’s 60-cent per pack cigarette tax hike in 2002, adult smoking declined 3 percent.
Prop. 86 wouldn’t curb smoking through price effects alone, however. The initiative would also allocate funds for tobacco-related disease research, anti-tobacco campaigns and programs, and agencies responsible for enforcing laws regulating the sale of tobacco products to minors.
The initiative’s supporters estimate that all told, Prop. 86 could encourage more than half a million California smokers to quit and prevent roughly 300,000 deaths attributable to smoking.
Some proponents argue that the health benefits make the tobacco tax both fair and effective.
“Taxpayers are paying the cost of smoking right now—about $860 dollars per family [per year], whether they smoke or not,” says Kris Deutschman, media spokesperson for the Prop. 86 campaign, referring to the burden of smokers’ health costs that are often borne by the state, and ultimately, taxpayers. “This is one way to offset that,” she adds, “and it’s a purely voluntary tax.”
Prop. 86 would also address non-smoking related diseases. Revenue would support basic research into cervical, colorectal, and prostate cancer, heart disease, stroke, obesity, and lung diseases, including asthma. The measure would also add about $80 million per year to state funding for breast cancer research and early detection. (Currently, 2 cents per pack of cigarettes sold in California go toward the Breast Cancer Fund, established in 1993. With decreasing pack sales, this revenue would decline but be more than made up for by Prop. 86 revenue, according to the Legislative Analyst’s Office.)
Revenue would also be allotted to reimburse physicians and provide funding for community clinics that serve uninsured patients at a loss.
The initiative also aims to address California’s nursing shortage (the state currently has one of the lowest nurse-patient ratios in the nation). Prop. 86 would double the number of nursing school graduates from 6,000 per year to 12,000. Revenue from the tax would be used, in part, to create new nursing school programs and enlarge and improve existing ones.
By reducing overall smoking and its associated illnesses, and improving care, the Coalition also estimates that California could save close to $16.5 billion in long-term health costs if Prop. 86 passes. (The figure comes from a California Department of Health Services analysis of the number of tobacco-related illnesses and deaths that would be prevented by the tax.)
Insuring every child
By expanding children’s health insurance, proponents argue that in the long run, the Act would save the state not only costs associated with smoking but also costs associated with lack of health coverage among children.
Insured children get better overall health care and are far less likely to rely on emergency room services for routine care, says Lazarus of The Children’s Partnership; they also miss less school due to illness.
Ten percent of children in California—800,000 kids—currently do not have health insurance. Prop. 86 supporters say that the initiative offers an immediate and surefire plan to offer affordable health insurance to all of California’s children, regardless of their family income or immigration status. With the $371 million in revenue that the Act would earmark for children’s health coverage, the state would be able to offer insurance to many more of California’s uninsured youth under 19 years of age.
Many children from poor families now qualify for health insurance coverage through state Medi-Cal (California’s federal Medicaid program) or Healthy Family programs, or through county programs designed to cover children whose family income is too high to qualify for state programs. But income guidelines mean that hundreds of thousands of children are ineligible for state coverage, and waiting lists for county programs are often long. “Nonqualified aliens” are also ineligible for publicly-financed coverage, except in rare cases.
Most of the funds allocated for children’s health insurance through the Tobacco Tax Act would be used to expand Healthy Families to cover children currently ineligible for the program. The expanded Healthy Families program would cover two new groups: children with family income between 250 and 300 percent of the federal poverty level (FPL for a family of four is currently $20,000), and those legal and undocumented immigrants whose family income is up to 300 percent of FPL. (Healthy Families is currently available to children whose family income is between 133 and 250 percent of FPL, but the program does not cover undocumented children.)
Children enrolled in Healthy Families currently receive coverage for doctor visits, prescription medications, dental, eye, and hospital care, and other services—all for a monthly premium between just $4 and $15 per child.
The expanded Healthy Families program would also aim to get rid of the “hassle factor and some of the red tape,” associated with current state programs, says Lucien Wulsin, director of the Insure the Uninsured Project in Los Angeles. “It’s going to simplify, simplify, simplify,” he says.
To start, Medi-Cal and Healthy Families would operate as a single program from the point of view of families, to eliminate the need for re-enrollment and to help children avoid gaps in health coverage that could occur if their family income changes.
Enrollment would also be coordinated with other public programs, including the National School Lunch Program, the Food Stamp Program, and WIC (the Special Supplemental Nutrition Program for Women, Infants and Children), to draw in as many families and children as possible and make it easy for families to enroll.
Prop. 86 spokesperson Robles concedes that the expanded program wouldn’t catch every single child in the state. For one thing, coverage would be voluntary, and programs would have to rely on families to come forward and enroll their children.
The newly expanded Healthy Families also wouldn’t cover children with family income exceeding 300 percent FPL. In 2003, roughly 79,000 children fell into this category, according to the latest California Health Information Survey. The initiative takes this into account by setting aside funds for pilot projects to determine how children left in the gap might best be covered.
Improving emergency services and hospital care
California’s emergency rooms have been closing in recent years. Roughly 70 such rooms have closed in the past decade due to rising costs, retrofitting regulations, and nursing shortages, among other reasons, says Robles. Those that remain open, she says, are losing money. (There were 359 hospital emergency departments in California in 2001 according to Health Affairs.)
The largest fraction of the Tobacco Tax of 2006 Trust Fund—$758 million—would be designated for shoring up emergency care throughout the state. (The California Chapter of the American College of Emergency Physicians and the California Emergency Nurses Association are also among the coalition’s members.)
Most of the funds earmarked for hospitals would go toward expanding emergency services at hospitals throughout the state by improving emergency facilities and equipment. Funds would also cover the costs of doctors and nurses, as well as the uninsured, who often rely on emergency care in lieu of routine, preventive health care.
Private hospitals and some public hospitals would be eligible for funding; hospitals operated by the federal government and some state agencies would be ineligible. To determine how much funding they can receive, hospitals must submit to the state health department information on how many emergency cases they handle each year and how much of their costs are lost to bad debts or go toward charity cases.
The initiative would also establish safeguards to protect emergency room patients whose family incomes are at or below 350 percent of FPL and who lack health insurance. Hospitals that received funds through the Act would be required to help patients find out whether they are eligible for government health care programs. The hospitals would be required to limit the measures they might take to collect on patients’ unpaid bills. They would have to take several steps before employing a collection agency, for one, and must agree not to garnish wages or place liens on patients’ homes.
Who opposes Prop. 86?
So far, two committees opposed to Prop. 86 have formed, according to the California Secretary of State’s office: Californians Against Unaccountable Taxes, sponsored by R.J. Reynolds Tobacco Company, and the “Committee to Stop the $2 Billion Tax Hike, a Coalition of Business, Law Enforcement, Taxpayer Groups,” and Philip Morris USA.
As of mid-July, Californians Against Unaccountable Taxes and the Committee to Stop the $2 Billion Tax Hike had reported expenditures totaling more than $1.5 million with the Secretary of State. (The Coalition for a Healthy California had listed $3.1 million.)
The history of the “No on 10” campaign in 1998 indicates what Prop. 86 opponents might spend in the months to come. Tobacco companies Philip Morris Co. Inc., Brown and Williamson Tobacco Co. (now owned by R.J. Reynolds), and Lorillard Tobacco Co. spent a combined $29.8 million to stop Prop. 10 from passing, with most of their publicity appearing only in the final month before the election. (The “Yes on 10” campaign, by comparison, spent $9 million.)
These tobacco industry efforts ultimately failed, but they did succeed in turning the initiative’s lead from a comfortable one, several months before the election, into a very narrow win on election day.
Tax evasion, terrorists, and discrimination
Opponents of the tax argue that tobacco taxes—particularly hefty ones—hurt state economies, unfairly target the poor, force smokers to subsidize nonsmokers, encourage smuggling, and create an unsustainable source of revenue.
Kris Vosburgh, executive director of the Howard Jarvis Taxpayer’s Association in Los Angeles, says that California has one of the highest tax burdens in the country, and that high tax burdens are bad for a state’s economy.
Vosburgh, who points out that his organization is not in favor of smoking, worries that higher taxes in general will ultimately drive families and businesses out of the state. When that happens, says Vosburgh, “there are fewer of us left to pay for essential services.”
More importantly, argues Grover Norquist, president of Americans for Tax Reform, based in Washington, D.C., taxes hinder government innovation and responsiveness to public concerns. “It doesn’t matter whether you tax oil, cigarettes, insurance, liquor, or exercise,” says Norquist. “When you raise taxes, you say to the government, you do not need to reform.”
Opponents also argue that taxing cigarettes unfairly forces a small segment of the population to shoulder the financial burdens of an entire state, and disproportionately targets low-income smokers, who spend a greater share of their incomes on cigarettes and smoke at higher rates than wealthier groups.
Robert Levy, a senior fellow in constitutional studies at the Cato Institute in Washington, D.C., says that cigarette taxes result in a “wealth transfer” from poor smokers to wealthier nonsmokers. Levy wrote in a 2002 report for the Phoenix, Arizona-based Goldwater Institute, “61 percent of any price increases [on cigarettes] will be paid by those persons with annual incomes under $40,000.”
Critics also point out that smokers will go to great lengths to evade hiked-up taxes on cigarettes, crossing state lines, shopping online, turning to tribal lands, and smuggling. There is evidence to suggest that they are correct:
In the four months following Minnesota’s 75-cent per pack tobacco tax increase in 2005, Minnesotans flocked over the border to North Dakota, which saw its own tobacco tax revenues climb 13.6 percent.
Hundreds of internet retailers selling tax-free smokes now exist, compared to just a handful a decade ago.
And in states across the nation, smokers have also turned to tribal lands to buy cheaper cigarettes—though in California any non-Native American smoker buying tobacco products at a tribal retail outlet must pay the excise tax to the state.
The same excise tax applies to internet sales, too, and the California Board of Equalization has recently begun a crackdown to collect taxes from consumers who attempted to evade them by shopping online.
Criminal smuggling remains a concern, and some critics point to high-level allegations that smuggled cigarettes may even support terrorist groups. A May 2004 U.S. Government Accountability Office report states that according to the Bureau of Alcohol, Tobacco and Firearms, “some cigarette smugglers have ties to terrorist groups and there are indications that terrorist group involvement in illicit cigarette trafficking…will grow in the future because of the large profits that can be made.”
Some opponents of state tobacco taxes also argue that if proponents invoke the public costs of smoking as a justification for cigarette tax hikes, then it is fair to point out that cigarette taxes generate revenue far in excess of those costs. Cigarettes, they argue, are overtaxed to make up for the social costs of smoking.
Levy and others suggest that smokers may even represent cost savings for a state because smokers make fewer demands on retirement services by dying prematurely.
Sustainability of revenue source
Another critique of the Tobacco Tax Act is its inherent contradiction: The more successful it is in reducing smoking, the less revenue it will bring in. The tax is expected to curb smoking simply because the increased cost of cigarettes would force many people to quit. Some of the revenue from the tax would go toward smoking cessation programs, which would speed that quit rate along.
“These programs are all funded by a diminishing source of revenue,” says Jean Ross, executive director of the California Budget Project in Sacramento. If the tax and the smoking cessation programs it supports declare victory, she adds, then ultimately there’s no money left for children’s health coverage—or any of the initiative’s other public health aims.
Tobacco tax critics point out that cigarette tax hikes are unreliable sources of revenue by definition. (And of course, smoking shouldn’t be encouraged simply because cigarette purchases provide a source of needed revenue.)
In fact, California’s Prop. 10 resulted in a 10 percent decline in pack sales in its first year, cutting into revenues for Prop. 99, both because of declined tobacco consumption and tax evasion.
Despite this effect, statistics compiled by the Campaign for Tobacco-Free Kids show that every state that has implemented a cigarette tax hike has seen a substantial overall increase in revenue despite measurable declines in pack sales. Even Illinois, which saw its pack sales decline by close to a third after its 40-cent per pack tax went into effect in 2002, saw state revenue increase by close to 40 percent in the year that followed.
In part, this is because tax evasion efforts are often temporary, says Lindblom, noting that die-hard smokers—those who won’t quit despite a tax hike—often go back to buying cigarettes at their local store, with revenues going to the state.
Projected expenditures also often take into account the decline in revenues expected as smokers quit or cut back. Because so many states have passed cigarette taxes, says Lindblom, a distinct pattern has become discernible; revenues increase dramatically in the short term, then decline slowly over time.
Experts on both sides of the debate, however, agree that it is impossible to predict the effect that a $2.60 per pack tax hike will have on smoking rates—and in turn projected revenues—simply because no state has implemented a cigarette tax this large.
The scale of the currently proposed cigarette tax has led the Legislative Analyst’s Office to conclude that “revenue estimates…would likely be overstated”—in large part because they predict a larger number of quitters and smugglers than seen with previous tobacco tax hikes.
Proponents remain confident that the initiative would provide roughly a decade of reliable funding for its proposed projects, noting that no tax hike, so far, has encouraged all smokers to quit.
Elena Conis did the research and writing for this article.
