November 7, 2006 Ballot Prop. 86

Proposition 86 would raise the excise taxes on cigarettes and other tobacco products to pay for additional hospital funding, health coverage of children, nursing education, anti-smoking education programs, and funding for nonprofit clinics. The price per pack would be raised $2.60. Other tobacco products would indirectly experience higher taxes as well. The proposition is hotly contested, with large tobacco companies backing the opposition to the measure with an expensive campaign. Proponents from the medical industry have also devoted large amount of money to pushing the proposition forward.

Background

Cigarettes in California are subject to the California Cigarette Tax and the Tobacco Products Surtax as mandated by Proposition 10 (1998). Currently, that amounts to a tax of 87 cents per pack. Other tobacco projects are taxed at around the same rate. Proposition 10 was passed by voters in 1998 and was created to provide funding for community health care programs, child care and education programs for young children and families, early childhood development programs, and programs to educate the public about the negative effects of smoking. Excise taxes on tobacco products raise approximately $1.1 billion a year in California.

Of the 87 cents spent on each pack of cigarettes:

• 50 cents pays for early childhood development programs mandated by Proposition 10 (1998).
• 25 cents pays for tobacco prevention education programs, health care services for the poor, tobacco related illness programs and environmental protection programs.
• 10 cents goes into the general fund.
• 2 cents goes into breast cancer research and programs aimed at breast cancer detection in uninsured women.

Tobacco products are taxed by the Tobacco Products Surtax which is currently 46.7% of the cost of the product. Tobacco products include cigars, unrolled tobacco, snuff, chewing tobacco, and any other product which contains 50 percent tobacco or more. The California State Board of Equalization determines the annual surtax rate.

Proposition 86 would amend the state constitution by raising the tax on cigarettes in California an additional $2.64 per pack above the current cost of about $4 per pack, effectively raising the cost of a pack of cigarettes to close to $7. The Board of Equalization is required by state law to increase taxes on other tobacco products in an amount equivalent to any increase in the tax on cigarettes. Prop. 86, therefore, would increase the excise tax on other tobacco products. Proposition 86 would likely increase excise tax revenues for about $2.1 billion annually in 2007-08.

Revenues from the tax increase would go into a new fund called the Tobacco Tax of 2006 Trust Fund. An as-yet-undetermined amount of the additional tax revenues would be used to fund Proposition 10 programs which would lose likely lose money with the passage of Proposition 86. As Proposition 86 adds a large amount to cigarettes and tobacco products, a reduction in sales is expected. The amount needed to backfill the Proposition 10 programs would be determined by the State Board of Equalization. 52.75% of the money left after funding Proposition 10 programs would go to a Health Treatment and Services Account to pay for hospitals emergency services that serve poor patients. Some funds would be used for non profit clinics in impoverished areas and for health care for uninsured persons. The account would also pay into nursing education programs provided by the University of California, the California State University, California community colleges, and private nursing programs.

After the Proposition 10 money has been allocated, 42.25 percent of the funds left would allocated to a new Health Maintenance and Disease Prevention Account. The money would be allocated as followed:

• Approximately 50% of funds would expand the Healthy Families Program to include health insurance for children from impoverished families and families of undocumented and documented immigrants not currently covered by the program. Proposition 86 would require enrollment procedures for these families to be simplified by the California Managed Risk Medical Insurance Board and the Department of Health Services, agencies which currently administer health insurance for California's poor and at-risk children.
• Approximately 43% of funds would pay for public relations campaigns and educational programs aimed at preventing smoking in children. Local health departments and local organizations would receive funds to develop these programs. Some funding would also go to state and local agencies which enforce tobacco laws and support the regulation of cigarette tax and sales as determined by court settlements. Additional funding would be used to study the value and effectiveness of such programs. Finally, some of the funds would be used for programs which research specific smoking related diseases and conditions such as heart disease, stroke asthma and lung cancer.
• Approximately 5% of funds would go into a Health and Disease Research Account which would be used to fund research on breast, lung, and other types of cancer. It would fund research on tobacco-related diseases. Some of the funds would be used to build a cancer registry which would be used to collect data on cancer cases across the state. Funds would also be used to study the effectiveness of tobacco education and control efforts.

Proportion 86 would require the state to continue to reimburse physicians who treat uninsured persons who are poor as mandated by Proposition 99 (1988). It would prevent the funds allocated from being appropriated by the annual state budget act which is passed by the legislature and the governor. In effect, neither the governor nor the legislature would be unable to change the amount appropriated. Proposition 86 mandates that the revenues raised by the initiative would be used specifically for the amounts detailed in the measure. Hospitals which receive Proposition 86 funds would have to limit what they charge for certain emergency and trauma care services for poor families. Some funding would go to hospitals to coordinate certain medical services with other hospitals. Finally, the proposition requires the Department of Health Services to issue an annual report describing all programs that received additional cigarette tax funding with descriptions of how the funding was used.

Other notes:

• US Smokeless Tobacco is the maker of such snuff brands as Copenhagen and Skoal. Altria is the name of the conglomerate formerly known as Philip Morris, but the tobacco division of the company retains its Philip Morris brand. Philip Morris's tobacco brands include Benson & Hedges, Marlboro, Parliament, and Chesterfield. Commonwealth Brands is the fourth-largest tobacco company in the United States. Its brands include Montclair, Malibu, and Riviera.
• The Yes on 86 campaign also received $2500 from the actress Mary Steenburgen and $1000 from the director and screenwriter Paul Haggis.

Arguments For and Against

Proponents of Proposition 86 come from the health industry, health education groups and the anti-smoking community. They believe that the measure would save hundreds of thousands of lives, prevent smoking habits in the young, and would compel more than a half a million smokers to quit. They say that billions would be saved in health care costs and that the programs implemented by the measure would increase state revenues by $2.2 billion a year. Proponents contend that the funds created by the proposition would be subject to careful fiscal analysis to prevent allocation to other areas of the budget. They believe that the programs initiated by Proposition 86 are vital public health needs that target portions of the population not presently served.

Opponents believe that Proposition 86 is not written to encourage Californians to stop smoking but rather is designed to net millions of dollars for large hospital corporations. They say that the proposition does not guarantee where the funds will go and that any governmental oversight is inadequate. Critics believe that the initiative will increase California's debt over time as revenues from cigarette sales will decline. Some believe that the increased cost of cigarettes and other tobacco products will cause an increase in stolen or smuggled tobacco goods. Finally, opponents disagree with amending the constitution for the purposes mandated by Proposition 86 as it becomes un-alterable by the governor or legislature. Opponents of the initiative come from anti-tax groups, law enforcement groups, small business coalitions and members of the tobacco industry.

Official Voter Information

Voter Information Guide

Tax on Cigarettes
Analysis by California Legislative Analyst, 2006.

Individual Campaign Committees
Total Contributions and Expenditures (select "Nov. 2006 election" and "Prop. 86" in dropdown boxes)

Key Websites and Links

Health Vote
Informational page from the California Healthcare Foundation

Public Opinion

Analyzing the Vote for Selected Propositions, Los Angeles Times Exit Poll, Nov. 9, 2006.

Exit poll: Complete poll data, Los Angeles Times Exit Poll, Nov. 9, 2006.

Voters closely divided on Props. 87, 86 and 85 one week before the election. Field Poll, Release 2215, Nov. 2, 2006.

Drop in support for Propositions 86 (Tax on Cigarettes) and 87 (Alternative Energy/Oil Tax). Field Poll, Release 2215, Oct. 4, 2006.

Big early leads for Prop. 86 (cigarette taxes), Prop. 87 (alternative energy/oil tax) and especially Prop. 83 (sex offenders). 
Field Poll, Release 2208, Aug. 8, 2006.

Reports and Studies

What would Proposition 86 mean for California? Sacramento: California Budget Project, Sep. 2006.

Cigarette and Tobacco Products Taxes. Sacramento: State Board of Equalization, June 2006.

Alamar, Benjamin; Mahmoud, Leila; Glantz, Stanton A. Cigarette Smuggling in California: Fact and Fiction. San Francisco: Center for Tobacco Control, Research and Education, July 30, 2003.

State Cigarette Excise Tax Rates and Ranking. Washington D.C.: Campaign for Tobacco Free Kids, July 5, 2006.

Sweeney, James P. "Stiff Tobacco Taxes Inspire Flourishing Black Market in Cigarettes," Cal-Tax Digest, June 2001.