(1)The Cigarette and Tobacco Products Licensing Act of 2003 requires the State Board of Equalization to administer a statewide program to license manufacturers, importers, distributors, wholesalers, and retailers of cigarettes and tobacco products. Under existing law, a violation of this act is a misdemeanor.

This bill would expand the definition of tobacco products for purposes of that act to include electronic cigarettes, as defined, thereby subjecting manufacturers, importers, distributors, wholesalers, and retailers of electronic cigarettes to the same licensing requirements imposed pursuant to that act on manufacturers, importers, distributors, wholesalers, and retailers of tobacco products. By broadening the act to apply to manufacturers, importers, distributors, wholesalers, and retailers of electronic cigarettes, this bill would expand the scope of an existing crime, thereby imposing a state-mandated local program.

The Cigarette and Tobacco Products Tax Law, the violation of which is a crime, imposes a tax on distributors of cigarettes at the rate of $0.87 per package of 20 cigarettes and a tax on distributors of tobacco products, based on wholesale cost, at a rate determined annually that is equivalent to the combined rate of all taxes imposed on cigarettes, and at a rate equivalent to $0.50 per package of 20 cigarettes. Revenues from taxes imposed under this law are deposited in specified accounts. These taxes are inclusive of the taxes imposed under the Tobacco Tax and Health Protection Act of 1988 (Proposition 99) and the California Families and Children Act of 1998 (Proposition 10).

This bill would, on or after the first day of the first calendar quarter commencing more than 90 days on or after the effective date of the bill, impose an additional tax on the distribution of cigarettes at the rate of $0.10 for each cigarette distributed, which would be $2 per pack; would require a dealer and a wholesaler to file a return with the State Board of Equalization showing the number of cigarettes in its possession or under its control on that date, and impose a related floor stock tax; and would require a licensed cigarette distributor to file a return with the board and pay a cigarette indicia adjustment tax at the rate equal to the difference between the existing tax rate and the tax rate imposed by this bill for cigarette tax stamps in its possession or under its control on that date. Because the bill would impose an additional tax on cigarettes under the Cigarette and Tobacco Products Tax Law, it would thereby increase the tax upon the distribution of tobacco products pursuant to Proposition 99, the revenues from which are required to be deposited in the Cigarette and Tobacco Products Surtax Fund.

This bill would additionally, on or after the first day of the first calendar quarter commencing more than 90 days on or after the effective date of the bill, impose a tax on the distribution of electronic cigarettes, as defined, based on the wholesale cost, at a rate determined annually that is equivalent to the cigarette tax rate, which would be $2.87 per package of 20 cigarettes.

This bill would expand the definition of tobacco products for purposes of the Cigarette and Tobacco Products Tax Law to include electronic cigarettes, thereby subjecting distributors, wholesalers, and transporters of electronic cigarettes to, among other things, the same licensing, bonding, and registration requirements imposed on distributors, wholesalers, and transporters of tobacco products.

This bill would provide that the revenues collected from the taxes imposed on cigarettes and electronic cigarettes by this bill, less refunds, would not be considered General Fund revenues and would be deposited in the California Health Care, Research, and Prevention Tobacco Tax Act of 2015 Fund created by this bill. The bill would continuously appropriate those amounts without regard to fiscal year to the Controller for allocation in accordance with this bill to be expended for specified purposes, which include, but are not limited to: (1) offsetting any revenue decreases directly resulting from the additional taxes imposed by this bill to the Cigarette and Tobacco Products Surtax Fund, the Breast Cancer Fund, and the California Children and Families Trust Fund; (2) reimbursing the State Board of Equalization and the State Auditor for administrative duties imposed by the bill; (3) providing funding to the University of California for the purpose of increasing the number of physicians trained in California; (4) funding state and local law enforcement efforts and investigative activities to reduce illegal sales of tobacco products; (5) providing funding to the State Department of Health Care Services for existing health care programs and services and to draw down federal funding; (6) funding the California Department of Public Health Tobacco Control Program; and (7) supplementing the Cigarette and Tobacco Products Surtax Medical Research Program administered by the University of California.

Because this bill would impose new requirements under the Cigarette and Tobacco Products Tax Law, the violation of which is a crime, it would impose a state-mandated local program.

(2)Existing law provides for the county-administered In-Home Supportive Services (IHSS) program, under which qualified aged, blind, and disabled persons are provided with services to permit them to remain in their own homes and avoid institutionalization. Existing law provides, as part of the Coordinated Care Initiative, that IHSS is a Medi-Cal benefit available through managed care health plans in specified counties. Existing law provides for a 7% reduction in hours of service to each IHSS recipient of services.

This bill would repeal the 7% reduction in hours of service to each IHSS recipient of services.

(3)Existing law establishes the Medi-Cal program, administered by the State Department of Health Care Services, under which health care services are provided to qualified low-income persons. The Medi-Cal program is, in part, governed and funded by federal Medicaid Program provisions. Under existing law, one of the methods by which Medi-Cal services are provided is pursuant to contracts with various types of managed care plans. Existing law also imposes a sales tax on sellers of Medi-Cal managed care plans.

This bill would establish a new managed care organization provider tax, to be administered by the department in consultation with the Department of Managed Health Care. The tax would be assessed by the department on licensed health care service plans and managed care plans contracted with the department to provide Medi-Cal services, except as excluded by the bill. The bill would require the health plans to report to the department specified enrollment information, on a quarterly basis, beginning with the 201617 state fiscal year. On December 1, 2016, or the date upon which the department receives approval for federal financial participation, whichever is later, the department would commence notification to the health plans of the assessed tax amount and due date for the first taxable quarter.

This bill would establish applicable taxing tiers and per enrollee amounts for the 201617 fiscal year, for Medi-Cal enrollees, and other enrollees, as defined. Commencing with the 201718 fiscal year, the bill would require the department and the Department of Managed Health Care to determine tax tiers and per enrollee tax amounts. The bill would require the department to request approval from the federal Centers for Medicare and Medicaid Services, as necessary, to implement the bill. The bill would authorize the department to implement its provisions by means of provider bulletins, all-plan letters, or similar instructions, and to notify the Legislature of this action.

This bill would establish the Health and Human Services Special Fund in the State Treasury, into which all revenues, less refunds, derived from taxes imposed by the bill would be deposited. The bill would require $230,000,000 in the fund to be transferred to the Developmental Disabilities Fund, which the bill would create, to be used upon appropriation to increase funding provided to regional centers, as specified, and increase rates paid to service providers for providing services to persons with disabilities, as specified. The remaining moneys in the fund would be continuously appropriated to the department for the purpose of funding the nonfederal share of Medi-Cal managed care rates, as prescribed, thereby making an appropriation.

(4) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(5) This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

 THIRD READING  

Bill No: SBX2 14

Author:

:

Vote:

SENATE HEALTH & DEV. SVCS. COMMITTEE: 9-4, 9/10/15

AYES: Hernandez, Beall, Hall, Leno, McGuire, Mitchell, Monning, Pan, Wolk

NOES: Morrell, Anderson, Moorlach, Nielsen

SENATE APPROPRIATIONS COMMITTEE: 5-2, 9/10/15

AYES: Lara, Beall, Hill, Leyva, Mendoza

NOES: Bates, Nielsen

SUBJECT:

SOURCE: Author

DIGEST: This bill imposes an additional excise tax of $2 per package of 20 cigarettes, imposes an equivalent one-time “floor stock tax” on the cigarettes held or stored by dealers and wholesalers, and indirectly increases the tobacco products tax. Imposes a tax on electronic cigarettes equivalent to the $2 per package tax imposed on cigarettes by this bill. Requires revenue from tobacco and electronic cigarette taxes to be used for various tobacco use prevention and research, law enforcement, medical school education, for improved payments for Medi-Cal funded services, and to backfill existing tobacco-tax funded services for any revenue decline resulting from the additional tax. Imposes a managed care organization provider tax (MCO tax) on health plans, with different taxing tiers based on enrollment. Continuously appropriates funds from the MCO tax for purposes of funding the nonfederal share of Medi-Cal managed care rates, and transfers $230 million, to be used upon appropriation by the Legislature, to increase the funding provided to regional centers and to increase rates paid to providers of service to the developmentally disabled. Repeals the 7% reduction in hours of service to each In-Home Supportive Services recipient of services.

ANALYSIS:

Existing law:

1. Imposes an 87 cents tax per pack of 20 cigarettes on distributors of cigarettes and tobacco products, which funds a variety of programs and services including: tobacco-related health education, tobacco-related disease research, hospital and physician services, fire prevention, environmental conservation, breast cancer research and early detection services, and early childhood development programs.
   
2. Requires the Board of Equalization (BOE), under the Cigarette and Tobacco Products Licensing Act of 2003 (Licensing Act), to administer a statewide program to license manufacturers, importers, distributors, wholesalers and retailers of cigarettes and tobacco products.
   
3. Establishes the county-administered In-Home Supportive Services (IHSS) program, under which qualified aged, blind, and disabled persons are provided with services to permit them to remain in their own homes and avoid institutionalization. Existing law provides for a 7% reduction in hours of service to each IHSS recipient of services.
   
4. Establishes the Medi-Cal program, administered by the Department of Health Care Services (DHCS), under which health care services are provided to qualified, low-income persons. Under existing law, one of the methods by which Medi-Cal services are provided is through contracts with various types of managed care plans.
   
5. Imposes a sales tax on sellers of Medi-Cal managed care organizations (MCOs), until July 1, 2016.
   
6. Requires, under the Lanterman Developmental Disabilities Services Act, the Department of Developmental Services (DDS) to contract with regional centers to provide services and supports to individuals with developmental disabilities. Under existing law, the regional centers purchase needed services for individuals with developmental disabilities through approved service providers or arrange for those services through other publicly funded agencies. The annual Budget Act also appropriates funds to DDS to fund regional center operations.
   
7. Establishes specified rates to be paid to certain developmental service providers and the rates to be paid for certain developmental services. Requires that rates to be paid to other developmental service providers either be set by DDS or negotiated between the regional center and the service provider.

This bill:

1. Imposes an additional excise tax of $2 per package of 20 cigarettes, and imposes a one-time “floor stock tax” on the cigarettes held or stored by dealers and wholesalers.
   
2. Imposes a tax on electronic cigarettes equivalent to the $2 per package tax
   imposed on cigarettes by this bill.
3. Expands the definition of “tobacco products” to include electronic cigarettes, as defined, for purposes of the Licensing Act, thereby subjecting manufacturers, importers, distributors, wholesalers, and retailers of e-cigarettes to the same licensing requirements imposed under the Licensing Act applicable to tobacco products.
   
4. Creates the California Health Care, Developmental Services, and Prevention Tobacco Tax Act Fund of 2015 in the State Treasury, and requires all revenue from the $2 excise tax increase and equivalent tax on e-cigarettes be deposited in this fund.
5. Prohibits the cigarette and e-cigarette taxes imposed by this bill from being considered part of the General Fund, or be considered General Fund revenue for purposes of Proposition 98.
6. Establishes the California Health Care, Research, and Prevention Tobacco Tax Act of 2015 in the State Treasury as a continuously appropriated fund, to be used for the following purposes:
   1. To offset the revenue decrease resulting from the imposition of the additional tax in this bill on the existing tobacco-tax funded Breast Cancer Fund, Proposition 99 and Proposition 10-funded programs based on the decrease in tobacco consumption resulting from the additional tax imposed by this bill;
   2. To reimburse the Board of Equalization (BOE) in the administration, calculation, and collection of the tax, the calculation and distribution of funds and in regulation promulgation, with a 1% cap for administrative costs;
   3. To reimburse the State Auditor up to $400,000 for actual costs incurred to conduct audits required by this bill;
   4. To provide $40 million in funding to the University of California (UC) for the purpose and goal of increasing the number of physicians trained in California;
   5. To provide $48 million for the purpose of funding law enforcement efforts and investigative activities to reduce illegal sales of tobacco products, illegal sales to minors, reduce cigarette smuggling, tobacco tax evasion and counterfeit tobacco products, to enforce licensing requirements, to enforce tobacco-related laws, court judgments and legal settlements, and to conduct law enforcement training and technical assistance for tobacco-related statutes, provided these funds are not used to supplant existing state or local funds. Apportions these funds in the following manner:
      1. $30 million to the Department of Justice to be distributed to local law enforcement to support and hire front-line law enforcement peace officers;
      2. $6 million to BOE to be used to enforce laws that regulate the distribution and retail sale of cigarettes and other tobacco products;
      3. $6 million to the Department of Public Health (DPH) to be used to support programs, including grants to local law enforcement agencies to provide training and funding for the enforcement of state and local laws related to the illegal sales of tobacco to minors;
      4. $6 million to the Attorney General to be used for activities including enforcing laws that regulate the distribution and sale of cigarettes and tobacco products.
         
   6. Requires the BOE, beginning two years after the effective date of this bill, to determine the reduction in revenues from a reduction in cigarette and tobacco product consumption due to the additional taxes. Requires BOE, if it determines there has been a reduction, to reduce the amounts in a) through e) above proportionately.
7. Requires the Controller to allocate, after the transfers in 6) above, the remaining moneys as follows:
   
   1. 82% to the Health Care Treatment Fund, to be used by DHCS to increase funding for existing Medi-Cal health care programs and services by providing improved payments, including funding support for county and UC hospitals and the governmental entities with which they are affiliated, for the nonfederal share of payments. Requires, to the extent possible, payments and support to be increased based on criteria developed and updated by DHCS in consultation with the Legislature as part of the annual state budget process, provided these funds are used to supplant existing state general funds for these same purposes. Requires the criteria to include, but not be limited to, ensuring timely access, specific geographic shortages of services or ensuring quality care. Requires, consistent with federal law, the funding to be used to draw down federal funds;
      
   2. 13% for the purpose of funding comprehensive tobacco prevention and control programs, provided that these funds are not used to supplant existing state or local funds, apportioned in the following manner:
      
      1. 85% to DPH for tobacco control programs, and requires DPH to award funds to local government and community-based organization for the implementation, evaluation and dissemination of evidence-based health promotion and health communication activities in order to monitor, evaluate and reduce tobacco use, tobacco-related disease rates and health disparities;
      2. 15% to the Department of Education for school programs to prevent and reduce the use of tobacco and nicotine products by young people;
         
   3. 5% to the UC Tobacco-Related Disease Research Program for basic, applied and translational medical research in California into the prevention of, early detection of, treatments for, complementary treatments and potential cures for all types of cancer, cardiovascular and lung disease, oral disease and tobacco-related diseases.
8. Requires the State Auditor to define “administrative costs” via regulation, and caps administrative costs at specified amounts.
   
9. Requires the State Auditor to conduct at least biennially an independent financial audit of the state and local agencies receiving tobacco tax funds. Requires the State Auditor to prepare a report detailing its review, including any recommendations for improvements.
   
10. Requires state agencies and departments receiving tobacco tax funds under this bill to publish on an annual basis on their internet web site an accounting of how much money was received, and how the money was spent.
    
11. Repeals a provision of law that reduces by 7% the hours of service for each IHSS recipient.
12. Establishes a new MCO tax, to be administered by DHCS, in consultation with the Department of Managed Health Care (DMHC).
13. Assesses the MCO tax on health plans licensed by DMHC and managed care plans contracted with DHCS to provide Medi-Cal services, with some exceptions, as specified.
14. Requires health plans to report to DHCS specified enrollment information, on a quarterly basis, beginning with the 2016-17 state fiscal year.
15. Establishes applicable taxing tiers and per enrollee amounts for the 2016-17 fiscal year. Requires, commencing with the 2017-18 fiscal year, DHCS and DMHC to determine tax tiers and per enrollee tax amounts. Requires DHCS to request approval from the federal Centers for Medicare and Medicaid Services as necessary to implement these provisions.
16. Establishes the Health and Human Services Special Fund in the State Treasury, into which all revenues, less refunds, derived from MCO taxes imposed by this bill would be deposited. Requires the moneys in the fund to be allocated as follows:
    1. $230 million transferred annually from the Health and Human Services Special Fund to the Developmental Disabilities Fund created by this bill, to be used upon appropriation by the Legislature, to do both of the following:
       
       1. Increase the funding provided to a regional center for the regional center’s operating budget by up to 10% above the levels in effect on the effective date of this bill; and,
       2. Increase all rates paid to service providers for providing services to developmentally disabled individuals by up to 10% above the levels in effect on the effective date of this bill.
    2. Continuously appropriates to DHCS for the purpose of funding the nonfederal share of Medi-Cal managed care rates.

Comments

1. Author’s statement. According to the author, this comprehensive piece of legislation directly addresses the shortage of funding for California’s most vulnerable communities. The author states this legislation guarantees funding to improve quality and expand access to health care for those on Medi-Cal, as well as restores funding for our developmentally disabled community, and clearly demonstrates California’s commitment to help those that need it most, including seniors, children, families, and individuals with special needs. This bill would increase the cigarette tax by $2 a pack, and would impose an equivalent increase on e-cigarette products, which is preliminarily estimated to generate nearly $1.3 billion annually. The revenue would go towards increasing Medi-Cal reimbursement rates to help improve access to quality providers for Medi-Cal recipients, and to ensure a robust tobacco prevention program by providing increased funding for existing tobacco-funded programs including law enforcement and smoking prevention efforts. In addition, the legislation also would enact the Governor’s most recent proposed tax on MCO and allocates the funding directly to Med-Cal managed care rates and to increase rates to providers of services to individuals served by the developmental disabilities system and regional center operations budgets by up to 10%. The author concludes that this bill is a win-win for Californians as it will not only generate much needed revenue for health care and developmental services, but it will also help reduce smoking rates and deter teenagers from getting hooked on a deadly habit. The revenue generated by enacting this bill will help provide care for the most underserved and neediest communities in California.
   
2. Cigarette and tobacco products tax law. State law imposes an 87 cent excise tax on a package of cigarettes. Federal law imposes a tax of $1.01 per pack of 20 cigarettes with the majority of the funds being used to fund children's health programs, under federal law. Since 1998, the Legislature and voters have adopted three tobacco tax measures which have raised the cigarette tax by 77 cents. Current state taxes and surtaxes are allocated in the following manner: 10 cents to the state General Fund; 25 cents to the Cigarette and Tobacco Products Surtax Fund (Proposition 99, 1988); 2 cents to the Breast Cancer Fund; and 50 cents to the California Children and Families Trust Fund (Proposition 10, 1998). In November 1998, state attorney generals and tobacco companies entered into the Master Settlement Agreement, whereby, tobacco companies, agreed to change the way tobacco products were marketed and agreed to pay, in perpetuity, various annual payments to compensate for medical costs for caring for persons with smoking-related illnesses. In 2012, California received a Master Settlement Payment of around $735.7 million, which adds an additional 50 cents tax per pack.

Current law provides that increasing the cigarette tax triggers an automatic tobacco products tax increase.  Specifically, a provision of Proposition 99 requires the BOE to annually determine the tobacco products tax rate at a rate equivalent to the combined rate of all taxes imposed on cigarettes.  Additionally, because the cigarette tax increase and indirect tobacco products tax will be included in the total sales price, the bill will increased sales tax revenues.  

1. The Lanterman Act. The Lanterman Developmental Disabilities Services Act establishes an entitlement to services and supports for Californians with developmental disabilities, defined as a disability originating before the age of 18, that can be expected to continue, indefinitely, and constitutes a substantial disability. Approximately 290,000 children and adults with developmental disabilities are served in community-based programs and supported by state- and federally funded services that are coordinated by 21 local, nonprofit regional centers. An additional 1,100 individuals are served in four state-run institutions, including three Developmental Centers. Approximately 45,000 agencies provide services in more than 150 service category types including residential care, day programs, behavioral therapies, independent and supported living, supported employment, respite, transportation and many others.

Since 2009, the state has reduced costs to community-based developmental services programs by more than $1 billion (GF) including restrictions on payments for specific services, caps on costs provided for other services, across-the-board reductions, mandated holidays and other cuts. Prior to the 2009 cost-containment measures, the state had frozen rates to providers in order to contain costs. Regional centers also have struggled with heavy caseloads and low salary reimbursements during this time period.

1. In-Home Supportive Services. The IHSS program provides personal care services to approximately 420,000 qualified low-income individuals who are aged (over 65), blind, or who have disabilities. Services include tasks like feeding, bathing, bowel and bladder care, meal preparation and clean-up, laundry, and paramedical care. These services frequently help program recipients to avoid or delay placement in institutional care settings. The average annual cost of services per IHSS client is estimated to be around $14,217 ($1,185 per client per month) for 2015-16.

In December 2011, as a part of the Governor’s budget trigger package that took effect as a result of lower than anticipated state revenues, a 20% across-the-board reduction of IHSS hours was imposed. A federal district court prevented the reduction from taking effect, pending the outcome of litigation. In March 2013, the Administration and plaintiffs (labor unions and disability rights advocates) announced a settlement agreement from an 8% across-the-board reduction to authorized service hours, effective July 1, 2013, and a 7% across-the-board reduction to service hours July 1, 2014. The settlement agreement includes a provision to “trigger off” the ongoing reduction of up to 7%–in whole or in part–as a result of enhanced federal funding received pursuant to an “assessment” (a provider tax under Medicaid law) on home health care services, including IHSS.

DHCS was required by statute to submit a proposal for its implementation to the federal government by October 2014, but the Administration instead submitted a letter to the Legislature in August 2014, indicating that it had worked in good-faith to develop a federally-compliant proposal but, given the new federal guidance on health care related taxes, it was unable to meet the deadline. The letter indicated that the Administration would work with all parties on viable legislation early in the 2015-16 session. Instead, the Governor’s budget included a proposal to create a new MCO tax, which is projected to raise for 2015-16 an additional $215.6 million GF in revenues (to be matched with federal funds) to fully restore the 7% reduction in IHSS hours.

1. MCO tax. California’s existing MCO tax imposes a 3.9% tax on the total revenue received by MCOs through their Medi-Cal managed care plans. This existing tax holds the MCOs harmless and generates funding to offset other GF costs. According to the Senate Budget Subcommittee on Health and Human Services, for 2015-16, the current MCO tax is projected to generate $1.13 billion in non-federal funding for the Medi-Cal program. The revenues are deposited into the Children’s Health and Human Services Special Fund. Half of the MCO tax revenues are used to draw down federal Medi-Cal funds and then used to pay back Medi-Cal managed care plans in order to “make them whole.” The other half of these funds is used to offset GF expenditures for Medi-Cal managed care rates for children, seniors and persons with disabilities, and dual eligibles. California’s current MCO tax sunsets on July 1, 2016.

In a July 2014 letter to State Medicaid Directors, the federal Centers for Medicare and Medicaid Services (CMS) indicates that taxes structured like California’s current MCO tax will likely be considered health care-related taxes that would have to meet Medicaid requirements. This means the tax must:

1. Be applied to all providers in a class (meaning the tax must be applied to all MCOs and not just MCOs providing services to Medi-Cal beneficiaries, unless a waiver is obtained);
2. Applied at the same rate for all payers of the tax (unless a federal waiver is obtained); and,
3. Cannot directly or indirectly guarantee that providers receive their tax back.

The federal deadline for states to reform tax structures that are out of compliance is the end of the states’ legislative session, which is August 31, 2016 for California.

The Administration revised its MCO proposal in early September 2015. This revised tax continues to use enrollment ranges with tax tiers for enrollment in each range, but it taxes Medi-Cal enrollees at a higher amount than non-Medi-Cal enrollees. The revised proposal continues to generate roughly the same amount of revenue ($1.3 billion GF net to the state), but reduces the net impact to managed care plans from the Administration’s prior proposal of $669 million, to $317 million. A more recent proposal further reduces the net impact to the plans to $114 million by selectively reducing corporate, gross premiums and corporate tax rates for plans paying the MCO tax, and by increasing some of the MCO taxing tier amounts and by exempting three plans from the MCO tax entirely. In addition, the revised proposal reduces the net impact to every plan, significantly reduces tax rates for non-Medi-Cal lives and reduces the differential between tiers for non-Medi-Cal enrollees from the previous proposal, particularly for those middle tiers that had the burden of the highest rates under the Administration’s prior proposal.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• Tobacco Tax Revenues. Estimated total annual revenue increase of $1.3 billion per year from taxes paid on cigarettes and other tobacco products ($1.2 billion per year) and electronic cigarettes ($100 million per year ) (General Fund).
• Tobacco Tax Expenditures. The bill specifies that revenues resulting from the increased tobacco tax will be spent as follows:
  • Ongoing costs of about $100 million per year to backfill existing programs supported with tobacco tax revenues (General Fund). Under current law, existing tobacco tax revenues are used to support Breast Cancer Research, programs supported by Proposition 99 (including public health and environmental protection programs), and programs supported by Proposition 10 (for early childhood education). The bill requires that reductions in existing tobacco tax revenues for those programs (due to declining tobacco use resulting from higher overall taxes) would be backfilled with revenue from the additional tobacco tax imposed by the bill. (Note that the bill does not require new tobacco tax revenues to be used to backfill the portion of the tobacco tax that is deposited in the General Fund.)
  • Ongoing costs up to $12 million per year for administration and enforcement by the Board of Equalization (General Fund). The bill authorizes the Board of Equalization to use up to 1% of new tax revenues (after backfilling existing programs) for administration and enforcement.
  • Annual costs of $400,000 per year for required audits of tobacco tax revenues by the Bureau of State Audits (General Fund).
  • Annual costs of $40 million per year to support physician training programs within the University of California System (General Fund).
  • Annual costs of $48 million per year for enforcement programs at the local level, the Board of Equalization, the Department of Public Health, and the Attorney General’s Office (General Fund).
  • Annual costs up to about $900 million per year for increased payments to Medi-Cal providers (General Fund). The bill provides that 82% new tobacco tax revenues (after accounting for the above expenditures) shall be used by the Department of Health Care Services to augment payments to Medi-Cal providers. The General Fund monies allocated in the bill would be augmented with federal matching funds, more than doubling the actual amount of payments made to Medi-Cal providers.
  • Annual costs up to about $140 million per year for tobacco prevention and control programs by the Department of Public Health and the Department of Education (General Fund).
  • Annual costs up to about $55 million per year for research on tobacco-related diseases by the University of California (General Fund). Similar to the increase in Medi-Cal provider payments, the actual amount of funding that would be available will be reduced by any backfill of existing programs.
• Managed Care Organization Tax Revenues. Annual revenues of $1.939 billion per year in tax revenues paid by managed care organizations, including those providing services under the Medi-Cal program and those managed care plans that do not contract with the Medi-Cal program (General Fund).
• Managed Care Organization Tax Expenditures. The bill would allocate the resulting revenues as follows:
  • Annual costs of $1.645 billion to provide increased capitation payments to Medi-Cal managed care plans ($576 million from the Managed Care Organization Tax revenues and $1.069 billion in matching federal funds).
  • Annual costs of $230 million per year to increase provider rates in the regional center system for services provided to individuals with developmental disabilities and increases in regional center operational budgets.
  • Annual General Fund revenues of $1.133 billion used to offset current expenditures in the Medi-Cal program (General Fund).
• Other state costs. In addition to the dedication of new revenues for specific expenditures, the may impose other direct costs on the state.
  
• Potential increased Proposition 98 funding obligation. The bill may result in additional state funding obligations for education (General Fund). The state constitution generally requires the state to make payments for K-14 education equal to about 50% of annual General Fund revenues. (The actual funding formulas for Proposition 98 are complex and vary from year to year based on economic conditions and state budgeting.) Historically, the state has not counted revenues from the existing Managed Care Organization Tax towards the Proposition 98 funding requirement. However, because this measure imposes new taxes, the resulting revenues may be subject to the requirements of Proposition 98. The state could therefore be obligated to increase payments for education on average by about 50% of the resulting revenues – in this case about $650 million per year due to the increased tobacco tax and $970 million per year due to the Managed Care Organization Tax.
  • IHHS restoration. Ongoing annual costs of $275 million (General Fund only) to restore an existing 7% reduction in In-Home Supportive Services hours.
  • Cost to the state through CalPERS managed care plans. Annual costs to the state of about $11 million per year, due to the cost of the Managed Care Organization Tax on CalPERS plans (General Fund and special funds). CalPERS health care plans would be subject to the tax as commercial managed care plans. Presumably those contracting managed care plans would pass along the increased tax cost to the state through higher premiums.
  • Ongoing reduction in General Fund tobacco tax revenue. By increasing tobacco taxes, the bill will reduce overall consumption of tobacco products, reducing revenues from the existing tobacco taxes. Based on the projected reduction in consumption, the bill will result in an annual reduction of about $14 million per year in tobacco tax revenue that is deposited in the General Fund. Unlike the other programs supported by existing tobacco tax revenues, the reduced General Fund revenue would not be backfilled with new tobacco tax revenue.

SUPPORT: (Verified 2/5/16)

American Federation of State, County and Municipal Employees, AFL-CIO
American Lung Association in California

OPPOSITION: (Verified 2/5/16)

Bay Area Council

California Business Roundtable

California Chamber of Commerce

California Manufacturing & Technology Association

California Taxpayers Association

Greater San Fernando Valley Chamber of Commerce

Los Angeles Area Chamber of Commerce

Pacific Business Group on Health

Simi Valley Chamber of Commerce

ARGUMENTS IN SUPPORT: The American Federation of State, County and Municipal Employees (AFSCME) writes in support of this measure that without a permanent funding source, the state will reinstate the 7% cut in IHSS hours on July 1, 2016, which would be a terrible injustice to the hundreds of thousands of Californians who rely on the IHSS program to live independently and safely in their homes. AFSCME states these cuts were devastating to all IHSS recipients but particularly so to families with developmental disabled loved ones who rely heavily on the IHSS program.

ARGUMENTS IN OPPOSITION: The California Taxpayers Association (CalTax) writes in opposition to the $2 per pack cigarette tax and the equivalent rate imposed on other tobacco products and e cigarettes. CalTax writes that relying on a declining revenue source to fund important programs creates long-term funding shortfalls that can be paid for only through siphoning revenue from other budgetary needs or through additional tax increases. In addition, CalTax argues this tax is a regressive tax that has a greater burden on lower- and middle-income taxpayers, and this bill will provide a financial windfall for criminals as higher taxes create an increased incentive for the black market and this problem would worsen should the tax increase by $2 a pack.

Prepared by:

2/9/16 10:28:58

**** END ****

 THIRD READING  

Bill No: SBX2 14

Author: Hernandez (D)

Introduced: 9/9/15

Vote: 27

SENATE HEALTH & DEV. SVCS. COMMITTEE: 9-4, 9/10/15

AYES: Hernandez, Beall, Hall, Leno, McGuire, Mitchell, Monning, Pan, Wolk

NOES: Morrell, Anderson, Moorlach, Nielsen

SENATE APPROPRIATIONS COMMITTEE: 5-2, 9/10/15

AYES: Lara, Beall, Hill, Leyva, Mendoza

NOES: Bates, Nielsen

SUBJECT: Tobacco: electronic cigarettes: taxes: managed care organization provider tax: in-home supportive services

SOURCE: Author

DIGEST: This bill imposes an additional excise tax of $2 per package of 20 cigarettes, imposes an equivalent one-time “floor stock tax” on the cigarettes held or stored by dealers and wholesalers, and indirectly increases the tobacco products tax. Imposes a tax on electronic cigarettes equivalent to the $2 per package tax imposed on cigarettes by this bill. Requires revenue from tobacco and electronic cigarette taxes to be used for various tobacco use prevention and research, law enforcement, medical school education, for improved payments for Medi-Cal funded services, and to backfill existing tobacco-tax funded services for any revenue decline resulting from the additional tax. Imposes a managed care organization provider tax (MCO tax) on health plans, with different taxing tiers based on enrollment. Continuously appropriates funds from the MCO tax for purposes of funding the nonfederal share of Medi-Cal managed care rates, and transfers $230 million, to be used upon appropriation by the Legislature, to increase the funding provided to regional centers and to increase rates paid to providers of service to the developmentally disabled. Repeals the 7% reduction in hours of service to each In-Home Supportive Services recipient of services.

ANALYSIS:

Existing law:

1. Imposes an 87 cents tax per pack of 20 cigarettes on distributors of cigarettes and tobacco products, which funds a variety of programs and services including: tobacco-related health education, tobacco-related disease research, hospital and physician services, fire prevention, environmental conservation, breast cancer research and early detection services, and early childhood development programs.
   
   
   

2. Requires the Board of Equalization (BOE), under the Cigarette and Tobacco Products Licensing Act of 2003 (Licensing Act), to administer a statewide program to license manufacturers, importers, distributors, wholesalers and retailers of cigarettes and tobacco products.
   
   
   

3. Establishes the county-administered In-Home Supportive Services (IHSS) program, under which qualified aged, blind, and disabled persons are provided with services to permit them to remain in their own homes and avoid institutionalization. Existing law provides for a 7% reduction in hours of service to each IHSS recipient of services.
   
   
   

4. Establishes the Medi-Cal program, administered by the Department of Health Care Services (DHCS), under which health care services are provided to qualified, low-income persons. Under existing law, one of the methods by which Medi-Cal services are provided is through contracts with various types of managed care plans.
   
   
   

5. Imposes a sales tax on sellers of Medi-Cal managed care organizations (MCOs), until July 1, 2016.
   
   
   

6. Requires, under the Lanterman Developmental Disabilities Services Act, the Department of Developmental Services (DDS) to contract with regional centers to provide services and supports to individuals with developmental disabilities. Under existing law, the regional centers purchase needed services for individuals with developmental disabilities through approved service providers or arrange for those services through other publicly funded agencies. The annual Budget Act also appropriates funds to DDS to fund regional center operations.
   
   
   

7. Establishes specified rates to be paid to certain developmental service providers and the rates to be paid for certain developmental services. Requires that rates to be paid to other developmental service providers either be set by DDS or negotiated between the regional center and the service provider.

This bill:

1. Imposes an additional excise tax of $2 per package of 20 cigarettes, and imposes a one-time “floor stock tax” on the cigarettes held or stored by dealers and wholesalers.
   
   
   

2. Imposes a tax on electronic cigarettes equivalent to the $2 per package tax
   imposed on cigarettes by this bill.

3. Expands the definition of “tobacco products” to include electronic cigarettes, as defined, for purposes of the Licensing Act, thereby subjecting manufacturers, importers, distributors, wholesalers, and retailers of e-cigarettes to the same licensing requirements imposed under the Licensing Act applicable to tobacco products.
   
   
   

4. Creates the California Health Care, Developmental Services, and Prevention Tobacco Tax Act Fund of 2015 in the State Treasury, and requires all revenue from the $2 excise tax increase and equivalent tax on e-cigarettes be deposited in this fund.

5. Prohibits the cigarette and e-cigarette taxes imposed by this bill from being considered part of the General Fund, or be considered General Fund revenue for purposes of Proposition 98.

6. Establishes the California Health Care, Research, and Prevention Tobacco Tax Act of 2015 in the State Treasury as a continuously appropriated fund, to be used for the following purposes:

1. To offset the revenue decrease resulting from the imposition of the additional tax in this bill on the existing tobacco-tax funded Breast Cancer Fund, Proposition 99 and Proposition 10-funded programs based on the decrease in tobacco consumption resulting from the additional tax imposed by this bill;

2. To reimburse the Board of Equalization (BOE) in the administration, calculation, and collection of the tax, the calculation and distribution of funds and in regulation promulgation, with a 1% cap for administrative costs;

3. To reimburse the State Auditor up to $400,000 for actual costs incurred to conduct audits required by this bill;

4. To provide $40 million in funding to the University of California (UC) for the purpose and goal of increasing the number of physicians trained in California;

5. To provide $48 million for the purpose of funding law enforcement efforts and investigative activities to reduce illegal sales of tobacco products, illegal sales to minors, reduce cigarette smuggling, tobacco tax evasion and counterfeit tobacco products, to enforce licensing requirements, to enforce tobacco-related laws, court judgments and legal settlements, and to conduct law enforcement training and technical assistance for tobacco-related statutes, provided these funds are not used to supplant existing state or local funds. Apportions these funds in the following manner:

1. $30 million to the Department of Justice to be distributed to local law enforcement to support and hire front-line law enforcement peace officers;

2. $6 million to BOE to be used to enforce laws that regulate the distribution and retail sale of cigarettes and other tobacco products;

3. $6 million to the Department of Public Health (DPH) to be used to support programs, including grants to local law enforcement agencies to provide training and funding for the enforcement of state and local laws related to the illegal sales of tobacco to minors;

4. $6 million to the Attorney General to be used for activities including enforcing laws that regulate the distribution and sale of cigarettes and tobacco products.
   
   
   

1. Requires the BOE, beginning two years after the effective date of this bill, to determine the reduction in revenues from a reduction in cigarette and tobacco product consumption due to the additional taxes. Requires BOE, if it determines there has been a reduction, to reduce the amounts in a) through e) above proportionately.

7. Requires the Controller to allocate, after the transfers in 6) above, the remaining moneys as follows:
   
   
   

   1. 82% to the Health Care Treatment Fund, to be used by DHCS to increase funding for existing Medi-Cal health care programs and services by providing improved payments, including funding support for county and UC hospitals and the governmental entities with which they are affiliated, for the nonfederal share of payments. Requires, to the extent possible, payments and support to be increased based on criteria developed and updated by DHCS in consultation with the Legislature as part of the annual state budget process, provided these funds are used to supplant existing state general funds for these same purposes. Requires the criteria to include, but not be limited to, ensuring timely access, specific geographic shortages of services or ensuring quality care. Requires, consistent with federal law, the funding to be used to draw down federal funds;
      
      
      

   2. 13% for the purpose of funding comprehensive tobacco prevention and control programs, provided that these funds are not used to supplant existing state or local funds, apportioned in the following manner:
      
      
      

      1. 85% to DPH for tobacco control programs, and requires DPH to award funds to local government and community-based organization for the implementation, evaluation and dissemination of evidence-based health promotion and health communication activities in order to monitor, evaluate and reduce tobacco use, tobacco-related disease rates and health disparities;

      2. 15% to the Department of Education for school programs to prevent and reduce the use of tobacco and nicotine products by young people;
         
         
         

   3. 5% to the UC Tobacco-Related Disease Research Program for basic, applied and translational medical research in California into the prevention of, early detection of, treatments for, complementary treatments and potential cures for all types of cancer, cardiovascular and lung disease, oral disease and tobacco-related diseases.

8. Requires the State Auditor to define “administrative costs” via regulation, and caps administrative costs at specified amounts.
   
   
   

9. Requires the State Auditor to conduct at least biennially an independent financial audit of the state and local agencies receiving tobacco tax funds. Requires the State Auditor to prepare a report detailing its review, including any recommendations for improvements.
   
   
   

10. Requires state agencies and departments receiving tobacco tax funds under this bill to publish on an annual basis on their internet web site an accounting of how much money was received, and how the money was spent.
    
    
    

11. Repeals a provision of law that reduces by 7% the hours of service for each IHSS recipient.

12. Establishes a new MCO tax, to be administered by DHCS, in consultation with the Department of Managed Health Care (DMHC).

13. Assesses the MCO tax on health plans licensed by DMHC and managed care plans contracted with DHCS to provide Medi-Cal services, with some exceptions, as specified.

14. Requires health plans to report to DHCS specified enrollment information, on a quarterly basis, beginning with the 2016-17 state fiscal year.

15. Establishes applicable taxing tiers and per enrollee amounts for the 2016-17 fiscal year. Requires, commencing with the 2017-18 fiscal year, DHCS and DMHC to determine tax tiers and per enrollee tax amounts. Requires DHCS to request approval from the federal Centers for Medicare and Medicaid Services as necessary to implement these provisions.

16. Establishes the Health and Human Services Special Fund in the State Treasury, into which all revenues, less refunds, derived from MCO taxes imposed by this bill would be deposited. Requires the moneys in the fund to be allocated as follows:

1. $230 million transferred annually from the Health and Human Services Special Fund to the Developmental Disabilities Fund created by this bill, to be used upon appropriation by the Legislature, to do both of the following:
   
   
   

   1. Increase the funding provided to a regional center for the regional center’s operating budget by up to 10% above the levels in effect on the effective date of this bill; and,

   2. Increase all rates paid to service providers for providing services to developmentally disabled individuals by up to 10% above the levels in effect on the effective date of this bill.

2. Continuously appropriates to DHCS for the purpose of funding the nonfederal share of Medi-Cal managed care rates.

Comments

1. Author’s statement. According to the author, this comprehensive piece of legislation directly addresses the shortage of funding for California’s most vulnerable communities. The author states this legislation guarantees funding to improve quality and expand access to health care for those on Medi-Cal, as well as restores funding for our developmentally disabled community, and clearly demonstrates California’s commitment to help those that need it most, including seniors, children, families, and individuals with special needs. This bill would increase the cigarette tax by $2 a pack, and would impose an equivalent increase on e-cigarette products, which is preliminarily estimated to generate nearly $1.3 billion annually. The revenue would go towards increasing Medi-Cal reimbursement rates to help improve access to quality providers for Medi-Cal recipients, and to ensure a robust tobacco prevention program by providing increased funding for existing tobacco-funded programs including law enforcement and smoking prevention efforts. In addition, the legislation also would enact the Governor’s most recent proposed tax on MCO and allocates the funding directly to Med-Cal managed care rates and to increase rates to providers of services to individuals served by the developmental disabilities system and regional center operations budgets by up to 10%. The author concludes that this bill is a win-win for Californians as it will not only generate much needed revenue for health care and developmental services, but it will also help reduce smoking rates and deter teenagers from getting hooked on a deadly habit. The revenue generated by enacting this bill will help provide care for the most underserved and neediest communities in California.
   
   

2. Cigarette and tobacco products tax law. State law imposes an 87 cent excise tax on a package of cigarettes. Federal law imposes a tax of $1.01 per pack of 20 cigarettes with the majority of the funds being used to fund children's health programs, under federal law. Since 1998, the Legislature and voters have adopted three tobacco tax measures which have raised the cigarette tax by 77 cents. Current state taxes and surtaxes are allocated in the following manner: 10 cents to the state General Fund; 25 cents to the Cigarette and Tobacco Products Surtax Fund (Proposition 99, 1988); 2 cents to the Breast Cancer Fund; and 50 cents to the California Children and Families Trust Fund (Proposition 10, 1998). In November 1998, state attorney generals and tobacco companies entered into the Master Settlement Agreement, whereby, tobacco companies, agreed to change the way tobacco products were marketed and agreed to pay, in perpetuity, various annual payments to compensate for medical costs for caring for persons with smoking-related illnesses. In 2012, California received a Master Settlement Payment of around $735.7 million, which adds an additional 50 cents tax per pack.

Current law provides that increasing the cigarette tax triggers an automatic tobacco products tax increase.  Specifically, a provision of Proposition 99 requires the BOE to annually determine the tobacco products tax rate at a rate equivalent to the combined rate of all taxes imposed on cigarettes.  Additionally, because the cigarette tax increase and indirect tobacco products tax will be included in the total sales price, the bill will increased sales tax revenues.  

3. The Lanterman Act. The Lanterman Developmental Disabilities Services Act establishes an entitlement to services and supports for Californians with developmental disabilities, defined as a disability originating before the age of 18, that can be expected to continue, indefinitely, and constitutes a substantial disability. Approximately 290,000 children and adults with developmental disabilities are served in community-based programs and supported by state- and federally funded services that are coordinated by 21 local, nonprofit regional centers. An additional 1,100 individuals are served in four state-run institutions, including three Developmental Centers. Approximately 45,000 agencies provide services in more than 150 service category types including residential care, day programs, behavioral therapies, independent and supported living, supported employment, respite, transportation and many others.

Since 2009, the state has reduced costs to community-based developmental services programs by more than $1 billion (GF) including restrictions on payments for specific services, caps on costs provided for other services, across-the-board reductions, mandated holidays and other cuts. Prior to the 2009 cost-containment measures, the state had frozen rates to providers in order to contain costs. Regional centers also have struggled with heavy caseloads and low salary reimbursements during this time period.

4. In-Home Supportive Services. The IHSS program provides personal care services to approximately 420,000 qualified low-income individuals who are aged (over 65), blind, or who have disabilities. Services include tasks like feeding, bathing, bowel and bladder care, meal preparation and clean-up, laundry, and paramedical care. These services frequently help program recipients to avoid or delay placement in institutional care settings. The average annual cost of services per IHSS client is estimated to be around $14,217 ($1,185 per client per month) for 2015-16.

In December 2011, as a part of the Governor’s budget trigger package that took effect as a result of lower than anticipated state revenues, a 20% across-the-board reduction of IHSS hours was imposed. A federal district court prevented the reduction from taking effect, pending the outcome of litigation. In March 2013, the Administration and plaintiffs (labor unions and disability rights advocates) announced a settlement agreement from an 8% across-the-board reduction to authorized service hours, effective July 1, 2013, and a 7% across-the-board reduction to service hours July 1, 2014. The settlement agreement includes a provision to “trigger off” the ongoing reduction of up to 7%–in whole or in part–as a result of enhanced federal funding received pursuant to an “assessment” (a provider tax under Medicaid law) on home health care services, including IHSS.

DHCS was required by statute to submit a proposal for its implementation to the federal government by October 2014, but the Administration instead submitted a letter to the Legislature in August 2014, indicating that it had worked in good-faith to develop a federally-compliant proposal but, given the new federal guidance on health care related taxes, it was unable to meet the deadline. The letter indicated that the Administration would work with all parties on viable legislation early in the 2015-16 session. Instead, the Governor’s budget included a proposal to create a new MCO tax, which is projected to raise for 2015-16 an additional $215.6 million GF in revenues (to be matched with federal funds) to fully restore the 7% reduction in IHSS hours.

5. MCO tax. California’s existing MCO tax imposes a 3.9% tax on the total revenue received by MCOs through their Medi-Cal managed care plans. This existing tax holds the MCOs harmless and generates funding to offset other GF costs. According to the Senate Budget Subcommittee on Health and Human Services, for 2015-16, the current MCO tax is projected to generate $1.13 billion in non-federal funding for the Medi-Cal program. The revenues are deposited into the Children’s Health and Human Services Special Fund. Half of the MCO tax revenues are used to draw down federal Medi-Cal funds and then used to pay back Medi-Cal managed care plans in order to “make them whole.” The other half of these funds is used to offset GF expenditures for Medi-Cal managed care rates for children, seniors and persons with disabilities, and dual eligibles. California’s current MCO tax sunsets on July 1, 2016.

In a July 2014 letter to State Medicaid Directors, the federal Centers for Medicare and Medicaid Services (CMS) indicates that taxes structured like California’s current MCO tax will likely be considered health care-related taxes that would have to meet Medicaid requirements. This means the tax must:

1. Be applied to all providers in a class (meaning the tax must be applied to all MCOs and not just MCOs providing services to Medi-Cal beneficiaries, unless a waiver is obtained);

2. Applied at the same rate for all payers of the tax (unless a federal waiver is obtained); and,

3. Cannot directly or indirectly guarantee that providers receive their tax back.

The federal deadline for states to reform tax structures that are out of compliance is the end of the states’ legislative session, which is August 31, 2016 for California.

The Administration revised its MCO proposal in early September 2015. This revised tax continues to use enrollment ranges with tax tiers for enrollment in each range, but it taxes Medi-Cal enrollees at a higher amount than non-Medi-Cal enrollees. The revised proposal continues to generate roughly the same amount of revenue ($1.3 billion GF net to the state), but reduces the net impact to managed care plans from the Administration’s prior proposal of $669 million, to $317 million. A more recent proposal further reduces the net impact to the plans to $114 million by selectively reducing corporate, gross premiums and corporate tax rates for plans paying the MCO tax, and by increasing some of the MCO taxing tier amounts and by exempting three plans from the MCO tax entirely. In addition, the revised proposal reduces the net impact to every plan, significantly reduces tax rates for non-Medi-Cal lives and reduces the differential between tiers for non-Medi-Cal enrollees from the previous proposal, particularly for those middle tiers that had the burden of the highest rates under the Administration’s prior proposal.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• Tobacco Tax Revenues. Estimated total annual revenue increase of $1.3 billion per year from taxes paid on cigarettes and other tobacco products ($1.2 billion per year) and electronic cigarettes ($100 million per year ) (General Fund).

• Tobacco Tax Expenditures. The bill specifies that revenues resulting from the increased tobacco tax will be spent as follows:

  • Ongoing costs of about $100 million per year to backfill existing programs supported with tobacco tax revenues (General Fund). Under current law, existing tobacco tax revenues are used to support Breast Cancer Research, programs supported by Proposition 99 (including public health and environmental protection programs), and programs supported by Proposition 10 (for early childhood education). The bill requires that reductions in existing tobacco tax revenues for those programs (due to declining tobacco use resulting from higher overall taxes) would be backfilled with revenue from the additional tobacco tax imposed by the bill. (Note that the bill does not require new tobacco tax revenues to be used to backfill the portion of the tobacco tax that is deposited in the General Fund.)

  • Ongoing costs up to $12 million per year for administration and enforcement by the Board of Equalization (General Fund). The bill authorizes the Board of Equalization to use up to 1% of new tax revenues (after backfilling existing programs) for administration and enforcement.

  • Annual costs of $400,000 per year for required audits of tobacco tax revenues by the Bureau of State Audits (General Fund).

  • Annual costs of $40 million per year to support physician training programs within the University of California System (General Fund).

  • Annual costs of $48 million per year for enforcement programs at the local level, the Board of Equalization, the Department of Public Health, and the Attorney General’s Office (General Fund).

  • Annual costs up to about $900 million per year for increased payments to Medi-Cal providers (General Fund). The bill provides that 82% new tobacco tax revenues (after accounting for the above expenditures) shall be used by the Department of Health Care Services to augment payments to Medi-Cal providers. The General Fund monies allocated in the bill would be augmented with federal matching funds, more than doubling the actual amount of payments made to Medi-Cal providers.

  • Annual costs up to about $140 million per year for tobacco prevention and control programs by the Department of Public Health and the Department of Education (General Fund).

  • Annual costs up to about $55 million per year for research on tobacco-related diseases by the University of California (General Fund). Similar to the increase in Medi-Cal provider payments, the actual amount of funding that would be available will be reduced by any backfill of existing programs.

• Managed Care Organization Tax Revenues. Annual revenues of $1.939 billion per year in tax revenues paid by managed care organizations, including those providing services under the Medi-Cal program and those managed care plans that do not contract with the Medi-Cal program (General Fund).

• Managed Care Organization Tax Expenditures. The bill would allocate the resulting revenues as follows:

  • Annual costs of $1.645 billion to provide increased capitation payments to Medi-Cal managed care plans ($576 million from the Managed Care Organization Tax revenues and $1.069 billion in matching federal funds).

  • Annual costs of $230 million per year to increase provider rates in the regional center system for services provided to individuals with developmental disabilities and increases in regional center operational budgets.

  • Annual General Fund revenues of $1.133 billion used to offset current expenditures in the Medi-Cal program (General Fund).

• Other state costs. In addition to the dedication of new revenues for specific expenditures, the may impose other direct costs on the state.
  
  

• Potential increased Proposition 98 funding obligation. The bill may result in additional state funding obligations for education (General Fund). The state constitution generally requires the state to make payments for K-14 education equal to about 50% of annual General Fund revenues. (The actual funding formulas for Proposition 98 are complex and vary from year to year based on economic conditions and state budgeting.) Historically, the state has not counted revenues from the existing Managed Care Organization Tax towards the Proposition 98 funding requirement. However, because this measure imposes new taxes, the resulting revenues may be subject to the requirements of Proposition 98. The state could therefore be obligated to increase payments for education on average by about 50% of the resulting revenues – in this case about $650 million per year due to the increased tobacco tax and $970 million per year due to the Managed Care Organization Tax.

  • IHHS restoration. Ongoing annual costs of $275 million (General Fund only) to restore an existing 7% reduction in In-Home Supportive Services hours.

  • Cost to the state through CalPERS managed care plans. Annual costs to the state of about $11 million per year, due to the cost of the Managed Care Organization Tax on CalPERS plans (General Fund and special funds). CalPERS health care plans would be subject to the tax as commercial managed care plans. Presumably those contracting managed care plans would pass along the increased tax cost to the state through higher premiums.

  • Ongoing reduction in General Fund tobacco tax revenue. By increasing tobacco taxes, the bill will reduce overall consumption of tobacco products, reducing revenues from the existing tobacco taxes. Based on the projected reduction in consumption, the bill will result in an annual reduction of about $14 million per year in tobacco tax revenue that is deposited in the General Fund. Unlike the other programs supported by existing tobacco tax revenues, the reduced General Fund revenue would not be backfilled with new tobacco tax revenue.

SUPPORT: (Verified 9/11/15)

American Federation of State, County and Municipal Employees, AFL-CIO
American Lung Association in California

OPPOSITION: (Verified 9/11/15)

Bay Area Council

California Business Roundtable

California Chamber of Commerce

California Manufacturing & Technology Association

California Taxpayers Association

Greater San Fernando Valley Chamber of Commerce

Los Angeles Area Chamber of Commerce

Pacific Business Group on Health

Simi Valley Chamber of Commerce

ARGUMENTS IN SUPPORT: The American Federation of State, County and Municipal Employees (AFSCME) writes in support of this measure that without a permanent funding source, the state will reinstate the 7% cut in IHSS hours on July 1, 2016, which would be a terrible injustice to the hundreds of thousands of Californians who rely on the IHSS program to live independently and safely in their homes. AFSCME states these cuts were devastating to all IHSS recipients but particularly so to families with developmental disabled loved ones who rely heavily on the IHSS program.

ARGUMENTS IN OPPOSITION: The California Taxpayers Association (CalTax) writes in opposition to the $2 per pack cigarette tax and the equivalent rate imposed on other tobacco products and e cigarettes. CalTax writes that relying on a declining revenue source to fund important programs creates long-term funding shortfalls that can be paid for only through siphoning revenue from other budgetary needs or through additional tax increases. In addition, CalTax argues this tax is a regressive tax that has a greater burden on lower- and middle-income taxpayers, and this bill will provide a financial windfall for criminals as higher taxes create an increased incentive for the black market and this problem would worsen should the tax increase by $2 a pack.

Prepared by: Scott Bain / HEALTH /

9/11/15 12:39:20

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SBX2 14 (Hernandez) – Tobacco: electronic cigarettes: taxes: managed care organization provider tax: in-home supportive services.

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB X2 14 would increase the current tobacco tax by $2.00 per package of cigarettes and dedicate the resulting revenues for specified purposes. The bill would revise and extend the current Managed Care Organization Tax and dedicate the resulting revenues for specified purposes. The bill would eliminate an existing reduction in the number of hours for which IHSS beneficiaries are eligible.

Fiscal Impact:

• Tobacco Tax Revenues. Estimated total annual revenue increase of $1.3 billion per year from taxes paid on cigarettes and other tobacco products ($1.2 billion per year) and electronic cigarettes ($100 million per year ) (General Fund).

• Tobacco Tax Expenditures. The bill specifies that revenues resulting from the increased tobacco tax will be spent as follows:

  • Ongoing costs of about $100 million per year to backfill existing programs supported with tobacco tax revenues (General Fund). Under current law, existing tobacco tax revenues are used to support Breast Cancer Research, programs supported by Proposition 99 (including public health and environmental protection programs), and programs supported by Proposition 10 (for early childhood education). The bill requires that reductions in existing tobacco tax revenues for those programs (due to declining tobacco use resulting from higher overall taxes) would be backfilled with revenue from the additional tobacco tax imposed by the bill. (Note that the bill does not require new tobacco tax revenues to be used to backfill the portion of the tobacco tax that is deposited in the General Fund.)

  • Ongoing costs up to $12 million per year for administration and enforcement by the Board of Equalization (General Fund). The bill authorizes the Board of Equalization to use up to 1% of new tax revenues (after backfilling existing programs) for administration and enforcement.

  • Annual costs of $400,000 per year for required audits of tobacco tax revenues by the Bureau of State Audits (General Fund).

  • Annual costs of $40 million per year to support physician training programs within the University of California System (General Fund).

  • Annual costs of $48 million per year for enforcement programs at the local level, the Board of Equalization, the Department of Public Health, and the Attorney General’s Office (General Fund).

  • Annual costs up to about $900 million per year for increased payments to Medi-Cal providers (General Fund). The bill provides that 82% new tobacco tax revenues (after accounting for the above expenditures) shall be used by the Department of Health Care Services to augment payments to Medi-Cal providers. The General Fund monies allocated in the bill would be augmented with federal matching funds, more than doubling the actual amount of payments made to Medi-Cal providers.

  • Annual costs up to about $140 million per year for tobacco prevention and control programs by the Department of Public Health and the Department of Education (General Fund).

  • Annual costs up to about $55 million per year for research on tobacco-related diseases by the University of California (General Fund). Similar to the increase in Medi-Cal provider payments, the actual amount of funding that would be available will be reduced by any backfill of existing programs.

• Managed Care Organization Tax Revenues. Annual revenues of $1.939 billion per year in tax revenues paid by managed care organizations, including those providing services under the Medi-Cal program and those managed care plans that do not contract with the Medi-Cal program (General Fund).

• Managed Care Organization Tax Expenditures. The bill would allocate the resulting revenues as follows:

  • Annual costs of $1.645 billion to provide increased capitation payments to Medi-Cal managed care plans ($576 million from the Managed Care Organization Tax revenues and $1.069 billion in matching federal funds).

  • Annual costs of $230 million per year to increase provider rates in the regional center system for services provided to individuals with developmental disabilities and increases in regional center operational budgets.

  • Annual General Fund revenues of $1.133 billion used to offset current expenditures in the Medi-Cal program (General Fund).

• Other state costs. In addition to the dedication of new revenues for specific expenditures, the may impose other direct costs on the state.

  • Potential increased Proposition 98 funding obligation. The bill may result in additional state funding obligations for education (General Fund). The state constitution generally requires the state to make payments for K-14 education equal to about 50% of annual General Fund revenues. (The actual funding formulas for Proposition 98 are complex and vary from year to year based on economic conditions and state budgeting.) Historically, the state has not counted revenues from the existing Managed Care Organization Tax towards the Proposition 98 funding requirement. However, because this measure imposes new taxes, the resulting revenues may be subject to the requirements of Proposition 98. The state could therefore be obligated to increase payments for education on average by about 50% of the resulting revenues – in this case about $650 million per year due to the increased tobacco tax and $970 million per year due to the Managed Care Organization Tax.

  • IHHS restoration. Ongoing annual costs of $275 million (General Fund only) to restore an existing 7% reduction in In-Home Supportive Services hours.

  • Cost to the state through CalPERS managed care plans. Annual costs to the state of about $11 million per year, due to the cost of the Managed Care Organization Tax on CalPERS plans (General Fund and special funds). CalPERS health care plans would be subject to the tax as commercial managed care plans. Presumably those contracting managed care plans would pass along the increased tax cost to the state through higher premiums.

  • Ongoing reduction in General Fund tobacco tax revenue. By increasing tobacco taxes, the bill will reduce overall consumption of tobacco products, reducing revenues from the existing tobacco taxes. Based on the projected reduction in consumption, the bill will result in an annual reduction of about $14 million per year in tobacco tax revenue that is deposited in the General Fund. Unlike the other programs supported by existing tobacco tax revenues, the reduced General Fund revenue would not be backfilled with new tobacco tax revenue.

Background:

Under current law, the state imposes a tax of $0.87 per package of cigarettes in addition to the existing $1.01 federal tax on cigarettes. Resulting tobacco tax revenues are allocated to a variety of programs to support public health, research, early childhood education, and deposited into the General Fund. Current law requires the Board of Equalization to assess an excise tax on non-cigarette tobacco products equal to the tax levied on cigarettes. Current law does not extend the current tobacco tax to electronic cigarettes.

The Medi-Cal program provides health care services to low income individuals and families and other qualified individuals. Over the last several years, there have been a variety of attempts by the state to reduce payment rates to Medi-Cal providers, in an effort to reduce state spending on the program. Many of those rate reductions have been enjoined by the courts or repealed and replaced by different budget actions. Since the enactment of the 2013-14 Budget Act, several categories of providers have been exempted from Medi-Cal rate reductions by statute or administrative action of the Department.

Under current law, the state imposes a Managed Care Organization Tax on Medi-Cal managed care plans. The resulting tax revenues are used to draw down matching federal funds. The state returns the taxes paid by Medi-Cal managed care plans through the capitation rates paid by the program (holding the Medi-Cal managed care plans harmless). The state keeps the remaining revenues, providing about $1.1 billion per year which is used to reduce the state’s funding obligation for the Medi-Cal program. The existing tax expires on July 1, 2016.

Recently, the federal government has indicated that the state’s current Managed Care Organization Tax is not permissible under federal rules. The federal government has indicated that in order to be permissible, such a tax cannot be levied solely on Medi-Cal managed care plans, but must be levied on a broader base of managed care plans in the state. The federal government has indicated that the state has until the end of the current legislative session to replace the existing tax with a tax structure that meets federal requirements.

Under current law, the In-Home Supportive Services Program provides qualified individuals with services intended to permit beneficiaries to remain in their home and avoid the need for institutional care. Current law (and a legal settlement the state has entered into) provides for a 7% reduction in the hours of service to each beneficiary. (However, the 2015 Budget Act temporarily eliminated the reduction in the 2015-16 budget year.)

Proposed Law:

SB X2 14 would increase the current tobacco tax by $2.00 per package of cigarettes and dedicate the resulting revenues for specified purposes. The bill would revise and extend the current Managed Care Organization Tax and dedicate the resulting revenues for specified purposes. The bill would eliminate an existing reduction in the number of hours for which IHSS beneficiaries are eligible.

Specific provisions of the bill would:

• Impose an additional excise tax of $2.00 per package of cigarettes and impose a one-time floor tax on existing supplies of cigarettes held by dealers;

• Impose a tax on electronic cigarettes equivalent to $2.00 per package of cigarettes;

• Expand the definition of “tobacco products” to include electronic cigarettes, for the purposes of licensing and tax collection;

• State that the revenues resulting from the tobacco tax increase in the bill are not General Fund revenues for the purposes of Proposition 98;

• Continuously appropriate new tobacco tax revenues to: (1) backfill existing programs supported by existing tobacco taxes, (2) pay for administrative costs, (3) provide $40 million for physician training at the University of California, (4) provide $48 million for law enforcement relating to illegal tobacco sales, (5) provide increased funding for Medi-Cal provider payments (82% of revenues after making previous allocations), (6) provide funding for tobacco prevention and control programs (13% of revenues after making previous allocations), and provide funding for tobacco-related research at the University of California (5% of revenues after making previous allocations);

• Repeal the existing 7% reduction in allowable hours provided by the In-Home Supportive Services program;

• Impose a new Managed Care Organization Tax (to replace the existing tax) on both Medi-Cal managed care plans and managed care plans that do not contract with the Medi-Cal program, beginning in the 2016-17 fiscal year;

• Establish a rate structure for the new Managed Care Organization tax including a tiered rate structure based on enrollment and which imposes differing tax rates at each tier depending on whether a managed care plan contracts with the Medi-Cal program (tax rates for non-Medi-Cal managed care plans would be substantially lower);

• Require revenues resulting from the new Managed Care Organization Tax to be allocated as follows: (1) $230 million per year to be used to provide additional funding for Regional Center operations and to increase payments to providers of services to developmentally disabled Regional Center consumers and (2) require the remaining revenues to be continuously appropriated to the Department of Health Care Services for support of the Medi-Cal program.

Staff comments: Proposition 98 impacts. As noted above, the state constitution requires payments for K-14 education based on state tax revenues. The bill provides that the tax revenues resulting from the increased tobacco tax are not to be considered General Fund revenues for the purposed of Proposition 98. However, because those revenues are the proceeds of taxes, the bill could be interpreted as increasing in the Proposition 98 funding requirement.

New Managed Care Organization Tax and federal requirements. As noted above, the federal government has indicated that the current tax structure is not permissible under federal requirements because it is only paid by Medi-Cal managed care plans rather than all managed care plans. The new tax structure proposed in this bill does expand the tax to non-Medi-Cal contracting managed care plans. However, because the structure of the new tax still places a significantly higher tax burden on Medi-Cal managed care plans than non-contracting plans, it is not clear whether the new tax structure will meet federal requirements.

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