California Proposition 56: Tobacco Tax Increase

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As of June 27, 2017, this page no longer reflects current events.  The California budget includes payments for health care providers from Proposition 56 tobacco tax funds.

According to the California Budget and Policy Center’s analysis of the budget, of the projected $1.3 billion in tobacco tax funds that are to flow to Medi-Cal in 2017-2018, up to $546 million could go to doctors, dentists, and other Medi-Cal providers as “supplemental payments.”  California will only disburse these payments if 1) the state receives “all necessary federal approvals” in order to ensure that federal Medicaid matching funds will be available to the state; and 2) the federal government does not cut funding for Medi-Cal.  The Department of Health Care Services will later determine more rules for allocating these payments.  The remaining funds will be used for ordinary spending growth in the program.

Although parties reached a compromise this year, these numbers are subject to change for the 2018-2019 fiscal year.

Quick Links

I. Introduction
II. Tax Distribution
III. Controversy over Funding
IV. External Analysis and Discussion



I. Introduction

On November 8, 2016, voters approved California Proposition 56, or the Tobacco Increase Initiative.  The measure went into effect on April 1, 2017 and is codified as the California Healthcare, Research and Prevention Tobacco Tax Act of 2016.

This initiative levied a tax on tobacco products and redefined “other tobacco products” in state law to include any type of device sold in combination with nicotine, including e-cigarettes.


II. Tax Distribution

In 2016, California’s excise tax on a pack of cigarettes was $0.87.  Under the new law, the total state tobacco tax per pack of cigarettes has gone up to $2.87 (not including the $1.01 federal tax).  The measure also raises the tax on other tobacco products by $2.00.  It is expected to generate anywhere from $1.2 billion to $1.8 billion in its first year.

Prior to the passage of Proposition 56, revenue from the tobacco excise tax went to the California General Fund, tobacco prevention, healthcare services for low-income persons, environmental protection, breast cancer screenings and research, and early childhood development programs.  The measure changes the distribution of the revenue according to a four-step process:

Step 1: New revenue will replace old revenue lost due to lower tobacco consumption resulting from the tax increase.  This amount is determined by the California Board of Equalization (“BOE”).

Step 2: The next 5% of the revenue will pay the costs for the BOE to administer the tax.

Step 3: Gross Amounts to Certain Groups and Organizations

— $48 million will be used to enforce tobacco laws;

— $40 million will go to the University of California for physician training to increase the number of primary care and emergency physicians in the state;

–$30 million will go to the Department of Public Health for preventing and treating dental disease; and

— $400,000 will go to the California State Auditor to audit funds from the new tax at a regular interval.

Step 4: The remaining funds will be distributed among four groups as follows:

— 82% of remaining funds go toward services related to Medi-Cal;

— 11% goes to the Department of Public Health for tobacco-use prevention;

— 5% goes to the University of California toward research into cancer, heart, and lung diseases and other tobacco-related diseases; and

— 2% go to the California Department of Education for school programs focusing on tobacco-use prevention and reduction.

According to the official proposition summary distributed to voters, an estimated $710 million to $1 billion will go to Medi-Cal, though some analysts say that number could climb to $1.3 billion.


III. Controversy over Funding

Although these funds are required to go to Medi-Cal, there is some dispute about how the funds should be distributed within the program.  Governor Jerry Brown has suggested that the tobacco excise tax revenues can “support new growth in Medi-Cal expenditures.”  Although this may sound as though the Governor wishes to expand Medi-Cal, he is actually suggesting to use the funds “to pay for typical year‑to‑year cost increases in the program.”

Some analysts, such as the California Budget and Policy Center, the California Medical Association (“CMA”), and the California Dental Association, have stated that this approach stands in direct contrast to the plain language of the measure.  The organizations explain that the proposition directs funds to be spent to improve provider payments, especially for those who provide Medi-Cal services.  They also argue that under Brown’s proposal the revenues would supplant existing state general funds, which goes against the language of the law (see page 20 of the linked pdf).

Furthermore, Medi-Cal providers hope that these funds would maintain funding for the Coordinated Care Initiative (“CCI”) program.  CCI aids the sickest and poorest Californians who are covered by both Medi-Cal and Medicare (known as “Medi-Medis”).  Currently, the Director of Finance must determine each year whether CCI is cost-effective; if it is not, the program automatically ceases operation in the following fiscal year.

The California Department of Finance has determined the CCI cannot afford to continue, and as a result, Governor Brown has proposed to eliminate CCI program in 2017-2018.  This would eliminate In-Home Support Services (“IHSS”) under the CCI plans.  Though CCI was not cost‑effective, the proposal suggest that “the duals demonstration program provided the potential to reduce the cost of health care for the affected individuals and improve health outcomes.”  Accordingly, the budget would continue the Cal MediConnect program, continue mandatory enrollment of dual eligibles, and integrate long-term services and supports (except IHSS) into managed care.”  This would reduce spending by over $600 million per year.

If legislators were to reject the governor’s plan, they could increase payments for Medi-Cal providers and pay for the IHSS under the CCI plans.  However, this would also create a gap of more than $1 billion in the Medi-Cal budget.  As the California Budget and Policy Center explains, state policymakers could fill the gap with revenues from the state’s general fund, but that may cause shifting of funds from other state services.  Finding a solution will not be easy, and may lead to a state congressional battle over these funds.


IV. External Analysis and Discussion

No April Fool: Big State Tobacco Tax Increase Set to Take Effect
California Budget and Policy Center
March 31, 2017

CMA Unveils Plan to Recoup Prop 56 Funding to Improve Access to Care
California Medical Association
March 20, 2017

An Overview of the Governor’s Proposition 56 Proposals
Legislative Analyst’s Office
February 22, 2017

Governor Brown’s 2017-2018 Budget Proposal: Overview and Summary
California Medical Association
January 10, 2017

Health and Human Services: Governor’s Budget Summary 2017-2018
California Health and Human Services

Proposition 56: Should California Voters Increase the State Excise Tax on Cigarettes and Other Tobacco Products?
California Budget and Policy Center
October 13, 2016

California General Election Official Voter Information Guide
California Secretary of State, Elections Division
September 2016