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Capitol Weekly
April 13, 2006
By Malcolm Maclachlan
Sponsors of an initiative to raise the state's tobacco
tax by $2.60 a pack say that the effort would not violate
the terms of the Master Tobacco Settlement Agreement
(MSA), despite claims to the contrary by Philip Morris.
However, a spokeswoman for Senate President Pro Tem Don
Perata, D-Oakland, said that he still had numerous concerns
about the initiative.
The Coalition for a Healthy California, which is sponsoring
the Tobacco Tax Act of 2006, commissioned a report from
the San Francisco law firm Renne Sloan Holtzman Sakai
LLP. Delivered last Wednesday, it concluded that, "Based
on the terms of the MSA, the provisions of the Initiative,
and established legal principles governing contracts,
we conclude that adoption of the Initiative would not
constitute a breach of the MSA."
The report was a response to a February 14 letter from
the four legislative leaders to Duane Dauner, president
of the California Hospital Association, which is a co-sponsor
of the initiative. The letter expressed concern that
the initiative could violate the terms of the MSA, the
1998 agreement between tobacco companies and 46 states
and several U.S. territories. The agreement brings California
around $800 million a year. In 2002, the state securitized
the revenue stream with a $3 billion bond used in part
to make up a revenue shortfall.
"If the Initiative were ever construed to violate
the MSA, the General Fund implications could be significant
if the MSA revenues are unavailable to pay the debt service
that support the tobacco revenue Bonds issued by the
state," the letter stated.
On Monday, Dauner and members of his group's board
met with the chiefs of staff of the four leaders and
Susan Kennedy, Schwarzenegger's chief of staff, and provided
copies of the Renne Sloan report.
Perata's chief of staff, Erin Niemela, said legislative
counsel had expressed concern over the MSA issue. Given
the potentially huge budget implications, she said that
Perata wanted to be sure about the implications of the
initiative.
"It is our hope that it doesn't violate the MSA," Niemela
said. She added that the letter was not prompted by a
January 9 letter from Philip Morris USA that had been
circulated in the Capitol, and that she had not seen
the letter before this week. The four page letter argues
that the initiative would violate the MSA: "In the
MSA, the settling states agreed not to impose additional
'statutory' liability for 'reimbursement of health care
costs' on MSA participants and their distributors above
and beyond the payments already provided for in the MSA."
The initiative, the letter states, would impose "additional
liability" on tobacco companies while specifically
earmarking money for health care--an alleged violation
of the MSA. The letter concludes: "not only would
it fail to raise the promised guaranteed revenues, it
would potentially also have the harmful effect of creating
uncertainty in the state's budget." "Philip
Morris' attacks have nothing to do with the MSA," said
Kris Deutschman, communications director for the Coalition
for Healthy Families. "It's just one in an expected
series of manipulations and misrepresentations to stop
an initiative that will reduce smoking."
In addition to the Renne Sloan analysis, she said,
the attorney general's and legislative analyst's offices
both prepared legal analyses as part of the standard
preparation for putting the initiative on the ballot--and
neither found a conflict with the MSA, Deutschman said.
The Philip Morris letter bases some of it's analysis
on a comparison to it's case against the state of Minnesota,
which is being heard this week by the Minnesota Supreme
Court. A lower court ruled in Philip Morris' favor in
December. Minnesota was not part of the MSA, instead
signing its own agreement with tobacco manufacturers.
Furthermore, Deutschman said, the legal issue is different--Minnesota
law is not a tax, but a fee imposed against tobacco manufacturers
to offset the costs of smoking. The initiative, she said,
uses a tax to fund health care, but not to specifically
offset the costs of smoking.
"Nowhere in the MSA does it explicitly say you
can't raise tobacco taxes," Deutschman said. "It
gives tobacco companies the right to oppose new taxes." "As
an original partner to the settlement agreement with
California and the other states, we feel like we understand
the agreement and stand by our analysis of the impact
this potential tax will have," responded Bill Phelps,
a spokesman for Philip Morris USA.
Niemela said that the initiative does reference the
health costs of smoking, which is an issue in the Minnesota
case.
The initiative's sponsors say it does seek to reduce
smoking rates, partially by pricing younger smokers out
of the market. Studies have widely shown the vast majority
of smokers start before the age of 21. If the new tax
passes, it could push the cost of a pack of cigarettes
in California well above $6, with total taxes of $3.47
a pack.
This could backfire, said Norman Sharp, president of
the Cigar Association of America. He said the last time
California pushed through a large increase in the tobacco
tax, a 25 cent increase under Proposition 99 in 1988,
hundreds of tobacco retailers went out of business. This
time around, the affect on retailers would be even worse.
"There is no way they can compete with an excise
tax of 135 percent," Sharp said.
The result, he said, would be to push buyers to stock
up in nearby low-tax states, such as Nevada, or to buy
cigarettes at Web sites that don't charge taxes at all--something
Sen. Deborah Ortiz, D-Sacramento, is seeking to curb
with SB 1208, a bill that targets Internet tobacco sales.
Because the initiative likely would drive down legal
in-state tobacco sales, the initiative would not bring
in anything close to the projected $2.27 billion annually
that it's proponents suggest, Sharp said.
The Legislative Analyst's Office's (LAO) analysis takes
this into account, noting that rising taxes generally
lead to a fall in tobacco sales. The proposed tax is "substantially
greater" than previous taxes, it noted, likely to
lead to a "somewhat greater consumer response." The
LAO's report estimates $2.1 billion in revenue from the
tax, projected to fall each successive year.
Niemela said that the coalition's analysis of the effect
of the tax projected a 26 percent drop in tobacco sales.
However, she said, the actual drop may be larger. This
is a problem because two important programs--the First
Families program created by Proposition 10 and the Proposition
99 breast-cancer program--already depend on tobacco taxes
and could see their funding drop with decreased sales.
Meanwhile, she said, new programs created under the program
do not expire, potentially creating new unfunded obligations
for the state.
"Everything they start up in this continues when
the funding stops," Niemela said.
Deutschman said that propositions 10 and 99 guarantees
are built into the initiative. The Tobacco Tax initiative
represents the merger of two earlier tobacco-tax initiatives.
The initiative's supporters have been touting that it
would bring hundreds of millions a year for children's
health care, nurse training and emergency-room funding.
It is currently in the signature phase for November.
The initiative includes some controversial clauses,
such as an antitrust exemption for private hospitals.
While widely supported in the health-care community,
it is opposed by some key groups, including the California
Nurses Association.
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