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Hospitals, Healthy Kids Have Stake in Election

In recent years, tobacco taxes have become enormously popular tools both for deterring smoking and boosting state revenues. Forty-one states, the District of Columbia and Puerto Rico have increased cigarette taxes in the past four years.

Rhode Island currently has the highest state tobacco tax in the nation at a hefty $2.46 per pack. If California voters approve Proposition 86 on the November ballot, the state will dwarf that amount by raising its tax to $3.37 per pack, or about 17 cents per cigarette.

Backed by a diverse group of health care organizations, the Tobacco Tax Act of 2006 would raise the average price of a pack of cigarettes in California to $6.55. Because state law requires that taxes on all tobacco products be raised following an increase in state cigarette taxes, levies on cigars, pipe tobacco and chewing tobacco would follow suit.

Revenue from the tax — projected at roughly $2.1 billion in 2007 — is earmarked for disease treatment, prevention and research. Money also will be used to “backfill” programs now funded under Proposition 10, the California Children and Families First Act. Enacted in 1998, Proposition 10 placed a 50-cent-per-pack tax on cigarettes to fund early childhood development programs.

If Proposition 86 passes, its authors say, Proposition 10 program funding will likely fall short due to declining cigarette sales.

Tobacco Taxes in California

California tobacco taxes currently raise about $1 billion per year. As the cost of cigarettes has increased, smoking rates in California have steadily declined, falling from close to 23% in 1998 to 14% today. California now has the second-lowest rate of adult smoking in the nation, following Utah, and one of the lowest rates of youth smoking: roughly 13% of California youth smoke, compared with 21.7% of high school students nationwide. Tobacco-related cancers also have dropped dramatically.

But while tobacco taxes have been popular in both the state and the nation, critics argue they are inherently unfair. Because such taxes burden smokers — a lower income group compared to nonsmokers — with an entire state’s public health costs, they target the poor and force smokers to subsidize the needs of nonsmokers. Opponents further argue that tobacco taxes have been shown to increase crime, by leading to increased Internet and black-market sales of cigarettes, as well as widespread smuggling.

The Crux of the Arguments

With Proposition 86, the coalition supporting the measure aims to provide health coverage for all California children, tackle California’s nursing shortage and declining state of emergency care, and provide funds for a host of additional public health aims, from curbing smoking to better detection and treatment of prostate and breast cancer.

The California Hospital Association, the California division of the American Cancer Society, the American Heart Association and the American Lung Association of California provided the bulk of funding required for the initiative process.

Proposition 86 spokesperson Maria Robles concedes that the initiative does not offer long-term solutions to the problems of providing affordable, comprehensive health care to children or keeping hospital emergency rooms open. “No one can do that with an initiative,” she says. “But our concern is to improve the health of Californians today, in the short term. It’s about saving lives.”

Opponents argue that the short-term view of the proposition is troubling and that it won’t provide a sustainable source of revenue in the long term because the tax will lead to declining smoking rates. So far, two committees opposed to Proposition 86 have formed, according to the California Secretary of State’s office: Californians Against Unaccountable Taxes, sponsored by R.J. Reynolds Tobacco Company; and the Committee to Stop the $2 Billion Tax Hike, a Coalition of Business, Law Enforcement, Taxpayer Groups, a group that includes Philip Morris USA.

Jerry Azevedo, a spokesperson for Californians Against Unaccountable Taxes, says that the proposition is somewhat misleading, in that revenue from the tax goes largely to hospitals and HMOs — and not to improving smokers’ health directly. “Less than 10% of the tax revenue goes to help smokers quit or stop kids from starting” to smoke, he says.

Distribution of new tax revenues

Revenue from the tax would be placed in a Tobacco Tax of 2006 Trust Fund. The Legislative Analyst’s Office estimates that the tax would raise “slightly declining amounts of revenues” in subsequent years.

Wendy Lazarus — founder and co-president of The Children’s Partnership, a member of the coalition supporting Proposition 86 — predicts that the tax will provide ample funds to expand health care coverage for children for roughly 10 years because first-year revenue would far exceed first-year costs. After that time, the tax would no longer be sufficient to provide coverage as revenue diminishes due to decreasing smoking rates and the number of children requesting coverage increases.

After providing backfill funds for Proposition 10 programs at an estimated cost of roughly $170 million, tax revenue would be divided between treatment, prevention and research programs. Money from the fund would flow to state agencies, cities, counties, schools and school districts, health departments and local law enforcement agencies to support qualified programs.

The health arguments

Proponents of the Tobacco Tax Act argue that in addition to providing much-needed funds for public health programs, the tax would curb smoking even further in California, especially among teens. They argue that over time, the tax would prevent more than 700,000 children from becoming smokers. (Currently, an estimated 50,000 children in California take up smoking each year.)

The initiative also would allocate funds for tobacco-related disease research, anti-tobacco campaigns and programs, and agencies responsible for enforcing laws regulating the sale of tobacco products to minors.

Supporters estimate that all told, Proposition 86 could encourage more than half a million California smokers to quit and prevent roughly 300,000 deaths attributable to smoking. By reducing illnesses associated with smoking and improving care, the coalition estimates that California could save close to $16.5 billion in long-term health costs if Proposition 86 passes.

Proposition 86 supporters say that the initiative also offers an immediate and surefire plan to offer affordable health insurance to all of California’s children, regardless of their family income or immigration status. Ten percent of children in California, about 800,000 children, currently do not have health insurance. With the $371 million in revenue that the Act would earmark for children’s health coverage, the state would be able to expand insurance coverage to many more of California’s uninsured youth under age 19.

Likewise, California’s emergency departments have been closing in recent years.

According to Robles, roughly 70 EDs have closed in the past decade due to rising costs, retrofitting regulations, and nursing shortages among other reasons. Those that remain open, she says, are losing money.

The largest fraction of the Tobacco Tax of 2006 Trust Fund — $758 million — would be designated for shoring up emergency care throughout the state. The California Chapter of the American College of Emergency Physicians and the California Emergency Nurses Association are members of the coalition in favor of Proposition 86.

Most of the funds earmarked for hospitals would go toward expanding emergency services at hospitals throughout the state by improving emergency facilities and equipment. Funds would cover the costs of doctors and nurses, as well as treating the uninsured, who often rely on emergency care in lieu of routine, preventive health care.

Sustainability of Tax Revenue

Opponents of Proposition 86 point to what they regard as its inherent contradiction: The more successful the additional tax in reducing smoking, the less revenue it will bring in.

“These programs are all funded by a diminishing source of revenue,” says Jean Ross, executive director of the California Budget Project in Sacramento. If the tax and the smoking cessation programs it supports declare victory, she adds, then ultimately there’s no money left for children’s health coverage — or any of the initiative’s other public health aims.

Tobacco tax critics point out that cigarette tax hikes are unreliable sources of revenue by definition. In fact, California’s Proposition 10 resulted in a 10% decline in pack sales in its first year, cutting into revenue for Proposition 99, both because of declined tobacco consumption and tax evasion. California voters in 1988 approved Proposition 99, which placed a 25-cent-per-pack tax on cigarettes and earmarked revenue for environmental and health care programs, including the California Department of Health Services Tobacco Control Program.

Despite this effect, statistics compiled by the Campaign for Tobacco-Free Kids show that every state that has implemented a cigarette tax hike has seen a substantial overall increase in revenue despite measurable declines in pack sales. Even Illinois, which saw its pack sales decline by close to a third after its 40-cent-per-pack tax went into effect in 2002, saw state revenue increase by close to 40% in the year that followed.

Experts on both sides of the debate, however, agree that it is impossible to predict the effect that a $2.60-per-pack tax hike will have on smoking rates — and in turn projected revenues — simply because no state has implemented a cigarette tax this large.

The scale of the currently proposed cigarette tax has led the Legislative Analyst’s Office to conclude that “revenue estimates … would likely be overstated” — in large part because they predict a larger number of quitters and smugglers than seen with previous tobacco tax hikes.

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