After SF rail system hack, concerns remain

Good morning! Lots going on today. Gov. Brown will introduce his budget this morning, while his nominee for attorney general, Rep. Xavier Becerra, D-Los Angeles, receives his first hearing.

But beyond the day’s headlines, six weeks after some 900 computers used by the San Francisco Municipal Railroad were hacked with ransomware, many concerns remain about the incident — especially as coverage of U.S. cyber vulnerabilities has become more extensive than ever.

San Francisco’s light-rail system, known as Muni, faced an emailed demand from an unknown hacker that he be paid about $73,000 in bitcoins if it wanted to regain control of the computers.

Apparently in fear that more computers had been hacked than the ones displaying a message, “You Hacked, ALL Data Encrypted,” the transit agency shut off ticket machines and fare gates at rail stations from the morning of Friday, Nov. 25, through Sunday, Nov. 27, allowing passengers free rides that weekend.

The following Monday, Muni officials announced that not only had they not paid the ransom, they never even considered paying it, confident in their tech prowess. Many targeted companies and organizations feel they have no choice. Last April, the Hollywood Presbyterian Medical Center in Los Angeles paid nearly $17,000 in bitcoins to recover access to data that had been encrypted by hackers.

Federal and state security officials have kept mum about the attack since it happened.

CalWatchdog has more.

In other news:

• “The powerful storms that soaked Northern California over the past week did more than trigger power outages, mudslides and flash floods. They sent roughly 350 billion gallons of water pouring into California’s biggest reservoirs — boosting their storage to levels not seen in years, forcing dam operators to release water to reduce flood risks and all but ending the five-year drought across much of Northern California, even though it remains in the south, experts said Monday.” The San Jose Mercury News has more. 

• “The fate of two of California’s four NFL teams should become much clearer this week. The Chargers have to decide by Sunday, Jan. 15, whether to exercise their option to share a $1.7 billion stadium being built in Inglewood by the Rams or to stay in San Diego despite voters’ sharp rejection of a Nov. 8 ballot measure to use an increase in the hotel room tax to contribute hundreds of millions of public dollars to build a billion-dollar-plus stadium in the city’s lively downtown.” CalWatchdog has more. 

• “President-elect Donald Trump’s plan to build a wall along the border will run into resistance in California, Lt. Gov. Gavin Newsom said in an interview with The Golden State podcast. The state could sue under the California Environmental Quality Act or its federal equivalent, said Newsom, utilizing a common tactic to delay or kill all sorts of development projects around the state.” The Los Angeles Times has more. 

• “Backers of a recent tobacco tax initiative ballot have agreed to pay a $2,500 fine for failing to identify that billionaire Tom Steyer was a major funder of the campaign in a YouTube video that urged voters to support the measure, according to documents released Monday.” The Los Angeles Times has more. 

Legislature:

• Assembly will hold 9 a.m. hearing on the appointment of Rep. Xavier Becerra to state attorney general.

Gov. Brown:

• Unveiling the proposed state budget today at 11 a.m. in Sacramento. 

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @RareCat

Californians voted in ways that would be expected for such a strongly Democratic-leaning electorate, except on the issue of the death penalty. That isn’t too surprising, either, given that Californians — despite their left-of-center tilt — have long been supportive of tough-on-crime measures and have consistently supported the death penalty.

Voters rejected, by 54 percent to 46 percent, Proposition 62, which would have repealed the death penalty and replaced it with life in prison without parole for murderers. They approved, with nearly 51 percent of the vote, the alternative Proposition 66. That measure streamlines the appeals process so the state can more quickly execute death row inmates.

Despite such “toughness,” voters overwhelmingly approved Gov. Jerry Brown’s sentencing-reform measure (Proposition 57) that would allow early release for some felons. There have been some increases in crime rates following the passage in 2014 of Proposition 47 (reducing some drug felonies to misdemeanors), but California voters remain committed to reducing some types of prison sentences.

On Election Day, voters also were strongly supportive of tax and spending measures. They approved, 54 percent to 46 percent, Proposition 51, which authorizes $9 billion in general-obligation bonds to modernize K-12 public schools. State bond measures are not direct tax increases, but they do increase the debt secured by the state’s general fund. That means legislators will have to allocate money to pay the service on the debt. They create pressure for tax hikes, or for spending cuts in other areas.

Voters also approved Proposition 55 by a hefty margin (62 percent to 38 percent), which will extend by 12 years the “temporary” personal-income tax increases included in the tax-raising Proposition 30 from 2012. The increases are applied on earnings of more than $250,000 for single filers and more than $500,000 for joint filers. Voters also agreed to boost the cigarette tax by $2 a pack — and other tobacco and nicotine products by equivalent amounts — by approving Proposition 56.

In a fairly close tally (51 percent to 49 percent), voters rejected Proposition 53, which was opposed by the business community and labor unions and would have subjected major infrastructure projects ($2 billion or more) to a statewide vote if they used revenue bonds. Such bonds are funded by revenues from the project (i.e., tolls) rather than general tax revenues. A variety of local tax increases also passed. California voters have moved a long way from the days of the 1970s-era tax revolt.

On social issues, Californians voted Tuesday in a reliably liberal way, as well. They supported, 63 percent to 37 percent, Lt. Gov. Gavin Newsom’s measure (Proposition 63) requiring background checks to purchase ammunition. They rejected an effort, by 8 percentage points, to require actors in adult films to wear condoms. They upheld a controversial new law (Proposition 67) banning grocery stores from handing out those single-use plastic bags and turned back an effort by the plastic-bag industry (Proposition 65) to redirect any bag fees from grocery stores to a state environmental fund. The latter was designed as payback to grocers and grocery unions for their role in the legislative deal that led to the plastic bag ban.

In another victory for liberal activists, voters approved — by an overwhelming 72 percent to 28 percent margin — Proposition 58, which overturns the state’s ban on bilingual education in public schools. That’s an educational program in which immigrant kids are taught largely in their native language. It was largely banned in 1998 by Proposition 227, whose supporters were concerned that native Spanish speakers were not learning English quickly enough. Prop. 58 did not get much attention this year, and its ballot designation suggested that a vote for 58 was a vote for preserving English proficiency.

Voters did, however, OK a significant political-reform measure by a wide margin (64 percent to 36 percent). Proposition 54 requires that the final version of any bill in the state Legislature be available in print for 72 hours, thus eliminating those controversial gut-and-amend bills in which new language is inserted at the last minute without public or media scrutiny. The measure also gives the public expanded rights to record the Legislature.

California voters also joined voters in Massachusetts, Nevada and (probably, based on close results) Maine in legalizing the recreational use of marijuana. Several other states approved medical marijuana – something that’s been legal in California since Proposition 215 passed in 1996. Given California’s immense size, this vote (Proposition 64) is viewed as a massive boost to an already-emerging marijuana industry – and to similar votes in other states in coming elections.

Voters approved Proposition 52, which extends a Medi-Cal hospital fee program that allows the state to collect federal reimbursements. It was backed by most of the state’s political establishment. Also passed was Proposition 59, which was an advisory vote asking whether state officials should support a constitutional amendment overturning the U.S. Supreme Court’s Citizens United decision, which invalidated certain limits on campaign spending. This was a largely meaningless initiative, but it garnered 52 percent of the vote.

Finally, voters rejected, 54 percent to 46 percent, a measure (Proposition 61) that would have capped the prices state agencies pay for prescription drugs. Opponents ran an aggressive campaign that no doubt contributed to its failure.

None of this was particular surprising, which is a surprise in and of itself. As the rest of the country defied the predictions, California went along with flow.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Clinton leads CA by a mile

Good morning. It’s Thursday and in the spirit of getting through to the weekend, we’ll give a quick rundown of today’s news and happenings.

Here’s something that should come as no surprise: Hillary Clinton has twice as much support as Donald Trump in California, according to a new poll. A 26-point lead. The San Francisco Chronicle has more.

But here’s something you may not have known: Hollywood’s stars are often quick to lend their name to causes, but not always so quick to give their money. Of course, some open their wallets. Robert Downey Jr. and his wife each gave $35,000 to Prop. 57, Gov. Jerry Brown’s parole measure. The Sacramento Bee has more.  

One of the most endangered legislative incumbents, Assemblyman David Hadley, R-Torrance, has been ordered by a Sacramento judge to explain why he hasn’t fully cooperated with a political ethics investigation. This South Bay seat is one of a handful that will decide if Democrats get a two-thirds “supermajority” in the legislature. Capital Public Radio has more. 

Speaking of donors, the Bay Area’s Tom Steyer — the largest donor in the country — is now the largest donor to the $2-per-pack tobacco-tax increase after giving $3.5 million to the cause on Tuesday. The potential gubernatorial candidate has now spent $11.3 million on Prop. 56, including in the primary. The Los Angeles Times has more.

And totally unrelated to the election, San Diego’s City Council will consider banning Airbnb and other short-term rentals, reports The San Diego Union-Tribune.

Legislature:

• Gone till December.

Gov. Brown: 

• No public events announced.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @mamaloney 

Tobacco-tax fact checks miss the mark

Good morning! With the election a little more than a month away, we’re being bombarded with horserace news about the 17 statewide ballot measures. That includes fact checks. 

Twice now we’ve seen fact-checkers panning the anti-tobacco tax campaign’s claim in a radio ad that Prop. 56, an increase of $2 per pack on cigarettes and other tobacco and nicotine products, “cheats schools out of at least $600 million a year” — once in The Sacramento Bee and once in Politifact California.

And then last week, when a video with similar claims was released by the “No” campaign, The Bee doubled down on its assessment that the commercial contains “inaccurate claims about school funding and omits information to mislead voters.”

Making no value judgement about the pending measure, while happily admitting that the fact-checker sites generally perform good work and a valuable public service, CalWatchdog decided to fact-check the fact-checkers.

One of the findings was that there is at least a diversion of potential funds. In 1988, voters passed Prop. 98, which Prop. 111 then amended the following election. These policies earmarked a certain amount of new revenue for education funding.

Voters have the power to amend the Constitution to waive this requirement, as would be done in this case. But that doesn’t change the fact that we currently live in a world where a certain amount of all new funding is earmarked for education.

CalWatchdog has more.

In other news:

• “Gov. Jerry Brown on Monday signed more than half a dozen bills that decriminalize prostitution and increase protections for young trafficking victims in court amid growing efforts in California to help children and young adults swept into the trade of forced sex and labor,” writes the Los Angeles Times.

• “Though often sympathetic to new gun regulations, Gov. Jerry Brown on Monday vetoed legislation that would have allowed sheriffs to raise the price of obtaining a permit to carry a concealed weapon,” reports The Sacramento Bee.

• “California’s system of roads, bridges and freeways have improved incrementally in recent years, according to a newly released annual survey of state highway systems by the free-market-oriented Reason Foundation.” CalWatchdog has more.

• “In California, at least, the assumption remains that Trump will drag down GOP candidates in congressional races. That’s why the state Democratic Party is seeking in seven swing districts to target Republicans who are ‘running on the Trump ticket,’ according to a party statement last week as it launched the WrongForCA.com website and related social media efforts.” CalWatchdog has more.

• “Californians will pay a new $1 fee on lead-acid car batteries under a law signed by Gov. Jerry Brown on Monday, with a portion of the proceeds going to the massive toxic cleanup in communities near the former Exide battery plant in Los Angeles County,” writes the Los Angeles Times.

Legislature:

• Gone ’til December. But the Senate Agriculture Committee meets today in Stockton at 10 a.m.

Gov. Brown:

• No public events announced.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @FERNnews

And then last week, when a video with similar claims was released by the “No” campaign, The Bee doubled down on its assessment that the commercial contains “inaccurate claims about school funding and omits information to mislead voters.”

Making no value judgement about the pending measure, while happily admitting that the fact-checker sites generally perform good work and a valuable public service, CalWatchdog decided to fact-check the fact-checkers.

Full disclosure: I grew up in Virginia and smoked from age 12 to 28. While I loved smoking, Newports especially, in the end I preferred playing soccer, walking up the stairs at a normal pace, falling asleep without violent coughing fits, waking up without puffy eyes, and yes, having money in my pocket. 

Ad transcript

Davina Keiser, a Long Beach Math Teacher says to the camera: “Good schools are important to my students, and California. That’s why voters passed a law to ensure that schools get 43 percent of any new tax revenue. I was astounded to learn that Prop. 56 was written intentionally to undermine that guarantee. Prop. 56 raises $1.4 billion a year in new taxes and gives most of that money to wealthy special interests, like insurance companies. But not one penny goes to improve our kids’ schools. That’s just bad math.”

As The Bee points out, “The words ‘cheats schools of $600 million a year’ appear on the screen.”

Since the three fact check stories are largely the same, we’ll analyze the most recent Bee story.

The Bee writes: “Similar to an earlier ad funded by the tobacco companies, the new commercial contains inaccurate claims about school funding and omits information to mislead voters. It is a stretch to say Proposition 56 ‘cheats schools of $600 million a year.’ Nothing in the measure reduces school funding from current levels. If the measure passes, the education budget doesn’t decrease.”

We agree that “cheat” is a stretch. Cheat implies there is intent on the part of the Yes campaign to either deceive voters or go outside the normal framework to achieve its objective. Since the proponents are going through the legal, democratic process and are not hiding the fact that the measure is exempt from education-funding requirements, “cheat” seems like normal political hyperbole. 

But that doesn’t mean there isn’t a diversion of funds, or at least a diversion of potential funds. In 1988, voters passed Prop. 98, which Prop. 111 then amended the following election. These policies earmarked a certain amount of new revenue for education funding. While the number changes depending on many factors, it could be between 40 and 50 percent (we found conflicting numbers in our research, but this range should suffice).

Voters have the power to amend the Constitution to waive this requirement, as would be done in this case. But that doesn’t change the fact that we currently live in a world where a certain amount of all new funding is earmarked for education.

Even if everyone says it’s fine to do this, the money still won’t be going to education. If this wasn’t true, proponents wouldn’t have had to write the Prop 98 exemption into the Prop 56 language. 

For The Bee to write Prop. 56 would not cut funding is a red herring. The ad says “cheat,” not cut. And while “cheat” itself is misleading, there is an unquestionable loss of potential revenue. 

The Bee writes: “While Keiser says she was ‘astounded’ to learn that the measure works around Proposition 98, she shouldn’t be. It isn’t unusual. The last two increases in tobacco taxes approved by voters shielded the money from the Proposition 98 education funding guarantee.”

To be clear, you can’t fact check whether or not someone should or shouldn’t be astounded. But since The Bee speculated on Keiser’s level of astoundedness, we’ll speculate it’s possible she wasn’t aware of the prior measure’s exemptions. It’s even more possible that she’s just reading from a script.

To continue our speculation, we believe there is a significant percentage of voters who are unaware that prior tobacco taxes were exempt from Prop. 98. Again, we’re just speculating, but doesn’t it seem more logical than assuming every voter is fully-versed in budgetary minutiae and constitutional law?

In fact, Judge Michael Kinney agreed when he said in August that “Voters don’t know the numbers.” According to the Los Angeles Times, that was Kinney’s justification when he ruled the attorney general needed to be more specific in Prop. 56’s summary, to make clear to voters the connection between Prop. 98 and school funding.

The Bee is correct that the last two tobacco-tax ballot measures were exempt from Prop. 98. But the original tobacco excise tax, passed in 1959, has been contributing a certain amount to education funding since Prop. 98 was approved in 1988. So it’s not unprecedented. We can sympathize with Keiser or any other voter who doesn’t know all of this. 

The Bee writes: “It’s also wrong to say ‘not one penny’ of the funding goes to improve schools. The Legislative Analyst’s Office estimates that up to $20 million of the new tax revenue would to go the Department of Education for school programs to prevent the use of tobacco among young people.”

Anti-tobacco programs in school will do little to give teachers raises, reduce classroom sizes, improve academic performance, improve graduation rates, increase the number of kids going to college, or implement any other meaningful suggestion policy makers and advocates have for improving California’s schools.

While steadily increasing, only 23 percent of voters think California schools have improved over the last few years, while 30 percent say schools gotten worse (35 percent say it’s stayed the same, which could either be negative or positive), according to a recent poll from Policy Analysis and California Education/University of Southern California Rossier School of Education.

These programs may deter some kids from smoking and encourage others to quit (although it never worked on me), and maybe a tobacco opponent would make an argument that lowered-tobacco/nicotine usage actually improved a school, but it would be stretch. To claim it’s “wrong to say ‘not one penny’ of the funding goes to improve schools” is absurd, unless The Bee is being both narrow and creative in its understanding of improvement.

It’s possible that proponents aren’t as concerned with the loss of potential education funding because of another measure on the November ballot, Prop. 55, which would extend a temporary tax on personal incomes of $250,000 or more to education and health care funding. The Legislative Analyst’s Office estimates this will generate between $4 billion and $9 billion per year until fiscal year 2030-31, with a little more than half going to education.

Tom Torlakson, the state superintendent of public instruction, co-wrote the ballot measure argument in favor of Prop. 55, arguing it would fund the hiring of more teachers, help with college affordability, help restore arts and music programs and help stave off cuts, among other things. “We can’t go back to the days of devastating cuts and teacher layoffs,” Torlakson and others wrote.

But despite the sky-is-falling argument on Prop. 55 (there would be a substantial loss of revenue if Prop. 55 fails), Torlakson wrote a letter in favor of Prop. 56, which, as the PolitiFact California fact-check noted, said: “Make no mistake, Proposition 56 will not divert a dime away from schools. Rather, it will raise revenues for school based tobacco prevention and intervention programs.”

The state’s top educator pleads with voters to bolster education funding to fight off “devastating cuts,” while he’s cavalier about the loss of a potential $600 million. There’s a chance the prospect of Prop. 55 passing helped him leave $600 million on the table.

The Bee writes: “This time around, Proposition 56 directs most of the tobacco tax revenue increase to Medi-Cal to raise reimbursement rates, which critics have long blamed for the state’s health care conundrum. Doctors say the financial reimbursements they receive for providing care to California’s most impoverished patients are too low to maintain a practice. The ‘wealthy special interests’ the ad refers to are doctors, clinics, hospitals, managed care plans and any other health-related group that get Medi-Cal payments because they provide services to eligible patients.”

There is big money at stake here. The Legislative Analyst’s Office estimates Prop. 56 could generate between $1.27 billion and $1.61 billion in revenue next fiscal year.

The ad says “most of this money goes to wealthy special interest groups, like insurance companies.” Medi-Cal, the state’s health care program for low-income residents, would receive the bulk of the Prop. 56 revenue, after certain requirements and programs are paid for.

Depending on how the money is actually divvied up in the budget process will determine whether “most” of the funding goes to insurance companies, like managed-care plans, although other health care providers, like doctors, clinics and hospitals, will get their share as well. 

In February, the Legislative Analyst’s Office estimated that in 2016-17, 75 percent of Medi-Cal beneficiaries are enrolled in managed care. 

Tobacco tax one of the most heated ballot measures

Good morning! Happy hump day. We’re talking about ballot measures first this morning. 

There’s broad agreement that the 17 initiatives on the statewide ballot on November 8 cover some of the most significant public-policy issues to come before voters in more than a decade.

For instance, voters will have a chance to legalize marijuana, outlaw the death penalty, put an end to the state’s virtual ban on bilingual education, approve a broad gun-control package and reduce prison sentences for some non-violent felons.

But two months before the election, one of the highest-visibility measures also is fairly narrow in scope. Proposition 56 would raise California’s relatively low tobacco tax (relative to other states) by $2 a cigarette pack – and increase taxes by an equivalent amount on all other tobacco products (cigars, chewing tobacco, etc.).

It also would significantly increase taxes on electronic cigarettes and vaping products. It has high visibility right now because of a series of advertisements opponents are running on radio stations across the state.

CalWatchdog has more.  

In other news:

• “Orange County plans to open a temporary homeless shelter in a former Santa Ana bus terminal within 30 days in an effort to address mounting pressure to reduce a large homeless encampment that has engulfed nearby government offices, causing health and safety problems. The action came just hours before the Santa Ana City Council approved a resolution declaring ‘a public health and safety homeless crisis.’” The Orange County Register has more. 

• “California voters face two capital punishment choices on the November ballot: End the death penalty or speed the way for execution. On death row, inmates are conflicted on the prospects of one-shot appeals, mandated lawyer assignments and simplified execution rules meant to rekindle a capital punishment system that hasn’t executed anyone in a decade, or the simple alternative, throw out the death penalty in favor of life without parole.” The Los Angeles Times has more. 

• Lynwood is the first city in Los Angeles County to approve marijuana cultivation, reports LA Weekly.

• “The mighty grizzly bear ruled California’s valleys, forests and coasts with fierce claws and jaws until people shot the last ones nearly a century ago. Now an environmental group is asking the state to consider bringing it back,” reports The San Jose Mercury News, which is showing off its flashy new website this morning.
• Quote of the day: “Reintroducing grizzly bears to California would be idiotic,” said Pete Margiotta, a Walnut Creek resident and longtime hunter. “Somebody is going to get killed.” 

Legislature: 

• Gone ’til December.

Gov. Brown:

• Speaking at 12:30 p.m. at the California Independent System Operator’s eighth annual stakeholder symposium in Sacramento.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @_RDeLaRosa

With de Leon slated to become the next Senate president pro-tem later this year, SB768 enjoys increased clout behind it.

According to the bill, the money would go into “the Cigarette and Tobacco Products Surtax Fund, the Breast Cancer Fund, the California Children and Families Trust Fund, and the General Fund, to offset the revenue decrease directly resulting from imposition of additional taxes by this article.”

California’s current tobacco tax is is 87 cents a pack. So $2 on top of that would be a 230 percent increase. The bill’s language diverts some of the revenues to the “General Fund” because a new cigarette tax would reduce cigarette purchases due to people quitting and increased black-market smuggling. The reduced sales thus would cut the sales taxes that also are collected on cigarettes.

Even though Democrats have supermajorities in both houses of the Legislature, it might not be easy to get two-thirds voting margins in an election year. Moderate Democrats with lots of Republican voters might shy away from being labeled “tax increaser.”

Initiative

As a result, as a backup option, tobacco-tax advocates are firing up the California Tobacco Tax for Healthcare Initiative. It has been approved for circulation in California as a contender for the November 4, 2014 ballot. The initiative’s name is “The California Healthcare, Research and Prevention Tobacco Tax Act of 2014.”

The initiative also would raise taxes by $2 a pack, although the money would be disbursed differently from SB768. According to the Legislative Analyst, the money would go to anti-tobacco campaigns, cancer research and to abate budgets that lose money because of reduced cigarette sales.

In an estimate that also would apply to SB768, the Legislative Analyst estimates that a $2 a pack tax increase would increase revenues from $1.1 billion to $1.5 billion a year. However, after backfills, only $830 million to $1.4 billion would go to the specified projects.

Prop. 29

The new proposals are advancing less than two years after Proposition 29 was rejected by voters in June 2012. It would have increased taxes $1 a pack to fund cancer research, anti-smoking programs and law enforcement.

If the new tax increase goes on the November ballot, it also would have a tough time passing because it would be twice the amount proposed by Prop. 29. However, Prop. 29 barely lost, 50.3 percent to 49.7 percent, giving hope to tax increase proponents.

And SB768  is backed by the same coalition which supported Prop. 29: the American Heart Association, the American Lung Association, the American Cancer Society, the Service Employees International Union and Health Access California. All would benefit from the proceeds of the higher tax.

Black market 

The Tax Foundation published a study in Jan. 2012 which found nearly 60 percent of the cigarettes sold in New York state are smuggled from other states, or come from Indian reservations with lower tobacco taxes. The study found that tobacco smuggling and the tax rate have risen in tandem since 2006, a strong indication that tax increases and smuggling go hand-in-hand.

The New York State tax on cigarettes has risen 190 percent since 2006, while the rate of smuggling increased 170 percent. New York’s current rate is $4.35 a pack, a fair amount above the $2.87 tax California would impose should a $2 new tax be enacted by either the Legislature or the voters. But it’s clear, as the Leg Analyst also noted, that smuggling would increase.

The National Taxpayers Union Foundation released an excellent study in August detailing the recent history of tobacco taxes in the states. It found:

* States with low cigarette taxes have lower overall tax burdens;

* Tobacco tax hikes are rarely used to cut other taxes;

* Tobacco taxes don’t forestall other tax increases;

* Tobacco tax hikes may encourage other tax hikes down the road;

* Cigarette taxes don’t spur economic growth.

Other new taxes

Californians already pay the highest gas, sales and income taxes in the nation. Yet California lawmakers, on top of the potential new tobacco tax, also are introducing proposals that create new taxes and fees, including:

* SB241 by Sen. Noreen Evans, D-Santa Rosa, would impose a 9.9 percent oil severance tax;

* SB622 by Sen. Bill Monning, D-Carmel, would create a one cent per ounce tax on soft drinks and sweetened beverages;

* SB700 by Sen. Lois Wolk, D-Davis, would create a five cent tax on single-use paper or plastic bags.

Senate Bill 768 by Sen. Kevin de León, D-Los Angeles, proposes to triple California’s cigarette excise tax from $0.87 to $2.87. The tax would also extend to cigars.

De León was unable get SB768 passed during the 2012-2013 legislative session. While it sits on the shelf in the Senate Appropriations Committee, there is already talk of bringing it back to life, as well as initiating another statewide cigarette and tobacco tax ballot initiative.

The bill's language contends its passage would benefit Californians because, among other things, “Tobacco use costs Californians more than $9.1 billion in tobacco-related medical expenses every year. The cost of lost productivity due to tobacco use adds an additional estimated $8.5 billion to the annual economic consequences of smoking in California…. The treatment of cancer, heart disease and stroke, lung disease, diabetes, and other diseases related to tobacco use continues to impose a significant burden upon California’s overstressed health care system, including publicly funded health care programs.”

New study on tobacco tax increase

But would this huge tax increase actually raise the revenues intended, while curbing smoking?

The California Foundation for Commerce and Education report on The State and Local Impact of Tobacco Prices on Smuggling and Black Market Sales found that, by failing to account for smuggling, proponents overestimate tax revenue from tobacco products by $500 million 
annually due to smuggling caused by the tax increase. “In addition, lost legitimate retail sales will eliminate approximately 11,000 direct retail jobs,” it concluded.

“The literature suggests that the $2 excise tax increase may create the unintended consequence of increasing 
organized crime in California,” the study found.

The tax promotes smuggling

California consumers would pay a total tax rate of 137.4 percent per cigar, and a $2-per-pack additional tax on cigarettes, lighting up incentives for smuggling.

De León's bill aims to raise an estimated $1.4 billion, with the money slated to fund research into tobacco-related diseases and the stronger enforcement of tobacco laws.

The tax increase would make California’s cigarette tax rate the fifth highest in the nation, with New York state's the highest at $4.30 a pack. New York City tacks on an additional $1.50 a pack, making smokers inhale a price of up to $12 a pack.

In addition to the state and local taxes, another tax of $1.01 is imposed by the federal government.

If SB768 becomes law, in California a pack of cigarettes would cost more than $9 at grocery stores, including sales tax; a bit less at tobacco stores.

Smuggling tobacco products doesn't pay

The Tax Foundation published a study in January which found nearly 60 percent of the cigarettes sold in New York state are smuggled from other states, or come from Indian reservations with lower tobacco taxes. The Tax Foundation reported that tobacco smuggling and the tax rate have risen in tandem since 2006, a strong indication that tax increases and smuggling go hand-in-hand.

The New York State tax on cigarettes has risen 190 percent since 2006, while the rate of smuggling increased 170 percent.

The National Taxpayers Union Foundation released an excellent study in August detailing the recent history of tobacco taxes in the states. They found:

* States with low cigarette taxes have lower overall tax burdens;

* Tobacco tax hikes are rarely used to cut other taxes;

* Tobacco taxes don’t forestall other tax increases;

* Tobacco tax hikes may encourage other tax hikes down the road;

* Cigarette taxes don’t spur economic growth.

Proposition 29's failure

De León’s bill was introduced less than a year after the June 5, 2012 defeat of Proposition 29, the 2012 tobacco tax ballot measure. Prop. 29 would have boosted cigarette taxes $1 a pack to fund cancer research, anti-smoking activities and more law enforcement for an expected expansion of black markets. And despite voters’ defeat of Prop. 29, its $1 proposed tax would be doubled by SB768.

SB768  is backed by the same coalition which supported Prop. 29: the American Heart Association, the American Lung Association, the American Cancer Society, the Service Employees International Union and Health Access California.

These longtime proponents of cigarette tax increases said Prop. 29′s narrow defeat justified bringing it back through the Legislature. The groups also stand to benefit from the estimated $1.4 billion raised by the tax (assuming the black market does not increase so much it substantially cuts that amount).

Smokers are resilient

“No sooner does the new tax go into effect, my street contacts tell me, than Indian tribes will open tobacco shops at their casinos, where buyers can escape state taxes and buy cigarettes on the cheap,” said Willie Brown,
 former Mayor of San Francisco and California State Assembly Speaker, in a June 2012 “Willie’s World” column in the San Francisco Chronicle.

“Just as quickly, smugglers will start rolling in truckloads of smokes from Nevada, Arizona and Oregon, as street dealers realize there is more money to be made selling hot cigarettes than there is selling dope,” Brown said.

Even the California Department of Public Health found “following a tax increase, many smokers will find a way to buy cheaper cigarettes.”

“Some smokers will try to find cheaper cigarettes on the internet; others will buy their cigarettes on Indian reservations and in casinos, or even travel across state lines,” the California Department of Public Health said. “This type of individual ‘casual’ evasion does not have a significant fiscal impact on the illicit cigarette market whereas, large-scale bulk tobacco smuggling can be a problem.”

Tobacco taxes are relatively easy for lawmakers to pass because they are a tax on a hated and “sinful” habit — smoking. But the smoking tax proposed in SB 768 would extend to cigars, a  favorite vice of many lawmakers and Capitol elites.

There are several chichi cigar lounges within walking distance of the Capitol, where in many cases the real political business of the state takes place.

A sin tax is a state-mandated tax added to products or activities seen as vices, such as alcohol, tobacco and gambling. These taxes are levied by governments ostensibly to discourage use without making the products illegal, while raking off taxes to pay for government programs.

Smoke tax

SB 768 is by Sen. Kevin DeLeon, D-Los Angeles. It would boost cigarette taxes $2 per pack. As I wrote earlier, the bill likely would promote cigarette smuggling.

But this bill is more than just a $2 per pack tax on cigarettes. SB 768 also targets cigar and pipe tobacco by creating a disproportionate tax increase on these products. Because of how the state excise tax works, there is no cap on the amount of tax that can be charged on cigars or pipe tobacco. If SB 768 passes, the state excise tax applied to cigars would go from 31 percent per cigar, to 75 percent.

On top of that, the state and local sales tax — as high as 10 percent in some cities — would be charged. Plus the recently enacted federal excise tax of 52.4 percent on cigars.

Total: California consumers would pay a total tax rate of 137.4 percent per cigar. This translates into nearly $1.40 in taxes for every $1 of product.

This tax reminds me of a car I rented while on a visit to Seattle: The city taxes cost me more than the actual cost to rent the car.

Tobacco products

Tobacco products are an important source of revenue for the nearly 34,000 retailers in California. According to the National Association of Convenience Stores, tobacco sales account for 35 percent of all in-store sales.  Many of these retailers are small “mom and pop” stores that specifically cater to the cigar and pipe market.

SB 768 will irreparably harm these retailers and small businesses by forcing them to cut jobs or even close their business altogether.

We’ve already seen this happen. After Proposition 10 was passed in 1999 and the tobacco tax rose by 50 cents, there was a 26 percent decrease in the taxable sales of tobacco within two years, forcing many retailers out of business. Because of the federal excise tax, the maximum tax rate on large cigars has surged more than 700 percent and has already resulted in significant layoffs within the cigar industry, according to Stogie News.

States with high tobacco taxes open the door to smuggling and black market sales. This illegal activity puts a strain on law enforcement and results in a loss of revenue to businesses, as well as to the state.

According to a January study by the Tax Foundation, 60 percent of the cigarettes sold in New York state are smuggled from other states or Indian reservations with lower tobacco taxes.

According to a CNN summary of the study, “The report said that tobacco smuggling and the tax rate have risen practically in tandem since 2006. The New York State tax on cigarettes has risen 190% since that time, as the rate of smuggling increased 170%.”

Tax hit

The State Board of Equalization has found that California will actually lose hundreds of millions of dollars in revenue if SB 768 passes.  Even legislators have become weary of funding programs using tobacco tax revenue because of its instability.

Californians aren’t the biggest fans of tobacco taxes anyway. In 2006, voters rejected a $2 tax on tobacco and more recently, in 2012, a $1 tax on tobacco. What makes politicians think Californians will be supportive now?

Smokers have always been easy targets, but there’s a bigger picture here. SB 768 will negatively affect our economy, jobs and the livelihood of millions of Californians.

By Katy Grimes

By Katy Grimes

A new bill could drive cigarette prices even higher. It especially would hit working-class Californians because they’re more likely to smoke than professionals.

SB 768 is by state Sen. Kevin de León, D-Los Angeles. It would increase the state’s cigarette tax another $2 a pack from the current 87 cents. That would be a 230 percent hike, to $2.87. It would raise an estimated $1.4 billion, with the money funding research into tobacco-related diseases and the stronger enforcement of tobacco laws.

The tax increase would make California’s cigarette tax rate the fifth highest in the nation, with New York’s the highest at $4.30 a pack. New York City tacks on an additional $1.50 a pack, making smokers inhale a price of up to $12 a pack.

In addition to the state and local taxes, another tax of $1.01 is imposed by the federal government.

If SB 768 becomes law, in California a pack of cigarettes would cost more than $9 at grocery stores, including sales tax; a bit less at tobacco stores. That likely will spark more black-market activity.

According to a January study by the Tax Foundation, about 60 percent of the cigarettes sold in New York state are smuggled from other states or Indian reservations with lower tobacco taxes. According to a CNN summary, “The report said that tobacco smuggling and the tax rate have risen practically in tandem since 2006. The New York State tax on cigarettes has risen 190% since that time, as the rate of smuggling increased 170%.”

De León’s bill also is advancing less than a year after the June 5, 2012 defeat of Proposition 29, the 2012 tobacco tax ballot measure that would have boosted cigarette taxes $1 a pack to fund cancer research, anti-smoking activities and more law enforcement for an expected expansion of black markets. Despite voters’ defeat of Prop. 29, its $1 tax would be doubled by SB 768.

Unlikely to discourage consumption

“Sin taxes” are aimed at currently legal activities or products frowned on by some people, including taxes on alcohol, gambling or sugary drinks.

According to the Adam Smith Institute, “Sin taxes are more likely to deter moderate users than heavy users, whose demand for cigarettes and alcohol is relatively inelastic.” “Sin taxes” are the most regressive indirect taxes, as they tend to target products that are disproportionately consumed by the poor. The law even concedes this, explaining in its own words, “Tobacco use rates are much higher than the general population in African Americans, white men, Korean men, enlisted military personnel, lesbian, gay, bisexual and transgender, young adult, rural, and low-income populations.”

Proposition 29 redux

Prop. 29 was sold as the “Tobacco Tax for Cancer Research Act.” SB 768  is backed by the same coalition which supported Prop. 29: the American Heart Association, the American Lung Association, the American Cancer Society, the Service Employees International Union and Health Access California.

These longtime proponents of cigarette tax increases said Prop. 29’s narrow defeat justified bringing it back through the Legislature. The groups also stand to benefit from the estimated $1.4 billion raised by the tax (assuming the black market does not increase so much it substantially cuts that amount). That’s the way legislation is done in today’s political environment.

The current $1.01 federal tax and the .87 cent tax in California on a pack of cigarettes apparently are not enough to keep the anti-smoking and health programs alive.

Tobacco tax monies currently are divided among the general fund and three programs:

* 10 cents to the General Fund.

* 25 cents to the Cigarette and Tobacco Products Surtax Fund (created by Proposition 99 in 1988).

* 2 cents to the Breast Cancer Fund (created by AB 478, Chapter 660 of 1993).

* 50 cents to the California Children and Families Trust Fund (created by Proposition 10 in 1998).

Cigarette smuggling

Cigarette taxes have historically been an easy mark for politicians who keep raising them. The growing intolerance by non-smokers of the smoking population helps. But the social consequences are serious, along with a lucrative black market for smuggled cigarettes.

“But state and local levies have grown so onerous in some parts of the country that they almost could be called ‘prohibition by price,'” wrote Michael D. LaFaive and Todd Nesbit, Ph.D. of the Mackinac Center. Their study looked at cigarette smuggling into Michigan, where state taxes are $2 a pack — that is, less than the $2.87 under SB 768. They found shocking results:

“And like other forms of prohibition, this one has led to a spike in smuggling-related criminal activity as smokers turn to illicit distribution channels. We estimate that for 2011, 29.3 percent of all cigarettes consumed in the Great Lake State were smuggled in.”

For SB 768, the bill analysis said:

“California tax-paid cigarette distributions have decreased dramatically over the past 30 years, both before and after passage of Proposition 10. Consequently, revenues for all funds supported by cigarette taxes have declined as well.”

Unfortunately for government budgets, revenue expectations from tobacco taxes tend to be chronically wrong. “Since 2003 there have been 57 cigarette tax increases across the nation and 68% of them have failed to meet projected revenues,” The Minnesota State News reported in 2011, when faced with another tobacco tax increase. “In 2006, New Jersey raised cigarette taxes with the hope of pulling in $30 million in extra revenue each year.  Not only did the tax hike fail to bring in extra revenue, but the state actually collected $20 million less in cigarette sales.”

New Jersey’s cigarette tax currently is $2.70 a pack, also less than the $2.87 it would be in California if SB 768 becomes law.

Decline in cigarette sales means funding gap

According to the California Board of Equalization, programs funded by cigarette taxes have experienced a “funding gap” due to cigarette sale decreases.

Those most adversely impacted by an increase in the tobacco tax are working class and low-income Californians. Those with an annual income of $10,000 to $20,000 bear the burden of tobacco tax increases.

The Taxpayers Protection Alliance reports “these types of ‘targeted’ tax increases harm small businesses and could result in smuggling, which would not only defeat the purpose of tax increase but also take away money from both those businesses and the state that they otherwise would have received without the proposed legislation.”

Ironically, smokers and heavy drinkers do not cost the state more for health care, according to the Adam Smith Institute. “Though smokers may cost more during their working lives, non-smokers require greater expenditure in pensions, nursing care and welfare payments. Chronic diseases associated with old age are far more expensive than the lethal diseases associated with smoking and alcoholism.”