February 01, 2013
Pursuant to Elections Code Section 9005, we have reviewed the
proposed statutory initiative regarding cigarette tax increases and
financial aid programs for students enrolled at public universities
(A.G. File No. 12‑0018).
Background
Public Universities Charge Students Tuition.
California has two public universities: the University of
California (UC) and the California State University (CSU). The
universities charge resident students tuition to pay for a portion of
education costs, with state funding covering nearly all remaining
education costs. Undergraduate and academic graduate students are
charged about the same, while professional degree students are charged
more. The state has no specific policy for how tuition levels should be
adjusted annually.
Financial Aid Programs Help Students Cover Costs.
The California Student Aid Commission (CSAC) is responsible for
administering several state financial aid programs that help financially
needy resident students cover education costs. The main state financial
aid program is the $1.5 billion Cal Grant program. This program
guarantees financial aid awards to California high school graduates and
community college transfer students who enroll as undergraduates and
meet financial, academic, and other eligibility criteria. At UC and CSU,
the awards typically cover tuition for up to four years. In 2011‑12, 29
percent of UC undergraduates and 20 percent of CSU undergraduates
received Cal Grant awards. Though the Cal Grant program historically has
been supported almost entirely with state funds, the 2012‑13 budget
substituted over $800 million of state funds with federal funds.
Campus-Based Financial Aid Programs Also Cover Costs for
Certain Students. The UC and CSU also administer
campus-based financial aid programs that provide tuition discounts and
waivers as well as assistance for other expenses (such as room and
board). Most of this aid is allocated based on systemwide policies,
though some is based on individual campus policies. More than half of
undergraduates at UC and CSU receive some form of campus-based financial
aid. For example, 26 percent and 30 percent of students at UC and CSU,
respectively, receive full or partial tuition coverage. In addition, the
universities award financial aid to graduate students.
Existing State Tobacco Excise Taxes Support Various
Programs. Current state law—including two voter-approved
measures (Proposition 99 of 1988 and Proposition 10 of 1998)—imposes
excise taxes on the distribution of cigarettes and other tobacco
products, such as cigars and chewing tobacco. Excise taxes are generally
applied to a specific amount of a certain product. For example, the
cigarette excise tax is currently $0.87 per pack. Tobacco excise tax
revenues are used primarily for tobacco education and prevention
efforts, tobacco-related disease research, breast cancer screenings for
uninsured women, and early childhood education. These revenues totaled
just under $900 million in 2011‑12. In recent years, revenues have
decreased by about 3 percent to 5 percent annually because of the
long-term trend toward lower levels of tobacco use in California.
State and Local Sales Tax Revenues Derived From Tobacco
Products. Tobacco users also pay state and local sales and
use taxes (SUT) on the retail price of tobacco products. This retail
price includes the tobacco excise tax. For example, a pack of cigarettes
with a retail price of $5 includes $0.87 in excise tax, and the SUT is
applied to the $5. In 2011‑12, local governments received about $210
million from the SUT on tobacco products and the General Fund received
an additional $230 million. These revenues are used to support a variety
of programs.
Cigarette Excise Tax Linked With Other Tobacco Excise
Taxes. Under Proposition 99, any increase in the cigarette
excise tax triggers an automatic equivalent increase in the excise tax
rate on other tobacco products. The resulting revenue is deposited into
the Cigarette and Tobacco Products Surtax Account established by
Proposition 99 and is used to fund Proposition 99 programs, including
tobacco prevention and research efforts and various health care
programs.
Proposal
Increase in Cigarette Excise Tax. The
measure increases the state excise tax on cigarettes by $1 per pack of
20, increasing the total state excise tax to $1.87 per pack.
Tax Revenues Deposited Into New Special Fund.
Revenues from the $1 per pack cigarette tax increase imposed by this
measure would be deposited to a new special fund—the California
Residents College Accessibility and Affordability Fund. These funds
would be continuously appropriated according to the measure's
provisions, as discussed below. The measure prohibits the state from
transferring or loaning these funds to the state General Fund or any
other state fund.
Revenues for Programs Currently Supported by Cigarette
and Tobacco Taxes. The measure requires the transfer of
some revenues from the new special fund to "backfill," or offset, all
revenue losses for existing tobacco tax programs that occur as a direct
result of the new tax increase. These revenue losses would occur mainly
because an increase in the price of cigarettes and other tobacco
products would (1) reduce tobacco consumption and (2) result in some
tobacco consumption shifting to Internet or out-of-state purchases to
avoid the tax. Each year, the Board of Equalization (BOE) would estimate
the amount of required backfill, and the State Controller's Office (SCO)
would transfer this amount from the new special fund to each program to
offset any decreased funding. Administrative costs for BOE and SCO to
perform these and other duties imposed by the measure would be paid from
the new fund.
Revenues to Expand Financial Aid Programs.
After making the transfers described above, the amount remaining in the
California Residents College Accessibility and Affordability Fund would
be transferred to CSAC. The measure requires that CSAC use this funding
to expand financial aid for California residents enrolled at UC and CSU.
The measure prohibits any of this funding from being used to supplant
existing state funds used for tuition assistance. In addition, the
measure limits CSAC to using a maximum of 0.01 percent of the funds for
administrative costs.
Annual Audits. The measure makes SCO
responsible for having an independent annual audit conducted on the new
special fund. In addition, the measure requires CSAC to display on its
website the amount of money it received from the fund along with an
accounting of its expenditures.
Oversight Committee. The measure
establishes an Independent Financial Accountability Oversight Committee
to issue an annual report to the public and the Legislature evaluating
CSAC's performance. The State Controller would chair the committee and
be responsible for appointing four other members with expertise in
higher education, financial aid, finance, or governance. Members of the
committee would serve four-year terms and would not be compensated,
except to reimburse expenses.
Civil and Criminal Penalties. The proposal
states that the Legislature is to establish civil and/or criminal
penalties related to the willful misuse of funds appropriated by the
measure, including exceeding the amount allowed for administrative
expenses.
Amendments. The measure permits the
Legislature to amend its provisions with a two-thirds vote. Amendments
would be allowed only to further the purposes of the initiative.
Fiscal Impact
This analysis assumes that the initiative appears on the November
2014 ballot. In that case, the first full year in which the proposal
would be in effect is 2015‑16.
Additional Excise Tax Revenues. We estimate
the cigarette excise tax increase would initially result in about $800
million deposited to the California Residents College Accessibility and
Affordability Fund. These revenues would be somewhat lower each year
thereafter, based on our projections of continued decline in cigarette
consumption. In addition, the increase in excise taxes on other tobacco
products that would be triggered by the measure would yield about $45
million annually for the Cigarette and Tobacco Products Surtax Account.
Increased Spending on Certain Programs Supported by
Tobacco Taxes. We estimate that the excise tax increases
imposed by the measure would reduce cigarette and tobacco consumption,
such that existing cigarette and tobacco tax revenues would decrease by
about $70 million. Programs supported by these revenues would receive
transfers from the California Residents College Accessibility and
Affordability Fund to backfill for this loss. As a result, spending on
these programs would not change as a direct result of the measure.
Proposition 99 programs, however, would benefit from the additional $45
million in annual revenues from the tobacco excise tax increase
triggered by the measure.
Likely Increased Spending on State Financial Aid Program.
After making the transfers described above, about $730
million would remain in the California Residents College Accessibility
and Affordability Fund for CSAC to expand financial aid for resident
students at UC and CSU. This could be done in a number of ways. For
example, the financial and academic eligibility criteria for the Cal
Grant program could be adjusted so that more students qualify for the
program; full tuition coverage could be provided to the relatively few
Cal Grant recipients at UC and CSU who do not receive tuition coverage
their first year of college; additional aid could be provided for
students' living expenses; or new programs could be created to provide
financial aid to students currently excluded from Cal Grants, such as
graduate students or students without financial need. Though the measure
prohibits the state from using the new revenues to supplant existing
state funds used for tuition assistance, this may not prevent financial
aid supported with other funds from being reduced. For example, the
state potentially could use the new revenues to supplant some or all of
the $800 million in federal funds supporting the Cal Grant program.
Additional SUT Revenues. State and local
sales tax revenue from cigarette and tobacco products also would
increase under this measure. These additional revenues, which we
estimate to be in the low tens of millions of dollars, would be offset
to some extent by reduced spending on other taxable goods as tobacco
users spend less elsewhere as a result of higher tobacco taxes.
Other Fiscal Effects. As discussed above,
this measure would result in a decrease in the consumption of tobacco
products. The use of tobacco products has been linked to various adverse
health effects by federal health authorities and numerous scientific
studies. Thus, this measure would reduce state and local government
health care spending on tobacco-related diseases over the long term.
Individuals living longer as a result of less tobacco-related disease
also could generate additional economic activity for the state through
higher lifetime earnings and greater consumption. This measure would
have other fiscal effects, however, that could offset these benefits.
For example, state and local governments could incur future costs for
the provision of health care and social services for individuals who
otherwise likely would not have lived as long. Given the many possible
effects resulting from individuals potentially living longer due to the
measure's provisions, the net fiscal impact of these factors is unknown.
Summary of Fiscal Effects:
The measure would have the following major fiscal effects:
Additional annual state tax revenues of (1) $800 million from the
cigarette excise tax increase of $1 per pack and (2) $45 million from
the excise tax increase on other tobacco products triggered by the
measure.
The additional cigarette tax revenue would be spent on financial aid
for resident students at the state's public universities ($730 million)
and backfilling losses to existing tobacco programs ($70 million). The
additional revenue from other tobacco products would be used for other
existing programs, including tobacco-prevention and education.
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