Spending Plan for Tobacco Tax Income Draws Fire From 2 Sides

Deukmejian Administration budget proposals to spend $625 million in new tobacco tax revenues for health and other programs came under fire Wednesday from both the tobacco industry and proponents of Proposition 99, the anti-smoking initiative.

Tobacco industry spokesmen, during a hearing of the Senate Revenue and Taxation Committee, said it is a mistake for Gov. George Deukmejian to count on raising $625 million because of a legal challenge to Proposition 99’s required increase in taxes on cigarettes and other tobacco products.

The industry representatives also said the Proposition 99 tax rate of 41.67% on the wholesale price of cigarettes is so high that the Administration’s expected windfall will never develop because smokers will smoke less and be encouraged to buy their tobacco products from mail-order firms in states that do not have the tax.

Supporters of Proposition 99 attacked the Administration for proposing to use the new revenues to fund a variety of programs that are now financed from general tax revenues. They argued that the governor’s budget proposals violate a provision of Proposition 99 prohibiting use of the money “to supplant existing levels of service.”

Deukmejian Administration officials insisted that their revenue projections as well as their reading of Proposition 99 are appropriate.

Lonnie Mathis, chief of financial research for the Department of Finance, said the Administration expects only a 2% reduction in smoking as a result of higher prices. That expectation, he said, is based on a belief that people who smoke today are “hard-core smokers” who do not plan to quit no matter what the price.

“We don’t think a penny a cigarette is going to have a real significant impact on those people,” he said.

Two committee members said they agree with critics that the Administration budget proposals violate provisions of Proposition 99.

Sen. John Garamendi (D-Walnut Grove), the committee chairman, said he thinks the Administration “is asking the Legislature to do something that is apparently illegal.”

Another committee member, Sen. Quentin L. Kopp (I-San Francisco), said he also thinks the Administration is trying to misuse Proposition 99 funds and asked for a formal legal opinion from the Legislature’s chief lawyer. Preparation of the opinion could take several weeks.

Health Services Plan

The dispute over whether Deukmejian is proposing to use Proposition 99 money to finance continuing state programs centers chiefly on a new plan to finance health services for poor Californians with $331.3 million in cigarette tax money. Deukmejian is also proposing to trim $358 million from a health program for the same patient group that is financed with general tax revenues.

Garamendi told John Ramey, deputy secretary of the Health and Welfare Agency, that he thinks the Administration “eliminated the old program and started a new one and substituted the source of funds using the cigarette tax. I think that is illegal.”

Ramey said, “We don’t believe that we are asking the Legislature to do something that is illegal.”

Dr. James Nethery, a dentist and chairman of Coalition for a Healthy California, sponsors of Proposition 99, accused the Administration of playing “a shell game.”

“The wording of the initiative is very clear. The funds are not to be used to replace existing programs, and there is no question in my mind that is exactly what is happening in this case,” Nethery said. He said that the coalition would file a suit to block the spending proposal if the Legislature accepts the governor’s plan.

Opponents of Proposition 99, during their turn before the committee, said they have already filed suit on the grounds that they believe the tax increase is illegal because it was not approved by the Legislature.

David R. Doerr, a tax specialist for the California Taxpayers Assn., told committee members not to count on seeing the money because it is possible that the courts will rule in the tobacco industry’s favor. Doerr said the California Constitution prohibits voters from raising taxes in any way other than through a constitutional amendment. Proposition 99 raised the tax by changing a statute in the tax law.

Department of Finance officials estimate that most of the revenue from Proposition 99, $595 million, will come from the tax increase on cigarettes and that about $30 million will come from sales of cigars, pipe tobacco and other tobacco products.

Norman Sharp, a spokesman for the Cigar Assn. of America and the Pipe Tobacco Council, predicted that “the $30 million will never materialize” because smokers will either quit or buy tobacco products by mail order. He said sales of pipe tobacco and cigars have declined 76% over the last 25 years.