Dispute over tobacco tax money sparks a budget brawl between the governor and medical groups

A smoker snuffs out a cigarette outside the Capitol in Sacramento.
A smoker snuffs out a cigarette outside the Capitol in Sacramento.
(Rich Pedroncelli / Associated Press)

California voters decisively settled the battle over the tobacco tax at the ballot box last November, overwhelmingly approving a tax hike on cigarettes in order to increase spending on healthcare.

But despite that victory, the initiative, Proposition 56, has set off another skirmish — this time in the state budget — over how Gov. Jerry Brown wants to spend an estimated $1.2 billion generated by the tax.

In one corner is the Brown administration, which has proposed using the money to boost overall spending on Medi-Cal, the subsidized healthcare program for the poor.


In the other corner are some of the initiative’s main proponents — the medical and dental lobbies — which argue that the funds should go toward increasing the reimbursements they receive for seeing Medi-Cal patients, which they say is crucial to keep doctors and dentists participating in the program.

Negotiations remain fluid. On Thursday, the medical and dental groups released a new proposal for spending the money that would give more generous payments to providers with higher Medi-Cal caseloads.

But the issue has taken on symbolic heft for legislators who say the administration has not been transparent about the reasoning behind its proposal, exposing long-smoldering tensions about how Brown’s finance gurus craft their budget plan and their interactions with lawmakers.

“The separation of the executive branch and the Legislature — that’s the fight,” said Assemblyman Devon Mathis (R-Porterville). “The executive branch is operating in the shadows, not being up front with us, not being honest with us, not letting us know what the conversation is.”

The question of how much doctors and dentists get paid to see patients enrolled in Medi-Cal — and its dental care equivalent, Denti-Cal — has long been a sticking point in budget negotiations. California has one of the lowest reimbursement rates in the nation, and medical lobby groups have tried unsuccessfully to roll back a 10% cut to those rates imposed in 2011.

Providers argue the low reimbursement rates make it financially difficult to participate in a program that now covers one-third of the state’s population.

“I know I will lose money in just about every Denti-Cal patient I see,” said Dr. John Blake, a dentist with the Children’s Dental Clinic in Long Beach.


Around 90% of patients at his nonprofit clinic get coverage through the low-income health program, but the meager rates “make it very, very difficult for any private dentist to say, ‘I’ll take 10% of my practice and make it Denti-Cal,’” Blake said.

Brown’s administration has shown skepticism that across-the-board rate increases will lead to more providers participating in the program.

After years of coming up short in the budget, medical groups turned to voters, placing a $2-per-cigarette pack tax hike on the November 2016 ballot. Partnering with labor and public health groups, the proponents squared off against tobacco companies in an expensive ad war that topped $100 million in total spending. Despite being outspent by around $40 million, the initiative’s proponents won with 64% of the vote.

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The initiative directed how the revenue generated by the tax would be spent, with the bulk of money going to existing healthcare programs such as Medi-Cal. The text of the measure does not explicitly designate how to raise reimbursement rates, but it does mention improving payments and it says the funds must increase overall spending, as opposed to being used to free up dollars to be spent on other programs in the state’s general fund. It also says the spending should ensure access and quality care, and address service shortages across the state.

“The initiative leaves the decision on how the money is allocated to the annual legislative process, because we wanted to showcase our willingness to have faith in the Legislature, have faith in the governor,” in how those rates would be raised, said Janus Norman, chief lobbyist for the California Medical Assn.

But when the governor unveiled his budget proposal in January, he didn’t designate any new money to increase reimbursement rates. Of the $1.7 billion in estimated tobacco tax revenue, the administration would put the bulk of those funds, $1.2 billion, toward expanding the Medi-Cal program. The rest would go to various research and law enforcement programs that were detailed in the initiative.

“The availability of $1.2 billion in new tobacco tax revenue is helping the state to continue to fund the expansion of services in Medi-Cal,” said H.D. Palmer, spokesman for Brown’s Department of Finance. “These funds will be put to good use.”

Because its proposal would increase what was spent on Medi-Cal compared with last year, the Brown administration says it complies with the initiative. Pointing to declining revenues and a larger burden of Medi-Cal costs now shouldered by the state under provisions of the Affordable Care Act, administration officials say the tobacco tax funds would help avert cuts to the program.

At a heated budget hearing on Monday, lawmakers drilled into the question of whether Brown’s proposal would supplement existing Medi-Cal funding, as the administration contends, or if it would be a substitute for money that would have come from the general fund, which would violate the terms of the initiative.

Lawmakers pressed budget officials to explain whether they had made contingency plans to make Medi-Cal cuts should the tobacco tax not pass. The administration repeatedly declined to say if such plans existed, citing confidential budget preparations.

Assemblywoman Blanca Rubio (D-Baldwin Park), who grew visibly irked at the hearing, said that under term limit extensions approved by voters in 2010, legislators are feeling emboldened to wrest power away from the executive branch.

“Those days of six-year terms are over. The culture has to change,” said Rubio, a first-year legislator. “Getting them used to actually answering [questions] is a problem.”

The unusually sharp exchange over the tobacco tax funds mirrors a larger frustration that lawmakers have in dealing with the governor’s office on the budget, said Assemblyman Phil Ting (D-San Francisco).

“The communication between the administration and the Legislature within the budget process does need to improve,” said Ting, who chairs the Assembly Budget Committee.

The Department of Finance said what’s relevant to lawmakers is the proposal Brown unveiled in January, not how he arrived at it.

“What [legislators] have before them is the final product of the decision the governor made in terms of his priorities, given the state’s overall fiscal environment,” Palmer said.

Palmer emphasized that the governor’s proposal is not set in stone and that lawmakers can find a way to increase reimbursement rates if they so choose.

“If the Legislature disagrees with what the administration has proposed regarding Prop. 56 and would propose to cut services in Medi-Cal in order to fund other programs … nothing is stopping them from making that choice,” Palmer said.

Lawmakers and medical lobby groups dismiss the prospect of trading reimbursement rates for Medi-Cal cuts as a false choice. Meanwhile, the California Medical Assn. and California Dental Assn. have proposed using tobacco tax money as incentive payments, giving more money to providers who are already serving high numbers of Medi-Cal and Denti-Cal patients.

“We want to make sure that our proposal increased access in a measurable way,” Norman said.

Norman left open the possibility that his group could sue the administration for what he sees as a violation of the initiative by not raising reimbursement rates. But for now, he said, “it’s way too early to have that discussion.”

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4:36 p.m.: This story was updated to add additional detail on the text of the tobacco tax initiative.

This article was originally published at 2:25 p.m.