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Proposition 56 Tobacco Tax
State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds

Report Number: 2019-046

January 5, 2021
2019-046

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As required by Revenue and Taxation Code sections 30130.56 and 30130.57, my office conducted an audit of the calculation, distribution, and administration of Proposition 56 tobacco tax funds, and the following report details our audit’s findings and conclusions. In general, we determined that the California Department of Tax and Fee Administration (CDTFA) used inaccurate data to calculate the tax; that some state agencies should implement stronger safeguards to ensure that they spend Proposition 56 funds in accordance with the law’s requirements; and that many state agencies did not properly disclose to the public their use of the funds.

Voters passed Proposition 56 in 2016, increasing the tax on tobacco products and generating more than a billion dollars per year in tax revenue for various health, education, and enforcement programs. However, CDTFA used arbitrary and inaccurate data when calculating the tax rate on certain tobacco products. These inaccuracies reduced the tax revenue designated for programs to reduce tobacco use and improve the health of Californians by more than $6 million in fiscal year 2018–19 alone.

Furthermore, certain state agencies did not implement adequate safeguards to ensure that they properly awarded and monitored the use of Proposition 56 funds. Without these safeguards, some agencies failed to apply Proposition 56 funds for their intended purposes. For example, the Department of Health Care Services (Health Care Services) receives Proposition 56 funds for its Physicians and Dentists Loan Repayment Act Program. One of this program’s priorities is to reduce geographic shortages of health care providers. However, Health Care Services awarded tens of millions of dollars to physicians and dentists located in areas of the State that do not have such provider shortages. Many state agencies also failed to publish the amounts of Proposition 56 funds they received and spent on their websites, as Proposition 56 requires, which limits the public’s ability to monitor agencies’ spending of these funds.

Respectfully submitted,

ELAINE M. HOWLE, CPA
California State Auditor