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

CDTFA used inaccurate data to calculate the tax rate for other tobacco products, including excluding discount and deep-discount cigarettes and applying an allegedly arbitrary 6 percent wholesale markup, resulting in potential revenue losses of millions.

State agencies receiving Proposition 56 funds did not consistently implement safeguards to ensure funds were awarded and monitored for allowable purposes; some grants did not comply with statutory requirements.

Several agencies failed or were late in publishing required information on Prop 56 funds on their websites for fiscal years 2017–18 and 2018–19, limiting public oversight.

Some grant awards did not align with law (e.g., Health Care Services loan repayment program not prioritized for areas with shortages; Justice Tobacco Grants not restricted solely to enforcement-related activities).

There were deficiencies in monitoring grantees’ use of Prop 56 funds, increasing the risk that funds were spent for purposes not authorized by law.

CDTFA should update its methodology by March 2021 to include nonpremium cigarettes in the average manufacturer price calculation for wholesale cost.

CDTFA should determine the current wholesale markup rate for cigarettes and use this rate (no less frequently than every three years) in calculating the tax rate for other tobacco products.

Publish complete Prop 56 funding information on agency websites by April 2021 (for fiscal years 2017–18 through 2019–20) and within six months for 2020–21, including amounts received, spent, and obligated, as well as corrections.

Health Care Services should amend its application selection process to require loan repayment program participants practice in health professional shortage areas and validate ongoing practice.

Justice should implement a formal grant application review process to ensure awards are for purposes allowed by Prop 56 and consistent with state law.

Public Health and Education should formalize processes to ensure at least 15 percent of Prop 56 funds are used to address tobacco-related disparities.

Establish and enforce monitoring processes to verify grantees’ compliance with grant agreements and ensure funds are spent for intended purposes.

UC should ensure compliance with Prop 56 priorities, including focusing on programs that address provider shortages and public health goals.