Smokers could cough up billions for health care if measure passes. health panels, tobacco firms pursue Prop. 86 defeat.

Local divisions are swelling over the latest proposed tobacco tax that would make California one of the most expensive places in the nation to buy cigarettes.

The San Diego Regional Chamber of Commerce public policy and legislative committees have agreed to oppose Proposition 86, which would raise $2 billion annually for health care if passed in the November statewide election, while the health care committee has endorsed the initiative. The chamber said it will take an official position this month.

Proposition 86 would raise the price of a pack of cigarettes by $2.60 beginning in January, bringing the average price of a pack to almost $7. California more than doubled its tobacco tax in 1998, but today about half the states still have higher taxes on cigarettes than California.

R.J. Reynolds Tobacco Co., the Cigar Association of America and Philip Morris USA Inc. are backing the "No on Prop 86" campaign, and have already laid down at least $7 million in opposition, according to campaign spokeswoman Carla Hass, who is working from Sacramento.

On Aug. 17 in U.S. District Court in Washington, D.C., Philip Morris and R.J. Reynolds were found guilty of a five-decade scheme to defraud the public on the dangers of smoking.

Others against the tax include mostly retailers, taxpayer groups and some law enforcement agencies that worry about increased smuggling. The Food and Beverage Association of San Diego and the Deputy Sheriffs Association of San Diego County oppose the tax.

Funding for the tobacco tax initiative comes largely from the California Hospital Association, and also from the American Cancer Society, the American Heart Association, California Emergency Nurses Association and Campaign for Tobacco Free Kids.

The "no" campaign is arguing largely that the "yes" campaign falsely brands itself as funding tobacco cessation and prevention programs, yet, said Hass, "less than 10 percent of the tax goes toward helping smokers quit or keeping kids from starting."

Backers: Money To Be Well Spent

That's incorrect, said Maria Robles, a Sacramento-based spokeswoman for the initiative and registered nurse. She said around $558.5 million, or 28 percent of the tax revenues, would go toward tobacco-related prevention or disease, including $267 million for cancer, heart, asthma and other disease-prevention and control programs; $177 million for tobacco-use-prevention education and enforcement programs; $96.5 million for tobacco-related disease and cancer research; and $18 million for tobacco cessation services.

The rest of the tax revenue, according to the "yes" Web site, would be allocated as follows: $758 million would fund emergency services, which health care industry professionals here say are overloaded due to the large uninsured and immigrant populations in San Diego County. Millions more would go toward physician and nurse education, community clinics and children's health insurance.

According to a telephone poll of 762 likely voters, conducted in late July by the San Francisco Sentinel, Proposition 86 has an early lead, with 63 percent of the respondents saying they would vote for the tax.

'Regressive Tax'

But some prominent San Diego Republicans say the tax largely funds the "special interest" of hospitals and call it a temporary fix for health care problems.

"In my mind, that's a regressive tax," said Roxana Foxx, owner of Hunter International, a San Diego-based small business that helps attorneys merge and acquire partners. Foxx is the vice chairwoman of the chamber's public policy committee and a former head of the San Diego County Republican Party. "This is ballot-box budgeting."

Foxx and local businessman Jim Knight, also a Republican, say it's an unreliable way to fund health care because as people quit smoking, the revenue could decline.

Knight, who is a urologist by training and the chief executive officer of San Diego-based Consumer Directed HealthCare Inc., as well as the chairman of La Jolla-based 1st Pacific Bank of California, said the tax "victimizes low-income people who are addicted to tobacco."

But "yes" spokeswoman Robles said tobacco companies do the victimizing, even as they increase their own prices each year and spend millions on marketing.

Deep Pockets

Robles said tobacco companies are planning a hard and expensive fight because, as the initiative's studies show, 43 percent of tobacco companies' revenue from new addicted smokers could be lost if the proposition were approved.

An advertising campaign that began recently in the San Diego area, paid for by the "No on Prop 86" campaign, includes TV commercials that say the proposition would allow hospitals to price-fix and avoid antitrust laws.

The yes campaign has asked TV stations to stop airing the ads, said Robles, because she said they are "false."

Knight, a former president of the San Diego County Medical Society, is concerned that the initiative could allow hospitals to share pricing and salary information that could raise the cost of health care services for patients and cause doctors to refuse overnight emergency on-call shifts. He said at local hospitals where the shifts are required, doctors are beginning to talk about leaving altogether if the proposition passes.

"Already, in several hospitals here in town, there are no doctors taking call for certain specialties," Knight said. "In one major hospital here in San Diego, there are no urologists taking call for kidney stones or fractured kidneys. In others, medical staff rules require physicians to take call. In these hospitals, it is already being discussed privately that the only alternative is to resign from the hospital staff rather than be forced to take call, get up in the middle of the night, leave your family, go care for a critically ill patient, see a full office the next day or operate while dead tired from the night call; all for little or no reimbursement."

Jesse Markham Jr., who oversees the firmwide antitrust practice at Morrison & Foerster LLP and is an adjunct professor of antitrust law at the University of San Francisco Law School, said the language in the initiative would exempt hospitals from some parts of federal and state antitrust law. However, he said the exemption is not likely to allow price fixing.

Sharing Personnel

The exemption, rather, said Markham, allows hospitals to share emergency personnel, particularly specialists.

"If hospitals got together to fix prices, it would be difficult for them to claim this as protection," said Markham, who has also served as the deputy attorney general for antitrust for the state of California. "What (hospitals are) being encouraged to do by this statute is to cooperate in ways that may not violate antitrust laws anyway. I don't think anybody is going to be fixing prices under this exemption."

Health care attorney George Root, a partner in Foley & Lardner LLP's San Diego office, said his firm, though not his office, helped write the initiative.

"Nothing in the bill sets pricing," said Root, who is the attorney for the Hospital Association of San Diego and Imperial Counties, or HASDIC, an organization that endorses the proposal. "This bill provides a source of money for hospitals to take care of their obligations."

More than half the state's hospitals operate in the red. San Diego County's situation is not as bad, but few hospitals here make a large profit, according to HASDIC.

California Medical Association spokeswoman Karen Nikos said the CMA has taken its name off Proposition 86's ballot language, which would have included CMA on an official list of supporters.

"The board voted unanimously to support the initiative, but to keep peace within the organization" we agreed to take our name off the ballot language, Nikos said.

Other objections by the no campaign include initiative revenue being distributed by the Legislature. Instead, that campaign suggests that an independent citizens oversight committee would be more accountable. When asked to explain why, Hass said she would pose the question to campaign leaders, but never called the San Diego Business Journal back.

The opposition also says the tax would cause an increase in tobacco smuggling. The no campaign cites a study by the Centers for Disease Control and Prevention that showed that even though the number of people who smoked remained about level from 1990 to 2002, the number of taxed packs of cigarettes sold per person dropped 20 percent.

"One explanation for this drop in taxed cigarette sales is that smokers are finding other venues for purchasing cigarettes and evading state and federal taxes, such as smuggling and online sales," the anti-86 campaign literature says. It also cites that 57 percent of New York smokers reported having purchased cigarettes from low or untaxed sources in 2004, when that state had among the highest cigarette taxes in the nation.

Robles said the opposition to previous tobacco tax proposals had similar concerns about smuggling.

"Studies only showed a 1 percent to 4 percent increase in smuggling related to the cost of cigarettes," Robles said. "The benefits far outweigh the small risk for smuggling."