High Court to Review Legality of Tax Initiative

SAN FRANCISCO â€”  In a far-reaching test of the voters’ power to raise taxes, the state Supreme Court has agreed to review the constitutionality of Proposition 99, the landmark tobacco tax initiative passed in 1988.

The justices said they will hear an appeal by a Glendale tobacco distributing and wholesaling firm that contends that the measure violates provisions of Proposition 13 prohibiting “any� new state tax without approval of two-thirds of both houses of the Legislature.

The high court, in a brief order filed Thursday and signed by all six participating justices, said it will review a ruling last December by a state Court of Appeal upholding the legality of the initiative.

The justices did not set a date for a hearing, but they are expected to resolve the issue quickly because of the hundreds of millions of dollars in annual revenues at stake and the broad implications of the case for future attempts to raise taxes by statutory initiative. For example, backers of the “nickel-a-drink� increased tax on alcoholic beverages hope to place their initiative on the November ballot.

Proposition 99, approved by 58% of the electorate, imposed on wholesalers and distributors a 25-cents-a-pack tax increase on cigarettes and tax hikes on other tobacco products. The initiative, in an era of scarce revenues, is expected to generate about $600 million a year for state health, educational and environmental programs.

Lawyers for the tobacco firm in the case, Kennedy Wholesale Inc., argue that the voters lack authority to enact a statutory tax increase in the face of constitutional limits on new taxes imposed under Proposition 13, the 1978 property tax-reduction initiative.

Company attorneys also claim that the tobacco tax measure, by providing funds for some programs they say are not really related to smoking, violates constitutional provisions limiting initiatives to a “single subject.�

State lawyers respond that Proposition 13’s restrictions were intended only to limit the Legislature’s taxing powers and not to intrude on the long-held initiative powers of the voters. All of the tobacco measure’s provisions are reasonably related to countering the wide-ranging problems resulting from smoking--and thus do not violate the “single-subject� rule, the state says.

State Deputy Atty. Gen. Floyd D. Shimomura refused Friday to view the high court’s action as a signal that it disagrees with the appeals court ruling upholding the initiative.

“We feel fairly confident that the Supreme Court is going to uphold the tobacco tax and the people’s right to increase revenues through the initiative process,� he said.

Shimomura said also that even if the initiative is invalidated, it was not assured that all tobacco distributors would be entitled to refunds of taxes already paid. Unlike Kennedy Wholesale Inc., most such firms did not file protests when they paid their taxes, and thus might not be eligible for any refunds, he said.

Carolyn B. Kuhl of Los Angeles, an attorney representing the Kennedy firm, declined comment on the case.

The initiative took effect on Jan. 1, 1989, and two days later, Kennedy paid an increased tax of $50,510.49, and simultaneously filed for a refund with the State Board of Equalization. The board denied the request and the firm filed suit.

The Court of Appeal, in its ruling Dec. 14, held that Proposition 13 was not intended to repeal the voters’ right to enact statewide tax increases by statutory initiative.

“If the people had wanted to abrogate their right of statutory initiative in this area or to impose upon themselves a (two-thirds) majority requirement, we are confident that they would have expressly done so,� Appellate Justice Rodney Davis wrote in an opinion joined by Justices Robert K. Puglia and Frances Newell Carr. “The enactment of the tobacco initiative was well within the power of the electorate.�