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The Tobacco Industry's Legislative Strategies

On January 17, 1989, the tobacco industry and its consultants met to discuss their short- and long-term strategies for dealing with Proposition 99. For the short term, they hired Sacramento lobbyist Kathleen Snodgrass as the lead “offensive” lobbyist and Paul Kinney from A-K Associates as the lead “defensive” lobbyist. They hired Nielsen, Merksamer, the law firm that had done the industry's political legal work in California at least since Proposition 5, to analyze the budget for the industry and to serve as political consultants.[45] Steve Merksamer was a former chief of staff to Governor Deukmejian and helped put together the Napkin Deal.[19] Jack Kelly, the Tobacco Institute's regional vice president in Sacramento, was to coordinate these efforts, working with the company representatives.

For the tobacco industry, the “major trouble spots” of the governor's budget were the anti-smoking health education program of $175.5 million and the University of California research grants of $43.9 million.[45] The strategy for the Research Account was to limit it: “We believe that appropriate language confining the $43.9 million to hard research would make this item acceptable.”[45] The Health Education Account was a greater concern: “Our efforts will have to be very concentrated in this area. The defensive lobbying program will concentrate on the defeat of the dozens of bills that have been or will be introduced to reallocate the Proposition 99 monies to areas unacceptable to our interests.”[45]

The long-term strategy was to gut Proposition 99 entirely by putting the revenue into the General Fund and eliminating Proposition 99's requirements that money be spent on anti-tobacco activities. This strategy would be implemented by participation in the Gann Coalition, which was forming to consider modifying some of the state spending rules:

The long term strategy was developed by our political consultants for two purposes. One purpose was to make the industry “players” in a coalition created to restructure the method of state government finances through an initiative. The discussion motivating such a coalition involves possible repeal or modification of the Gann spending limit, the constraints on the budget process imposed by Proposition 98 [which required that a specified fraction of


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state revenues be spent on education], and other constraints such as entitlement programs and automatic cost of living adjustments.

The second purpose was to develop possible goals to mitigate the impact of Proposition 99 on the industry and to strengthen the industry against future excise tax increases.

Our consultant [Nielsen, Merksamer] believes it is possible to fashion a strategy and an implementation plan designed to abolish Proposition 99 earmarking by placing the monies in the general fund instead of the six special funds… .

In order for the tobacco industry to be part of this process, which is essential if we are to capitalize on this opportunity, we must be able to offer to the other leaders of the coalition our resources, namely leadership, strategy, and money.

In turn we would want from the coalition a change in the law to abolish earmarking of excise taxes and to direct all revenues into the general fund.

We would also strive to change the law making it more difficult to raise excise taxes by the initiative process and/or a commitment from our coalition partners (doctors and hospitals) not to sponsor or support any further increase in excise taxes.

Major players in the coalition are the health care industry, the California Chamber of Commerce, the California Taxpayers Association, public employee groups, and Paul Gann… .

The coalition will help strengthen our ties with many groups including the health care industry, and it will also remove tobacco from the major target role… .

This second strategy of developing a permanent coalition will be much more visible than the first strategy which is aimed at abolishing Proposition 99 earmarking and sending the tobacco tax revenue from Proposition 99 to the general fund. The first strategy clearly has to remain an invisible one.[45] [emphasis different from original]

By February 21, 1989, the State Activities Division of the Tobacco Institute had issued its Project California Proposal, together with a detailed budget, amounting to $611,000 on top of the institute's existing lobbying budget for California. Of this money, $545,000 was to pay Nielsen, Merksamer to analyze the budget, to work for diversion of anti-tobacco funds to other purposes, and to strengthen ties with the CMA, CAHHS, and other health care interests in order to build a coalition that would restructure state finances in a way that would eliminate Proposition 99's earmarked money for tobacco control programs.[46]

The report analyzed the governor's budget to determine what were “acceptable” and “unacceptable” uses of the Proposition 99 revenues:

The Anti-Smoking Health Education program ($176 million) is an “unacceptable” program to receive funds. As currently structured, these funds could be distributed to state anti-tobacco groups for their use in anti-smoking


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advertising and other campaigns. This budget item was recently amended by the Department of Health to award contracts to private firms to conduct smoking prevention education programs (Attachment C). We must do everything possible to prevent these revenues from being used in a vigorous anti-smoking public relations or media campaign.[46] [emphasis different from original]

By February 21, 1989, the long-term strategy was on its way to being implemented: the Tobacco Institute's consultants had already started meeting with the Gann Coalition. The Project California Proposal was very specific about the industry's goals in participating in the Gann Coalition. Although they were willing to support modifying the Gann Limit and Proposition 98, which required at least 40 percent of the state budget to go to education, they emphasized that “the industry's key goals are to eliminate earmarking or dedication to Prop 99 revenues, and, if possible, also to prevent future excise tax increases through the initiative process” (emphasis in original).[46] While the industry was willing to help the Gann Coalition with “leadership, strategy, and money,” this help was conditional, as the February 21 plan made explicit: “It is our firm thought at this juncture that the tobacco industry would withdraw from active participation in the Gann coalition should the industry's goal—eliminate earmarking of Prop 99 revenues—not be included in the coalition's ultimate objective.”[46] The long-term strategy would eventually be reflected in an effort subsequently known as Project 90, which remained secret until the summer of 1989.

Nielsen, Merksamer had already begun to study “appropriate” budget items for the Proposition 99 funds to supplement. The firm's recommendation was for all the Health Education money to go to the California Department of Education to be put into the “Program elements” category, which includes bilingual programs, adult education, and vocational programs, among others. Nielsen, Merksamer warned, “There may be some pressure to allocate some of the educational money to the Department of Health Services.”[47] If DHS was to receive the money, Nielsen, Merksamer recommended that the money be put into either Maternal and Child Health Care or the Child Health and Disability Prevention (CHDP) program. Both schools and CHDP would eventually receive Health Education money in 1989; by 1994, Maternal and Child Health would also be added to the mix. For the Research Account, Nielsen, Merksamer recommended a requirement that research be performed at all nine University of California campuses, presumably to dilute the effect of the program. Nielsen, Merksamer made no recommendations and expressed no concerns about the Hospital, Physicians, or


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Public Resources Accounts. The law firm recommended spending the monies in the Unallocated Account on hospitals and physicians.[47]


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