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F I S C A L I M P A C T R E P O R T

SPONSOR Beam

DATE TYPED 03/15/05 HB 452/csHTRC/aHAFC

SHORT TITLE Cigarette Tax Changes

SB

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$859.8

$834.3 Recurring

General Fund

$16.3

$15.8 Recurring

Recreation Fund

$32.5

$31.6 Recurring

Cigarette Fund

$16.3

$15.8 Recurring

UNM Cancer

$24.4

$23.7 Recurring

NMFA (UNM)

$173.7

$168.5 Recurring

NMFA (UNM

Health Sciences)

$73.1

$70.9 Recurring

NMFA (DOH)

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Department of Health (DOH)

New Mexico Finance Authority (NMFA)

SUMMARY

Synopsis of HAFC Amendments

The House Appropriations and Finance Committee amendments strike the appropriation pro-

vided in the bill, and provides the following clarifying language regarding tax exempt stamps: “a

tax exempt stamp is not an excise stamp for purposes of determining units sold pursuant to sec-

tion 6-14-12 NMSA 1978.”

Section 6-14-12 defines units sold as follows: "units sold" means the number of individual ciga-

rettes sold in the state by the applicable tobacco product manufacturer (whether directly or

through a distributor, retailer or similar intermediary or intermediaries) during the year in ques-

tion, as measured by excise taxes collected by the state on packs (or "roll-your-own" tobacco

containers) bearing the excise tax stamp of the state. The secretary of taxation and revenue shall

House Bill 452/HTRC/aHAFC -- Page 2

promulgate such regulations as are necessary to ascertain the amount of state excise tax paid on

the cigarettes of such tobacco product manufacturer for each year.

Synopsis of HTRC Substitute

The House Taxation and Revenue Committee substitute for House Bill 452 amends the cigarette

tax act.

It provides for tax-exempt stamps; all cigarettes sold in New Mexico would be required to have

either a tax stamp or a tax exempt stamp, depending on whether they are subject to the cigarette

tax or not. Distributors must be affix stamps within 10 days of receipt of cigarettes. Stamps

would carry serial numbers.

The bill also changes the price for tax stamps by reducing discounts. The discount for the first

$30 thousand of stamps purchased in one month is reduced from 4 percent to one percent. The

discount for the next $30 thousand of stamps is reduced from three percent to eight tenths of one

percent. The discount for amounts greater than $60 thousand is reduced from two percent to

one-half percent.

The bill adds new licensing provisions and requires registration for the distribution or manufac-

ture of all cigarettes in New Mexico. These provisions include a $100 license fee, which the

Taxation and Revenue Department may charge for each manufacturer or distributor license.

The bill allows for intergovernmental agreements with Indian tribes to: enforce, administer and

implement the provisions of the act; increase the ability of the department to account for pack-

ages of cigarettes imported into, sold or transferred within or exported from the state; provide for

cooperative tax collection and administration. It adds that nothing in the act can be construed to

waive or restrict the sovereign immunity of either the Indian tribe or the state.

The bill provides enforcement mechanisms including increased penalties for violations of the act

and new reporting requirements.

No effective date is specified. The bill would presumably take effect 90 days after approval by

the Governor.

FISCAL IMPLICATIONS

The bill includes a $500 thousand general fund appropriation in FY06 to implement the provi-

sions of the act.

TRD has not issued an FIR for the HTRC committee substitute. However, it seems unlikely that

the provisions of the bill would significantly alter the fiscal impacts estimated for the original

bill. These were reported as follows: TRD estimates that the bill’s provisions reducing the dis-

counts would increase total revenue by $1.2 million in FY06. Approximately $860 thousand of

this would accrue to the general fund. The estimate assumes that the average discount would

decrease from 2.2 percent to 0.55 percent. Additional revenues also are expected from the li-

cense fees. Increased revenue distributions can be seen in the revenue table 11at the top of the

FIR.

House Bill 452/HTRC/aHAFC -- Page 3

ADMINISTRATIVE IMPLICATIONS

TRD reported the following issues, most of which were administrative:

Cigarette Tax Unit issues

•

Changes needed for forms and instructions within the cigarette tax program.

•

System changes will be needed to reflect new discounts, addition of the exempt tax

stamp, new forms, and changes to record the license, and provisions for recording, col-

lecting and tracking penalties imposed.

•

Design new applications for licensing and procedures for approving and issuing licenses.

•

Design and purchase new nontaxable stamps, hand-apply stamps, and stamps for packs

containing 25 cigarettes.

•

Redesign the tracking system for the issuance of stamps.

•

Revise the contract with the stamp supplier.

•

Develop procedures for implementing new penalties.

•

Taxpayer and department employee education.

•

Audit and compliance duties and procedures to be developed.

•

Four new FTEs will be required in the Revenue Processing Division to administer and

process cigarette stamp orders and applications for licensing, and to work closely with the

fraud and audit units on compliance efforts.

•

Addition Audit Division and Fraud Unit FTEs will be required.

Information systems issues

•

A new system or an expansion of the existing system will be necessary to accommodate

the increased licensing and reporting requirements of this bill.

•

New tax-exempt stamps, stamping of free samples and railway sales, as well as the re-

quirement of serial numbers on stamps will again require system development.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB 56 duplicates the original HB 452. These bills were introduced for the Tobacco Settlement

Oversight Committee.

OTHER SUBSTANTIVE ISSUES

TRD’s analysis notes that all tax exempt cigarette sales, including those by tribal facilities,

would be required to have stamps. They also report that it is not clear that they would be able to

enforce the penalty provisions against Indian tribes arising out of purely reservation-based activi-

ties.

The following issues were raised by the Department of Health

Cigarette smoking is the leading cause of premature death in New Mexico. Each year, over

2,100 New Mexicans die from smoking-related illnesses (Centers for Disease Control, Tobacco

Control State Highlights, 2002). In any given year more individuals die from tobacco-related ill-

nesses than from AIDS, alcohol, all illegal drugs, car crashes, fires, suicides and homicides,

House Bill 452/HTRC/aHAFC -- Page 4

combined.

In 1998, an estimated $360 million was spent in New Mexico on smoking-attributable direct

medical expenditures. Of that $360 million, $144 million was spent on Medicaid services, repre-

senting about 15% of all Medicaid expenditures. Furthermore, an additional $397 million in

smoking-attributable productivity costs was estimated in the State. Any decrease in the use of

cigarettes among New Mexicans will help to relieve both the economic and health-related burden

on the state of New Mexico (Centers for Disease Control, Tobacco Control State Highlights,

2002).

One of the major goals of a comprehensive tobacco control program is to prevent youth from us-

ing tobacco. Preventing youth access to tobacco is one of the major components of an effective

youth tobacco prevention initiative. The US Public Health Service developed a model Sale of

Tobacco Products to Minors Act intended to reduce the sale of tobacco to minors. Provisions in-

cluded in the act are: instituting 19 years of age as the minimum age for legal tobacco sales, cre-

ating a licensure system (retail licensure), establishing a graduated schedule of penalties for ille-

gal sales, establish an enforcement agency, use civil penalties and local courts to assess fines,

and banning cigarette vending machines.

The Centers for Disease Control and Prevention (CDC) recommends that each state develop a

tobacco licensure system as part of a comprehensive approach to reduce youth tobacco use and

illegal sales of tobacco to minors. CDC emphasizes that retail licensure is one of the most effec-

tive ways to reduce illegal sale of tobacco to minors (CDC, Best Practices for Comprehensive

Tobacco Control, 1999). A licensing system has three major benefits: (1) it provides for license

suspension or revocation and fines as a penalty, which provides additional motivation for manu-

facturers, distributors, and retailers, to comply with the law; (2) it helps to identify vendors that

sell tobacco, thus facilitating compliance checks; and (3) "licensing fees (when applicable) can

generate a source of funds to pay for enforcement..." (CDC, Preventing Tobacco Use Among

Youth, 1994). CDC also recommends that retailers be licensed to sell tobacco products because it

provides incentives for retailers to prevent the illegal sale of tobacco products to minors.

HB 452 would provide for new licensure requirements and penalties, ensuring that manufactur-

ers and distributors are adhering to the provisions of the Cigarette Tax Act by instituting fines

and license revocation for non-compliance.

A large body of economic research, numerous expert panels, experience in other states, and even

the tobacco industry have decisively concluded that price increases are effective in reducing

smoking, especially among youth. In 2000, the U.S. Surgeon General concluded that raising the

price of cigarettes is widely regarded as one of the most effective tobacco prevention strategies

and that these increases would lead to “substantial long-run improvements in health.” HB 452

would lower the volume discount on cigarette tax stamps, in essence causing a price increase. It

is estimated that for every 1% increase in the price of cigarettes, youth consumption decreases by

0.65% (Guide to Community Preventative Services, 2001).

HB 452 would increase penalties; establish reporting procedures; specify procedures for affixing

cigarette stamps and for sales; require each cigarette pack to have a serial number, and improve

documentation and inspection of retailer, distributor, and manufacturer records.

House Bill 452/HTRC/aHAFC -- Page 5

Multiple strategies implemented congruently are needed to continue decreasing youth tobacco

use. In addition to requiring licensure for tobacco manufacturers and distributors, retail licensure,

continued school, community, media, and cessation activities are needed. Any cigarette price in-

crease resulting from HB 452 could contribute to and enhance the comprehensiveness of the

statewide tobacco control program; therefore, helping to reach the goal of decreasing youth ini-

tiation and ultimately decreasing tobacco-related death and disease in New Mexico.

BT/lg