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

SPONSOR Ortiz y Pino

ORIGINAL DATE

LAST UPDATED

2/4/08

HB

SHORT TITLE Soft Drink Sale Gross Receipts

SB 431

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

5,735.8

5,879.2 Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates HB619, Relates to HB238, Conflicts with SB162

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Health Policy Commission (HPC)

Department of Health (DOH)

SUMMARY

Synopsis of Bill

Senate Bill 431 amends Section 7-9-92 NMSA 1978 to remove “soft drinks" from the list of

foods eligible to receive a gross receipts tax deduction for retail food that was enacted in 2004.

Soft drinks are defined as nonalcoholic flavored beverages commonly referred to as soft drinks

that contain a sweetener additive or are made from powder, syrup concentrate or other base

product.

The effective date of this provision will be July 1, 2008.

FISCAL IMPLICATIONS

According to TRD, the Beverage Marketing Corporation cites that in 2005, the average

American consumed 54.3 gallons of beverages commonly referred to as soft drinks per year

(carbonated beverages, not including fruit beverages or sport drinks). With a 2005 population of

1.8 million, this assumes that New Mexicans consumed about 97.8 million gallons of soft drinks

Senate Bill 431 – Page

2

per year in 2005. TRD assumes that soft drink consumption per person has remained flat but that

New Mexico’s population grows about 2.5 percent per year. Growing that figure for population

growth yields an estimated 108 million gallons consumed in FY09. About 77 percent (83.1

million gallons) of soft drink products are packaged and likely to be sold in retail food stores, but

only about half of those 83.1 million gallons (41.6 million gallons) are sold in stores that qualify

for the gross receipts tax deduction created in Section 7-9-92 NMSA 1978. Assuming each

gallon of soft drink costs $2, the bill excludes about $83.1 million of receipts from the food tax

deduction. Taxed at a statewide rate of 6.9 percent, the bill would increase general fund revenue

by about $5.7 million in FY09 (108 million gallons X 77% packaged X 50% sold at food stores

X $2 per gallon X 6.9% tax). Since local governments are held harmless from the food deduction

created in Section 7-9-92 NMSA 1978, this entire revenue increase would benefit the general

fund.

SIGNIFICANT ISSUES

The bill discourages consumption of soft drinks by increasing their price relative to other

beverages. A 12 ounce can of soda contains 10 teaspoons of sugar. According to DOH, US

consumption of sweetened beverages has doubled in adults and tripled in adolescents since the

1970s. Since the same time, milk consumption has declined by 30 percent.

By broadening the gross receipts tax base slightly, the bill would allow a lower tax rate to

generate the same amount of revenue.

PERFORMANCE IMPLICATIONS

DOH reports that the bill relates to Task 3.2 of the governor’s performance and accountability

plan, which is to reduce the prevalence of obesity and diabetes.

ADMINISTRATIVE IMPLICATIONS

TRD reports that implementing the food and medical deductions has been unusually complicated

and expensive due to programming necessary to distribute hold-harmless payments to local

governments. Currently, the definition of food items eligible for the food deduction is the same

as the definition for the federal Food Stamps program. Changing the definition will cause

administrative problems to grow.

Retail food stores will also experience administrative impacts. Food stores will need to

reprogram their systems to include receipts from soft drink sales in the taxable portion of sales.

CONFLICT, DUPLICATION, RELATIONSHIP

Senate Bill 431 duplicates House Bill 619.

Senate Bill 431 conflicts with Senate Bill 162, which amends the same section to expand the

definition of retail stores to include establishments with over 75 percent of sales attributable to

sales of bottled water, ice, and coffee.

Senate Bill 431 relates to HB238, which would impose a new soft drink tax on soft drink sales

and distribute most of the revenue generated to a newly-created soft drink dialysis fund for

dialysis equipment and training.

Senate Bill 431 – Page

3

TECHNICAL ISSUES

TRD notes the definition of a soft drink should be improved. The phrase “commonly referred to

as a soft drink" is troublesome because it could be construed to include any drink that does not

contain alcohol. Also, it is unclear whether some juices, energy drinks, fruit-flavored drinks,

sports drinks, flavored water, bottled teas and coffees that contain a sweetener would be taxable

under the proposal. The bill could be amended to stipulate that a soft drink “contains artificial

carbonation" could eliminate much of this ambiguity.

SS/mt