FISCAL NOTE
Date Requested: March 02, 2016
Time Requested: 04:40 PM |
| Agency: |
Tax Department, State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2639 |
Introduced |
HB4564 |
|
|---|
| CBD Subject: |
Taxation |
|---|
|
FUND(S):
General Revenue Fund, Drug Addiction Interdiction Treatment Fund
Sources of Revenue:
General Fund,Special Fund
Legislation creates:
Neither Program nor Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of the bill is to increase the tax on cigarettes and tobacco products to be used for funding public employees insurance and substance abuse programs.
The bill begins by changing the definition of “tobacco product,” excluding those products that approved for, marketed as, and sold as a tobacco cessation product, a tobacco dependence product, or for a medical purpose. Though the sales of such products have increased, they have not yet reached a level to become a significant percentage of sales of tobacco products. However, some decrease from the estimates provided below can be expected.
According to our interpretation, the bill increases the tax on a pack of twenty cigarettes to $1.55 after July 1, 2016, and then increases the tax by ten cents each year until July 1, 2021. Similarly, the bill increases the tax on other tobacco products to 27 percent of the wholesale price, and then increases the tax by three percentage points each year over the same time period as cigarettes. Further, the bill allocates funds from the increases to the PEIA Special Fund and the newly created Department of Health and Human Resources Drug Addiction Interdiction and Treatment Fund. The bill has a mathematical error in that by July 1, 2021 the total additional tax will be $1.40, not $1.50. The additional tax rate on other tobacco products is correct at 29 percent by July 1, 2021.
The bill dedicates a “percent of taxes” collected above the current tax rate to PEIA Special Fund and to the newly created DHHR fund. Therefore, the revenue split is between three different funds. This will create an incredibly complex process for the Tax Department and the Budget Office. Collections associated with these higher taxes and fees would begin with some lag in each fiscal year that the rate changes. Higher than normal tax receipts would occur prior to each rate change and lower than usual activity would occur immediately after each rate change due to taxpayer behavior shifting purchases to a period prior to each tax rate increase. The following revenue estimates reflect each year’s full revenue effect (the Net Gain amounts include the increase in revenue attributable to the change in the tax rate and the reduction in the Consumers Sales and Service Tax caused by declines in consumption attributable to higher prices for the indicated commodities). Furthermore, the fiscal note assumes that the additional funding for PEIA will come from the increase in the cigarette tax, as no allocation of the excess revenue is provided for in the bill.
Net Gain (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $115.0 $123.0 $129.0 $135.0 $140.0
Other Tobacco $11.0 $12.0 $13.0 $13.0 $14.0
Net Change $126.0 $135.0 $142.0 $148.0 $154.0
General Revenue Fund (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes -$22.0 -$24.0 -$27.0 -$29.0 -$32.0
Other Tobacco - $2.0 - $3.0 - $3.0 - $4.0 - $4.0
Net Change -$24.0 -$27.0 -$30.0 -$33.0 -$36.0
PEIA (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $120.0 $60.0 $60.0 $60.0 $60.0
Other Tobacco - - - - -
Net Change $120.0n $60.0 $60.0 $60.0 $60.0
DHHR (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $17.0 $87.0 $96.0 $104.0 $112.0
Other Tobacco $13.0 $15.0 $16.0 $17.0 $18.0
Net Change $30.0n $102.0 $112.0 $121.0 $130.0
The increased tax rates will generate net revenue between $126.0 million and $154.0 million per year. However, the structure of the allocations will result in a net decrease in General Revenue of $24 million per year in FY2017 and $36.0 million per year upon full implementation. The DHHR fund, once the allocation to the PEIA fund has decreased, will obtain revenue of between $102.0 million and $130.0 million. These revenue estimates are highly susceptible to behavioral changes and potential tax avoidance, especially considering the extreme levels of the increases.
Administrative costs to the Tax Department will be $23,000 in the current fiscal year, $48,480 in FY2017, and $43,000 in each year thereafter.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2016
Increase/Decrease
(use"-") |
2017
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
23,000 |
48,480 |
43,000 |
| Personal Services |
0 |
20,000 |
20,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
5,480 |
0 |
| Other |
23,000 |
23,000 |
23,000 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
The bill begins by changing the definition of “tobacco product,” excluding those products that approved for, marketed as, and sold as a tobacco cessation product, a tobacco dependence product, or for a medical purpose. Though the sales of such products have increased, they have not yet reached a level to become a significant percentage of sales of tobacco products. However, some decrease from the estimates provided below can be expected.
According to our interpretation, the bill increases the tax on a pack of twenty cigarettes to $1.55 after July 1, 2016, and then increases the tax by ten cents each year until July 1, 2021. Similarly, the bill increases the tax on other tobacco products to 27 percent of the wholesale price, and then increases the tax by three percentage points each year over the same time period as cigarettes. Further, the bill allocates funds from the increases to the PEIA Special Fund and the newly created Department of Health and Human Resources Drug Addiction Interdiction and Treatment Fund. The bill has a mathematical error in that by July 1, 2021 the total additional tax will be $1.40, not $1.50. The additional tax rate on other tobacco products is correct at 29 percent by July 1, 2021.
The bill dedicates a “percent of taxes” collected above the current tax rate to PEIA Special Fund and to the newly created DHHR fund. Therefore, the revenue split is between three different funds. This will create an incredibly complex process for the Tax Department and the Budget Office. Collections associated with these higher taxes and fees would begin with some lag in each fiscal year that the rate changes. Higher than normal tax receipts would occur prior to each rate change and lower than usual activity would occur immediately after each rate change due to taxpayer behavior shifting purchases to a period prior to each tax rate increase. The following revenue estimates reflect each year’s full revenue effect (the Net Gain amounts include the increase in revenue attributable to the change in the tax rate and the reduction in the Consumers Sales and Service Tax caused by declines in consumption attributable to higher prices for the indicated commodities). Furthermore, the fiscal note assumes that the additional funding for PEIA will come from the increase in the cigarette tax, as no allocation of the excess revenue is provided for in the bill.
Net Gain (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $115.0 $123.0 $129.0 $135.0 $140.0
Other Tobacco $11.0 $12.0 $13.0 $13.0 $14.0
Net Change $126.0 $135.0 $142.0 $148.0 $154.0
General Revenue Fund (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes -$22.0 -$24.0 -$27.0 -$29.0 -$32.0
Other Tobacco - $2.0 - $3.0 - $3.0 - $4.0 - $4.0
Net Change -$24.0 -$27.0 -$30.0 -$33.0 -$36.0
PEIA (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $120.0 $60.0 $60.0 $60.0 $60.0
Other Tobacco - - - - -
Net Change $120.0n $60.0 $60.0 $60.0 $60.0
DHHR (in millions)
Tax Type 2017 2018 2019 2020 2021
Cigarettes $17.0 $87.0 $96.0 $104.0 $112.0
Other Tobacco $13.0 $15.0 $16.0 $17.0 $18.0
Net Change $30.0n $102.0 $112.0 $121.0 $130.0
The increased tax rates will generate net revenue between $126.0 million and $154.0 million per year. However, the structure of the allocations will result in a net decrease in General Revenue of $24 million per year in FY2017 and $36.0 million per year upon full implementation. The DHHR fund, once the allocation to the PEIA fund has decreased, will obtain revenue of between $102.0 million and $130.0 million. These revenue estimates are highly susceptible to behavioral changes and potential tax avoidance, especially considering the extreme levels of the increases.
Administrative costs to the Tax Department will be $23,000 in the current fiscal year, $48,480 in FY2017, and $43,000 in each year thereafter.
Memorandum
The stated purpose of the bill is to increase the tax on cigarettes and tobacco products to be used for funding public employees insurance and substance abuse programs.
When changing the definition of tobacco products, “tobacco dependence product” appears contradictory. Also it is not clear who determines the “other medical purposes.”
The bill’s stated purpose is only to establish facilities. It does not provide for support of the facilities or to support existing facilities. There is no provision as to how the tax money will “establish” private entities providing services to identified addicted persons.
The bill deletes the prior effective date of May 1, 2003. This obscures the effective date for the current excise tax rates.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov