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BILL # SB 1147 |
TITLE: |
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SPONSOR: Leach |
STATUS: As Amended by House HHS |
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PREPARED BY: Jeremy Gunderson |
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The bill would increase the legal age to use or possess tobacco products, e-liquids, vapor products, and alternative nicotine products from 18 to 21 years old, with an exemption for active duty military personnel as well as for individuals who are 18 years old before October 1, 2019. The bill would also establish tobacco and vapor products a matter of statewide concern and preempt regulation regarding the sale and marketing of tobacco and vapor products by political subdivisions.
Estimated Impact
The bill is estimated to decrease total state revenues by $(3.5) million in FY 2020, increasing to $(10.2) million by FY 2022 upon full implementation of the legal age increase. Of this amount, the state luxury tax is projected to decrease by $(2.3) million and state Transaction Privilege Tax (TPT) collections would decline by $(561,600) in FY 2020, increasing to $(6.7) million and $(1.7) million, respectively, by FY 2022. (See Table 1.)
Tobacco monies offset a portion of the state costs of the Medicaid program in the Arizona Health Care Cost Containment System (AHCCCS). As a result, the reduced tobacco revenues may require an additional General Fund backfill of $619,900 and a Hospital Assessment backfill of $343,300 in FY 2020. Those amounts would increase to $1.8 million from the General Fund and $992,200 from the Hospital Assessment in FY 2022.
The Center for Disease Control (CDC) reports that the smoking rate in Arizona is 15.6%, and 12.3% for persons between the ages of 18 and 24. According to the U.S. Census Bureau’s recent 2018 population estimates, there are 299,000 people aged 18-21 in the state. Assuming the smoking habits of the 18-21 year old population matches those of persons aged 18-24, and excluding the estimated 400 active duty military personnel in the same age range who smoke, there are 36,400 smokers aged 18-21, or 3.4% of all smokers.
It is likely that some level of noncompliance will continue even after increasing the legal minimum age from 18 to 21, but that the level of noncompliance will be less than it is now, since underage smokers will have fewer members of their social networks above the legal minimum age who can legally purchase tobacco. Using the proportion of middle school smoking rate to the overall smoking rate of the population as a whole as a proxy for continued noncompliance, the JLBC Staff estimates that 23% of 18-21 year olds will continue to smoke if the bill becomes law.
Additionally, the daily smoking rate of the 18-21 population is lower than the daily smoking rate of the population as a whole, indicating that the volume of tobacco consumed by smokers is disproportionate by age. To account for this, the JLBC Staff estimates that tobacco consumption by smokers between 18-21 is 5% less than the average consumption of the total population. After these adjustments, the JLBC Staff estimates that the bill will reduce overall tobacco consumption by 2.4% upon full implementation. Because the bill includes an exemption for individuals who are 18 years old by October 1, 2018, there is a phased implementation effect. As such, the legal smoking age for all individuals (excluding active duty military personnel) will not be 21 years old until October 1, 2022.
(Continued)
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State Fund Impact |
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Luxury Tax |
FY 2020 |
FY 2021 |
FY 2022 |
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General Fund |
(180,400) |
(354,200) |
(521,800) |
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Corrections Fund |
(47,600) |
(93,400) |
(137,500) |
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Early Childhood Development Fund |
(927,600) |
(1,821,000) |
(2,682,300) |
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Smoke-Free Arizona Fund |
(21,600) |
(42,400) |
(62,500) |
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Medically Needy Account1/ |
(543,300) |
(1,066,500) |
(1,571,000) |
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Health Education Account |
(132,000) |
(259,200) |
(381,800) |
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Health Research Account |
(59,600) |
(117,000) |
(172,300) |
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Proposition 204 Account1/ |
(284,100) |
(557,700) |
(821,500) |
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Emergency Health Services Account1/ |
(135,300) |
(265,600) |
(391,200) |
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Subtotal |
(2,331,500) |
(4,577,000) |
(6,741,900) |
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Transaction Privilege Tax |
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General Fund |
(448,000) |
(896,000) |
(1,344,000) |
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Proposition 301 |
(113,600) |
(227,300) |
(340,900) |
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Subtotal |
(561,600) |
(1,123,300) |
(1,684,900) |
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AHCCCS Backfill Requirements 1/ |
FY 2020 |
FY 2021 |
FY 2022 |
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General Fund |
(619,600) |
(1,216,200) |
(1,792,500) |
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Hospital Assessment |
(343,100) |
(673,600) |
(992,200) |
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Subtotal |
(962,700) |
(1,889,800) |
(2,784,700) |
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Total Impact |
(3,855,800) |
(7,590,100) |
(11,211,500) |
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General Fund |
(1,248,000) |
(2,466,400) |
(3,658,300) |
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Non-General Fund |
(2,607,800) |
(5,123,700) |
(7,553,200) |
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Total Impact |
(3,855,800) |
(7,590,100) |
(11,211,500) |
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1/ Reductions in other fund revenue may require backfills. |
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Luxury Tax
Cigarettes are taxed at a rate of $2.00 per pack. Other tobacco products (OTP), such as chewing tobacco, cigars, and snuff are taxed at various rates. In FY 2018, state revenues for cigarettes and other tobacco products (OTP) totaled $297.7 million, and are estimated to decrease to $278.0 million by FY 2022. The bill would reduce tobacco consumption by an estimated 2.4% by FY 2022, resulting in a $(6.8) million reduction to state Luxury Tax revenues.
State Luxury Tax revenues from tobacco are distributed to multiple funds. Table 1 displays the impact of those beneficiary funds in FY 2020 through FY 2022. The $(6.7) million Luxury Tax revenue loss by FY 2022 upon full implementation includes $(1.6) million to the Medically Needy Account, which currently funds the traditional population in AHCCCS. These tobacco tax dollars, along with the General Fund, finance the traditional population. The Proposition 204 Protection and Emergency Health Services Accounts fund the Proposition 204 population, which is funded from the Hospital Assessment for physical health costs and the General Fund for behavioral health costs. Any reduction in revenues to these accounts may ultimately require a backfill appropriation for these services from either the General Fund or the Hospital Assessment. As a result, the bill may require in FY 2020 a $619,900 increase in AHCCCS General Fund appropriations and a $343,300 increase in the Hospital Assessment to backfill the loss of funds from all 3 accounts. These backfill amounts will increase to $1.8 million General Fund and $992,200 Hospital Assessment by FY 2022.
(Continued)
Transaction Privilege Tax
The JLBC Staff estimates there will be $936 million tobacco retail sales in FY 2020. Applying the state TPT rate of 5.0%, tobacco products are expected to generate $46.8 million in TPT revenues in FY 2020. The 2.4% tobacco consumption decline would reduce the state General Fund portion of TPT revenue by $(279,900) in FY 2020, increasing to $(839,600) in FY 2022. In addition to 5.0% state TPT rate, there is a 0.6% Sales Tax created by Proposition 301 used exclusively for education funding. The bill would reduce Proposition 301 revenues from tobacco sales by $(45,500) in FY 2020 and $(136,500) in FY 2022.
Retail sales of e-cigarettes are also subject to the state TPT but are not subject to state Luxury Taxes. Arizona's e-cigarette industry is estimated to generate $142.2 million in taxable sales under current law, generating $7.1 million in state TPT revenue. Unlike tobacco, users of e-cigarettes are disproportionately made up of younger consumers. Recent CDC surveys reported that e-cigarette use among adults age 18-24 was 12.5%, while e-cigarette use among the population as a whole was only 5.3%. Using similar simplifying assumptions of the rates of use for vapor products and potential non-compliance, the JLBC Staff estimates the bill would reduce e-cigarette consumption by (9.6)%, which would result in a $(236,200) reduction of TPT revenues in FY 2020 and $(708,800) by FY 2022.
Combined, the total impact of tobacco and e-cigarette retail sales is $(561,600) in FY 2020, increasing to $(1.7) million in FY 2022, as shown in Table 1.
Local Government Impact
State TPT revenues are shared with cities and counties under state-shared distribution formulas. Under the statutory distribution formula for retail sales, cities receive 10.0% of total state TPT collections, and counties receive 16.2% of total state TPT collections. Thus, the bill would reduce cities' share of state-shared revenues by $(60,700) and the counties' share of state-shared revenues by $(98,300) in FY 2020, increasing to $(121,400) and $(195,800) in FY 2021, and $(182,100) and $(295,000) in FY 2022, respectively.
The bill establishes tobacco and vapor products a matter of statewide concern and preempts regulation regarding the sale and marketing of tobacco and vapor products by political subdivisions. The impact to local jurisdictions or overall smoking rates as a result of this preemption is unknown.
4/18/19