Tobacco tax revenue to take hit

Smoking ban could cost health programs up to $10.8 million

Charley Able, Rocky Mountain News

Published July 3, 2006 at midnight

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The statewide smoking ban that took effect Saturday is expected to draw down Colorado's tobacco tax revenue by as much as 6.8 percent in 2007, a potential $14 million reduction in the first full year of the ban.

The loss to cities and the state's general fund is expected to be about $3.2 million.

But the biggest bite, an estimated $10.8 million, will be felt by health programs that benefited from a quadrupling of the tax on cigarettes when voters approved Amendment 35 in 2004. Still, more than $140 million will go to those programs in 2007.

Mike Mauer, the state economist who researched the fiscal result of the ban, is not totally confident of the accuracy of his predicted financial fallout from the smoking ban.

"I am fairly confident we will see some reduction. The level of the reduction we are basing on these other studies and other people's experiences," said Mauer, chief economist for the legislature.

Mauer's forecast is based largely on estimates compiled by other states with similar bans that have been in place long enough to gauge the tax revenue decline.

"Colorado is not the same as these other places, so you would have to think that we will end up varying a little bit, but it is the best estimate available," said Mauer, chief economist for the Legislative Council staff.

"There's a lot of mixed information out there, and certainly nothing is really conclusive, but the evidence that we could find led us to make a slight reduction in the cigarette tax forecast."

Among things that also come into play in the tax equation are an overall reduction in the number of smokers due to increased awareness of cigarette-related health issues and increasing social pressures, both of which present variables that could affect the state's bottom line.

"In general, rates of smoking are decreasing due to numerous factors: health reasons, higher taxes, smoking bans and social pressures for reducing smoking. It is very hard to isolate what is the result of the ban," said Amy Larsen, senior fiscal analyst for the Legislative Council.

Mauer said those factors warrant continued monitoring.

"Of course, we try and watch everything in our forecast closely, but that is something we are clearly going to keep our eye on as the year progresses to try and determine if we need to adjust the numbers in future forecasts," Mauer said.

The equation could be further complicated by the way smokers cope with the ban.

"Some of the impact also, I would think, wouldn't be uniform over the year," Mauer said.

"When we talk about restaurants, the people will be outside on the decks and so forth," he added. "Does that mean there's less impact in the summer and more in the winter because when it's 20 degrees out, you are not going to eat your whole meal outside on the deck and smoke cigarettes. You are going to go outside maybe and have one. I think there is some argument that we are going to see more of the impact in winter months than in summer months."

If Mauer's forecast holds true, the tax dollars devoted to Amendment 35 health programs will fall to about $142.8 million in 2007 from the pre-smoking ban prediction of $153.6 million.

Part of the cigarette tax - 27 percent of the pre-Amendment 35 levy - is distributed to cities and towns across the state. The state's general fund gets the remainder.

The Amendment 35 increase goes to health programs, including wider access to health care coverage through Medicaid for thousands of Coloradans and their children and anti-smoking programs for teens.

The funds also will pay for expanding screening and treatment for breast and cervical cancer and rural health care initiatives.

Colorado collected $188.75 million from the cigarette taxes in calendar year 2005, the first year of Amendment 35, said Heidi Craig, statistical analyst with the Colorado Department of Revenue.

The amendment increased the tax from about a penny a cigarette, or 20 cents a pack, to 4.2 cents per cigarette or 84 cents a pack.

Cigarette sales fell an estimated 22 percent in the first year of the Amendment 35 tax increase based on tax collections.

The decrease, Mauer said, was largely the result of those who quit smoking when the higher tax was imposed as well as smokers who turned to the Internet to buy their smokes without paying the state tax.

While Internet cigarette purchases are not illegal, the purchaser still is required to pay the state tax. But many do not.

State law specifics

• Smoking prohibited: Indoor public places

• Smoking ban exemptions: Casinos, cigar-tobacco bars, privately hired limousines and smoking lounges at Denver International Airport, nonresidential areas on farms or ranches with annual gross incomes of less than $500,000, businesses with three or fewer employees that do not allow public access and 25 percent of rooms in hotels and motels

• Smoking also allowed: Outdoor areas of businesses, including bar and restaurant patios and outdoor dining areas

• Other states with smoking bans: California, Connecticut, Delaware, Maine, Massachusetts, Montana, New Jersey, New York, Rhode Island, Utah, Vermont and Washington

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