Colorado Legislature Approves Bill Putting Tobacco Tax Increase on the Ballot

In an impressive fast-tracking of a bill, the Colorado Legislature has approved HB20-1427, which seeks to put the question of whether to raise the state’s tobacco tax to voters in November.

The bill was introduced in the state House of Representatives on June 11, quickly moving through committee hearings and passing its third reading the following day by a 41-19 vote with five members not voting. The Senate passed its amended version on Monday by a 20-13 vote with two members not voting, and the House concurred with the amendments later that day. The bill still needs to be sent to Gov. Jared Polis for his signature, which is expected as he has been in support of such increases. In 2019, the governor called for a similar increase though without the gradual implementation. It was defeated in the state Senate.

All tobacco products will be subject to a progressively increasing tax; in the case of premium cigars, the current tax rate of 40 percent of the wholesale price would increase to 50 percent beginning on Jan. 1, 2021, then to 56 percent in on Jan. 1, 2024, and finally 62 percent on Jan. 1, 2027.

In terms of real world costs for consumers, a cigar with an MSRP of $9.50 that currently costs approximately $13.30 at the register before any additional sales taxes are added would end up costing $15.39 when all the increases have been enacted, by halfwheel estimates.

The cigarette tax would also increase in a similar manner, but would start with establishing a new minimum price of $7 for a pack. The tax on cigarettes would then go up in stages; currently it is 84 cents per pack, and the bill proposes raising that to $1.94 as of Jan. 1, 2021, then to $2.24 per pack in 2024, and finally $2.64 in 2027. Additionally, it would raise the minimum price for a pack to $7.50 on July 1, 2024, and impose an inventory tax that corresponds to each tax increase beginning on Jan. 1, 2022.

Non-tobacco nicotine products, such as e-cigarettes and vaping devices, would become taxable if the legislation is approved. Currently, those are untaxed in Colorado; if enacted the bill would establish a tax rate of 50 percent of the wholesale price as of Jan. 1, 2021, and would increase that rate at the same time as the rates applied to cigars. Licenses would also be required to sell such products in the state.

It also creates a minimum tax for moist snuff products that would be a based on a combined minimum tax between the statutory tobacco tax and the tax imposed under Amendment 35. The bill also includes language that would lower the tax rate on a certain product by 50 percent if it were to get a Modified Risk Tobacco Product (MRTP) designation from the Food and Drug Administration (FDA).

All together, the bill projects the increase could bring in approximately $82.7 million in FY 2020-21, $167.6 million in FY 2021-22, and upwards of $294 million in revenue annually once fully phased in.

It also contains a provision that would allow cities, counties or other home rule municipality from tacking on any additional taxes to tobacco products should they pass the needed legislation.

For those who prefer to order their cigars and other tobacco and nicotine products online or over the phone from businesses out of state, the bill requires those entities, defined as delivery sellers, to impose the tax rate at the time of sale.

As for what voters will see on their ballot, the question will mention that the funds will primarily be used initially to fund public schools in an attempt to help offset lost revenue due to the economic impacts related to the COVID-19 pandemic, before being redirected to focus on tobacco cessation.

This could also mean the end of an initiative that was recently approved for signature gathering, though that petition does not include the incremental increases and would raise the tax rate to 62 percent as of Jan. 1, 2021. The organizers must gather at least 124,632 signatures by Aug. 3 in order to qualify the petition for the November ballot.