Basalt may suspend collections of its tobacco tax from April 1 through the end of the year to keep the town from running afoul of the state Taxpayer Bill of Rights, or TABOR, Town Manager Ryan Mahoney said Friday.
The town council will consider a resolution at its Tuesday night meeting that puts a temporary halt to the $2 levy on a pack of cigarettes as well as a 40 percent tax on other tobacco products. The tax went into effect on July 1 after voters approved it in the April 2018 municipal election.
According to a town staff memorandum, unaudited figures showed that the town collected $175,568 from the tax during the last half of 2018 — far more than the town’s initial estimate of revenue that would be generated for a full year.
Mahoney said there’s a provision within TABOR, the 1992 state constitutional amendment that places limits on government taxation, that requires the town to adhere to its maximum estimate of the first full year of the tax collection. That estimate, according to the memo, was $29,162.
Based on the amount that was collected from July to December last year, “we know that the taxes collected for 2019 will go over the $29,162 maximum,” the memo from Basalt finance director Christine Hamrick says.
Mahoney said the TABOR limitation only applies to the first full year of the tobacco tax collection. Starting in 2020, council members can lift the suspension and keep all the revenue generated by sales of nicotine products.
“Basically what we have is an over-collection issue,” Mahoney said. “There’s only a maximum amount in 2019.”
To estimate the first full year of revenue, he said, Basalt relied on a methodology used by the city of Aspen, which also has to consider how to deal with the over-collection of revenue from its tobacco tax.
“We used the same methodology, and unfortunately, it was just incorrect,” Mahoney said.
The estimate was not part of the tobacco-tax ballot language presented to Basalt’s voters last April. Mahoney said it was a requirement of a TABOR certification form for 2019.
The $175,568 that the town collected from six months of 2018 tobacco sales is unaffected — the town gets to keep it, he said.
He noted that the tax was designed to be a deterrent to tobacco use, not a revenue-generating measure. “Anecdotally, we have heard that the tax has affected some sales,” Mahoney said. “It was meant to be a tax of diminishing returns, and targeted more toward youth, to prevent them from ever starting smoking.”
Despite the large amount of revenue the levy is generating, he said the tax can still serve as a smoking deterrent. In other words, time will tell.
“It’ll probably be a slow process,” Mahoney said.
During the run-up to the April vote, Basalt’s tobacco tax was championed by Councilman Bernie Grauer as he was seeking re-election. Though Grauer was not re-elected, the tobacco tax passed by 630 to 203 votes, or a 3-to-1 margin.
According to the ballot language, Basalt must use the tax revenue to provide funds for education on tobacco-related health issues and substance-abuse education and mitigation.
The town also is grappling with another over-collection issue related to TABOR. In late January, officials said they detected an error in the town’s property tax rate-adjustment system.
An estimated $2 million in property tax revenue collected over the past four years may have to be returned to taxpayers. Basalt voters could be asked to approve a ballot question in November that authorizes the town to reset its millage rate and forgive the error.
Mahoney said a survey will be sent to the town’s voters next week to gauge community sentiments on how to address the issue. He declined to provide specifics about the survey questions, adding that the media and the public will be notified of its content simultaneously.