BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 27, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB -458

SPONSOR: Senator Cravens

BILL SHORT TITLE: One-time Income Tax Credit for Purchase of Electronic Identification Card Reader

DESCRIPTION: This bill allows a $300 income tax credit (irrespective of the amount the equipment may actually cost) for a business licensed to sell cigarettes, tobacco products or alcoholic beverages, in the year in which the business purchases and installs an electronic card reader capable of reading the state enhanced driver’s license for proof of age. The credit applies to each business location a taxpayer may have. The credit may be allocated among the members of a partnership, Sub S corporation or LLC. The credit may also be claimed by a regular corporation. This is a non-refundable, non-rollover credit.

EFFECTIVE DATE: applicable for tax years beginning on or after January 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:
		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
	 FY 2002 	Full Year	     Impact     t     	             Affected          .             	
	(345)	0	Non-recurring	General Fund	

The range of cost of devices ranges from $150 for an add-on module to an HP calculator, to a keyboard card reader that requires the purchase of a entire computer. After a few years, the cost of these readers will undoubtedly fall to the $100 level. Phillips Semiconductor is already marketing a self contained contactless computer chip, intended to provide all the reading and decrypting capacity needed to unload information from smart cards. This Phillips Semiconductor smart card chip will probably wholesale in quantity for well under $50. The impact shown above is based on 1,154 establishments (the number of liquor licensees) qualifying. While shown as an FY 2002 non-recurring impact, only a small fraction of eligible establishments will either purchase the devices or, more relevant, purchase them during CY 2002.

ADMINISTRATIVE IMPACT: minimal. Forms and instructions will have to reflect the change. Since this is not an ad valorem tax based on a percentage of purchase cost, the only verification the Department will conduct is to require a statement under penalty of perjury (notarized) that the business has purchased and installed a device.

TECHNICAL ISSUES:
The cigarette sale license at 7-12-9 NMSA is practically non-existent. The CRS registration application asks the question, “do you plan to sell cigarettes?”. However, the CRS ID application has never been denied or approved based on answer to the question. No verification is conducted, no regulatory activity is pursued. In practice, cigarette and tobacco product sales are unlicensed and unregulated. They are, however, taxed at both the wholesale/supplier/distributor level, and at the retail level. Whether registration for tax purposes is sufficient to meet the test of the bill is questionable. 

OTHER IMPACTS AND ISSUES:
1.	Efforts to use the tax system to subsidize purchase and use of hardware, even when constitutional, substitute the government’s judgment for that of the market.  The disaster with solar credits in the 1980’s demonstrates that this is not always an effective strategy.  

2.	This bill would certainly a dangerous precedent. Think of the number of situations where there are positive externalities – economist’s speak for sales or purchases that have some social benefit above the actual financial price. Water reduction devices, anti-pollution devices, energy efficiency enhancing devices, alternative energy devices, import substitution products and services, high-yield seed, crop treatments … The list is long, if not endless. Virtually every product has some distinguishable characteristic that makes it more valuable through unpriced benefits conferred. 

3.	It is not clear that there is any permanent public benefit to electronic card readers for the purpose of verifying age of supposed underage purchasers of liquor or cigarettes.  Initially, the card readers could detect alteration of birthdates on the face of the card. Subsequently, however, the forgers that periodically operate in New Mexico would figure out how to copy valid data onto the magnetic stripe, and to conform the printed information to that of the magnetic strip. At the point this new evasion occurred, the readers would be of little value in detecting it.

4.	Assuming that only places with on-premise or off-premise liquor licenses qualify (see TECHNICAL ISSUES), the following data (obtained from the 1997 New Mexico Economic Census) pertain:

Classification	Number 1997 Establishments	Estimated Fraction selling liquor	# Establishments eligible	
Eating & Drinking Places	2,843	20%	569	
Bars	217	100%	217	
Grocery Stores	549	40%	220	
Package stores	148	100%	148	
			1,154