Legislature(2003 - 2004)

02/25/2004 01:45 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 503                                                                                                            
                                                                                                                                
     An Act relating to the tobacco product Master                                                                              
     Settlement Agreement; and providing for an effective                                                                       
     date.                                                                                                                      
                                                                                                                                
CO-CHAIR  HARRIS, SPONSOR,  briefly introduced  HB 503.   The                                                                   
bill  addresses the  Master Settlement  Agreement (MSA)  with                                                                   
the tobacco industry and would  close a current loophole with                                                                   
the non-participating  tobacco manufacturers and  place money                                                                   
into an escrow account held by the state.                                                                                       
                                                                                                                                
TOM WRIGHT,  STAFF TO  REPRESENTATIVE JOHN HARRIS,  explained                                                                   
that   the  legislation   was  suggested   by  the   National                                                                   
Association of Attorneys General.  The statutory change would                                                                   
ensure  that the  non-participating  manufacturers (NPMs)  in                                                                   
the  MSA  place   in  escrow  approximately   1.5  cents  per                                                                   
cigarette sold in the state, rather  than an allocable share.                                                                   
Alaska's allocable share nationwide  is .34%.  Currently, the                                                                   
NPMs are able to  take out of escrow any amount  that exceeds                                                                   
its  allocable  share,   which  in  some  states   may  be  a                                                                   
significant  amount.   Mr.  Wright  commented  that the  bill                                                                   
sections are confusing.   He explained that Section  1 is the                                                                   
"heart"  of the bill,  and Section  2 and  Section 3  contain                                                                   
conditional language  in the event  that either Section  1 or                                                                   
Section 2 is found to be unconstitutional.                                                                                      
                                                                                                                                
Co-Chair  Harris  asked  for an  explanation  of  the  Master                                                                   
Settlement Agreement and the loophole.                                                                                          
                                                                                                                                
MIKE BARNHILL,  ASSISTANT  ATTORNEY GENERAL,  COMMERCIAL/FAIR                                                                   
BUSINESS SECTION,  DEPARTMENT OF LAW, provided  background on                                                                   
the Master  Settlement Agreement (MSA).  In 1997 most  of the                                                                   
states sued the four principal  tobacco manufacturers and the                                                                   
litigation was  settled in  1998 under the  MSA.    Under the                                                                   
agreement, all manufacturers  that have signed onto  it pay a                                                                   
certain  amount of  money  on every  cigarette  sold and  the                                                                   
money is  distributed on  an annual basis  to all  the states                                                                   
that participated  in the MSA.   It has generated  about $100                                                                   
million in revenue for the state of Alaska.                                                                                     
                                                                                                                                
Mr.  Barnhill  explained  that some  manufacturers  were  not                                                                   
going to  participate in the  MSA, which created  an "unlevel                                                                   
playing field".   The participating  members raise  the price                                                                   
of their cigarettes by the amount  they estimate they'll need                                                                   
to  contribute   to  the   MSA  revenues,   while  the   non-                                                                   
participating  members   don't  raise  their  price.     This                                                                   
undermines the MSA because the  non-participating members can                                                                   
capture market share by undercutting.   The MSA proposed that                                                                   
all  participating states  would enact  legislation to  level                                                                   
the economic playing field and  require all non-participating                                                                   
manufacturers to  deposit money into an escrow  account.  The                                                                   
money is calculated on an annual  basis, at about 2 cents per                                                                   
cigarette this year.  The amount  is designed to reflect what                                                                   
the non-participating  members  would have  paid in  the MSA.                                                                   
All the manufacturers in the participating  states either pay                                                                   
into  an  escrow  account  or   the  MSA  revenues  that  are                                                                   
approximately the same amount of money per cigarette.                                                                           
                                                                                                                                
Mr. Barnhill  explained the circumstances  in which  the non-                                                                   
participating manufacturers (NPMs)  can request that money be                                                                   
released from escrow:                                                                                                           
                                                                                                                                
*  If  the state sues the  NPM, recovers a judgment  and that                                                                   
manufacturer  is judgment-proof,  the  money  can be  claimed                                                                   
from the escrow account; or                                                                                                     
*   If more is  paid into a state's  escrow account  than the                                                                   
NPM would  have paid  as a  participating manufacturer  under                                                                   
the MSA; or                                                                                                                     
*  If  the money has been  sitting in the escrow  account for                                                                   
twenty-five years.                                                                                                              
                                                                                                                                
Mr.  Barnhill  noted the  spreadsheet  in the  packets,  "NPM                                                                   
Escrow    Release   Calculations    for   hypothetical    non                                                                   
participating  manufacturer  Cheap  Smokes,  Inc."  (copy  on                                                                   
file.)   The spreadsheet  indicates that  under current  law,                                                                   
the  market advantage  has shifted  to the  non-participating                                                                   
manufacturer who pays less than  a penny per cigarette.  This                                                                   
is the loophole that HB 503 is trying to solve.                                                                                 
                                                                                                                                
Representative  Croft  thought  that the  amount  would  keep                                                                   
sliding.  There would be more  sales by NPMs and a big Alaska                                                                   
market  share that  would grow.    Mr. Barnhill  acknowledged                                                                   
that was  correct.  He stated  that the good news  for Alaska                                                                   
is that the State  ranks last in the country in  terms of the                                                                   
size of the NPM market.  Alaskans smoke brand cigarettes.                                                                       
Mr.   Barnhill   noted   that   specialty   non-participating                                                                   
manufacturers  cater to  price  because a  percentage of  the                                                                   
market buys the lowest cost cigarettes that are available.                                                                      
                                                                                                                                
In  response  to  a question  by  Representative  Croft,  Mr.                                                                   
Barnhill advised that taxing has  no constitutional problems.                                                                   
There have been  proposals for a tax credit  scheme; however,                                                                   
the department  tends to follow  the National  Association of                                                                   
Attorneys  General  on  these   proposals,  and  strives  for                                                                   
uniformity with other states.                                                                                                   
                                                                                                                                
Representative  Croft  thought  that  the  simplest  solution                                                                   
would involve raising  the price to ten cents  per cigarette,                                                                   
giving everyone a credit for MSA  participation, and leveling                                                                   
the price.   Mr. Barnhill  acknowledged that there  have been                                                                   
similar  proposals  and  stated  that  he did  not  know  the                                                                   
specific problems.                                                                                                              
                                                                                                                                
Representative  Croft   noted  that  he  was   attempting  to                                                                   
understand the details of the bill.                                                                                             
                                                                                                                                
In response  to a  comment by  Co-Chair Harris, Mr.  Barnhill                                                                   
stated that there is no direct  financial impact to the state                                                                   
as  a  result  of the  legislation.    However,  an  indirect                                                                   
financial  impact resulted  from  implementation  of the  MSA                                                                   
that  raised cigarette  prices  and provided  the NPM  market                                                                   
advantage.  He added that it will  have an indirect effect on                                                                   
the state  revenues when the  market share of  NPMs increases                                                                   
on an aggregate basis.                                                                                                          
                                                                                                                                
In response  to a question  by Co-Chair Harris,  Mr. Barnhill                                                                   
affirmed that the NPMs and the  MSA participants pay the same                                                                   
tax to the state of Alaska.                                                                                                     
                                                                                                                                
Co-Chair  Harris  asked about  taxing  the  non-participating                                                                   
members more than the participants.   Mr. Barnhill thought it                                                                   
might cause equal protection problems.   He offered to follow                                                                   
up regarding the query.                                                                                                         
                                                                                                                                
Representative Croft noted his support for the bill.                                                                            
                                                                                                                                
Representative Croft  referred to Mr. Barnhill's  spreadsheet                                                                   
and the hypothetical  escrow of $20 thousand,  asking how the                                                                   
state  could continue  to  escrow that  amount  when the  MSA                                                                   
would  bring about  $6800. Mr.  Barnhill  explained that  the                                                                   
amount is  placed into escrow  for 25 years unless  a lawsuit                                                                   
or judgment is  filed, or the manufacturer is  eligible for a                                                                   
release. There  are a  variety of  adjustments under  the MSA                                                                   
that can be implemented against  a state. Alaska is obligated                                                                   
to  diligently enforce  state law  relating to  NPMs and  the                                                                   
department has  filed several lawsuits to  force noncompliant                                                                   
NPMs to deposit money into escrow.                                                                                              
                                                                                                                                
Mr.  Barnhill  commented  that   there  is  not  an  economic                                                                   
incentive  for the  State of Alaska  to file  suit against  a                                                                   
NPM.  The total  escrow account  is less  than $100  thousand                                                                   
dollars spread between  30 manufacturers.  The  NPM market is                                                                   
small  so the  corresponding  escrow deposit  requirement  is                                                                   
small. The state  has only sued the big manufacturers  as the                                                                   
principal cause of alleged harm.                                                                                                
                                                                                                                                
Representative Croft questioned  the legality of holding  $20                                                                   
thousand in  escrow when the NPM  only owes the  state $6800.                                                                   
Mr. Barnhill advised that the  state does not keep the money;                                                                   
rather, the  NPM opens  an escrow account  in their  own name                                                                   
and makes  deposits. Commonly  an NPM  with nationwide  sales                                                                   
deposits money  into segregated sub-accounts for  each of the                                                                   
states.  Alaska is a potential beneficiary of that money.                                                                       
                                                                                                                                
In  response  to  a question  by  Representative  Croft,  Mr.                                                                   
Barnhill  explained  the  three options  of  the  contingency                                                                   
language:                                                                                                                       
                                                                                                                                
*    Section 1  would require the  NPM to pay the  MSA amount                                                                   
into escrow  with no  release, putting it  on equal  par with                                                                   
the participating  member.   In Mr.  Barnhill's opinion,  the                                                                   
legal  drafters have  been  very cautious  in  the event  the                                                                   
states  are   sued  and  that   provision  is  found   to  be                                                                   
unconstitutional.                                                                                                               
                                                                                                                                
*    Section  two  eliminates  any  ability of  the  NPMs  to                                                                   
request a  release from  escrow.  The  escrow amount  is only                                                                   
released  after 25  years or to  pay the  state's lawsuit  or                                                                   
judgment.                                                                                                                       
                                                                                                                                
*    Section three reverts back  to current law if Sections 1                                                                   
and  2  are  found to  be  unconstitutional.    Mr.  Barnhill                                                                   
reiterated that it is cautious drafting.                                                                                        
                                                                                                                                
Mr. Barnhill explained  for Representative Croft  how the NPM                                                                   
sliding  scale has  the ultimate  effect  of undermining  the                                                                   
MSA.                                                                                                                            
                                                                                                                                
Representative  Hawker asked  if this  legislation ties  into                                                                   
the MSA  issues of  last session.  Mr. Barnhill replied  that                                                                   
complementary   legislation    was   designed   to   heighten                                                                   
enforcement  of  Alaska's  NPM  statute.    To  prevent  non-                                                                   
compliance,  a  law  was  passed  requiring  all  sellers  of                                                                   
cigarettes in  the state to  register with the  Department of                                                                   
Revenue.                                                                                                                        
                                                                                                                                
Co-Chair Harris  asked if the  tobacco tax could be  added to                                                                   
this bill.  Mr.  Wright advised that the title  would need to                                                                   
be expanded.                                                                                                                    
                                                                                                                                
Representative  Foster   MOVED  to  report  HB   503  out  of                                                                   
Committee with  individual recommendations and  a zero fiscal                                                                   
note. There being NO OBJECTION, it was so ordered.                                                                              
                                                                                                                                

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