Legislature(2003 - 2004)
02/25/2004 01:45 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.