Legislature(2003 - 2004)

05/11/2004 05:04 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 368(FIN) am                                                                                            
     An  Act relating  to  taxes  on cigarettes  and  tobacco                                                                   
     products, to tax stamps on  cigarettes, to forfeiture of                                                                   
     cigarettes  and  of property  used  in the  manufacture,                                                                   
     transportation, or sale of  unstamped cigarettes, and to                                                                   
     licenses and licensees under  the Cigarette Tax Act; and                                                                   
     providing for an effective date.                                                                                           
Co-Chair Harris MOVED to ADOPT  Work Draft 23-GS2116, Version                                                                   
V,  Bullock, dated  5/10/04, as  the  version of  legislation                                                                   
before the  Committee.  There  being NO OBJECTION, it  was so                                                                   
PETE  ECKLUND, STAFF  TO REPRESENTATIVE  WILLIAMS,  explained                                                                   
that  the grammatical  amendment  would simply  add the  word                                                                   
"that" on page 5, line 21.                                                                                                      
The Amendment reads:                                                                                                            
Page 5, lines 18-21:                                                                                                            
     "The department may not set the limit of stamps that a                                                                     
licensee may  purchase during  that three-month period  below                                                                   
an  amount equal  to three  times the  average monthly  stamp                                                                   
purchases  made by the  licensee during  the 12-month  period                                                                   
immediately preceding that three-month period."                                                                             
Mr.  Ecklund  explained  that  Version V  mirrors  the  House                                                                   
version of the  tobacco tax.  The bill removes  the floor tax                                                                   
of earlier versions, and substitutes  a stockpiling provision                                                                   
on page  5, line 14.  It removes  the Other Tobacco  Products                                                                   
(OTP)  tax from  the current  75%  to 100%  of the  wholesale                                                                   
price so  that in  this version  that tax  remains at  75% of                                                                   
wholesale   price.  The   Committee   Substitute  removes   a                                                                   
provision  added by the  Senate known  as the Internet  sales                                                                   
provision, and  it adds a nonparticipating  manufacturers tax                                                                   
at 25 cents a pack higher than the new tax rate.                                                                                
Mr. Ecklund  explained  that the  new tax rate  is a  60-cent                                                                   
increase beginning  on July  1, 2004,  with increases  in the                                                                   
four  following years  to total  a  dollar a  pack. The  bill                                                                   
clarifies the  definition of  unstamped cigarette  to include                                                                   
those cigarettes  with an  incorrect or  lower tax  stamp. At                                                                   
the direction  of the Department of Law,  clarifying language                                                                   
has been added to the minimum  pricing. Version V also rolled                                                                   
in the appeal bond limitation  in HB 468. It amended page 14,                                                                   
line 1, Section  4 of Chapter 48 of SLA 1997,  so that in the                                                                   
event that  the previous  tax increase of  $1 is found  to be                                                                   
unconstitutional,  it  would be  deposited  into the  General                                                                   
Fund rather than the School Tax Fund.                                                                                           
Co-Chair Williams  commented that he  and his staff  had been                                                                   
working  with people  on both  sides  of the  issue, and  had                                                                   
reached agreement  on this version of the bill  over the past                                                                   
Representative Chenault  asked about the tax  stair stepping.                                                                   
Mr. Ecklund pointed  out that the language begins  on page 4,                                                                   
line 13.                                                                                                                        
Vice-Chair  Meyer  asked  how  the  mil  works.  Mr.  Ecklund                                                                   
answered  that  one-mil  equals  two cents  per  pack.    The                                                                   
current tax rate  is 12 mils, and the first  year increase to                                                                   
30 mils would equal a 60-cent per pack increase.                                                                                
Vice-Chair  Meyer asked  how  the tax  schedule  of a  dollar                                                                   
increase was determined.                                                                                                        
Co-Chair  Williams  reiterated   that  he'd  negotiated  with                                                                   
tobacco and anti-tobacco people.                                                                                                
Vice-Chair Meyer noted that the  anticipated revenue for a $1                                                                   
a pack increase was $35.5 million  [Fiscal Note #1, Component                                                                   
2476  dated 3/19/04].  Co-Chair Williams  clarified that  the                                                                   
revenue  expected for  a  60-cent increase  would  be 60%  of                                                                   
$35.5  million.  Mr.  Ecklund  pointed out  that  an  updated                                                                   
fiscal note was expected.                                                                                                       
Co-Chair  Harris asked  if the  bill  includes provisions  to                                                                   
direct revenues  to smoking  cessation programs.  Mr. Ecklund                                                                   
affirmed, and  noted that Version  V uses the  House language                                                                   
directing  8.9%  of  the  proceeds  of  the  tax  to  smoking                                                                   
cessation programs. The language begins on page 4, line 24.                                                                     
Co-Chair  Harris  asked  if  the   bill  addresses  smokeless                                                                   
tobacco or  cigars. Mr. Ecklund  said that the OTP,  or Other                                                                   
Tobacco Products,  were proposed to  increase to 100%  of the                                                                   
wholesale price, but this version  retains the current 75% of                                                                   
the wholesale price.                                                                                                            
Vice-Chair Meyer  asked for the definition of  cigarettes and                                                                   
cigars that would avoid creating a tax loophole.                                                                                
JOEL GILBERTSON, COMMISSIONER,  DEPARTMENT OF HEALTH & SOCIAL                                                                   
SERVICES  (DHSS), explained  that a cigarette  is defined  as                                                                   
tobacco wrapped in paper.                                                                                                       
Co-Chair  Harris  asked  the Department's  position  on  this                                                                   
modification  of  the Senate  bill.  Commissioner  Gilbertson                                                                   
replied that the  primary concern of the DHSS  relates to the                                                                   
public health impact. This version  would accomplish the goal                                                                   
of  raising the  tax by  a dollar  a pack,  with the  largest                                                                   
portion of the tax levy [60 cents] achieved in first year.                                                                      
Co-Chair  Harris  asked  if  the  Administration  intends  to                                                                   
further increase the tax in future  years, or to simply stair                                                                   
step the  tax in  this legislation  to achieve the  long-term                                                                   
goal.    Commissioner    Gilbertson    replied    that    the                                                                   
Administration has not taken a  position on whether or not to                                                                   
increase the  cigarette tax in  future years.  The Governor's                                                                   
goal  is to  ensure a  climate where  cigarette products  are                                                                   
cost prohibitive for consumption by Alaskan youth.                                                                              
Co-Chair  Harris asked  about  the Department's  coordination                                                                   
with  tobacco  manufacturers   and  others  to  keep  tobacco                                                                   
products from minors. Commissioner  Gilbertson explained that                                                                   
the  greatest cooperation  is through  the Master  Settlement                                                                   
Agreement, which  helps finance  the tobacco control  program                                                                   
through the  State of Alaska.  He felt that a  solution would                                                                   
rely on the continuing cooperation  of the manufacturers, the                                                                   
retailers, the State, the Tobacco  Control Alliance and local                                                                   
communities.  He  pointed  out  that  the  reduction  in  the                                                                   
illegal sale rate from 30.2% to  10% last year would not have                                                                   
been accomplished without retailer compliance.                                                                                  
Representative  Chenault  commented   on  the  health  issues                                                                   
related to smoking,  noting that one solution  is to continue                                                                   
to tax  tobacco products. He said  that obesity is  a leading                                                                   
cause of  death in the United  States, and he was  curious if                                                                   
there would  be a tax  on fast foods  next year.  The tobacco                                                                   
tax singles out one group of people  "because it's easy," and                                                                   
does not  address other problems.   He  asked if the  DHSS is                                                                   
considering future taxes on other health-related issues.                                                                        
Commissioner Gilbertson  replied that  there are a  number of                                                                   
public  health  concerns,  and  he  did  not  feel  that  the                                                                   
Department  is  ignoring the  large  impact of  diabetes  and                                                                   
obesity, noting  that the DHSS is  in the middle of  a multi-                                                                   
year Federal  grant on obesity  prevention. He was  not aware                                                                   
of proposals to impose a tax levy  on the consumption of high                                                                   
fat products  even though it is  a public health  threat. The                                                                   
Department  has  worked  with the  Alaska  Native  population                                                                   
through  education  efforts  in  the schools,  and  with  the                                                                   
Tribal Health Consortium.                                                                                                       
STEVE  PORTER, DEPUTY  COMMISSIONER,  DEPARTMENT OF  REVENUE,                                                                   
stated  that the Department  is not  currently reviewing  the                                                                   
imposition of taxes  on Twinkies or similar foods,  but it is                                                                   
always   willing  to   provide  facts   and  information   to                                                                   
legislators to assist in pursuing tax proposals.                                                                                
Vice-Chair Meyer noted that the  appeals bond was merged with                                                                   
the tobacco bill  and asked the Administration's  position on                                                                   
Mr. Porter indicated that Ms.  Bales would address the issue.                                                                   
He said that  she has been active in both  the administration                                                                   
and enforcement of the Master Settlement Agreement.                                                                             
JOHANNA BALES,  REVENUE AUDITOR, TAX DIVISION,  DEPARTMENT OF                                                                   
REVENUE, VIA TELECONFERENCE,  stated that she  is the program                                                                   
manager for  the tobacco  tax in  Alaska. She explained  that                                                                   
the appeals  bond  provision in  HB 468 is  rolled into  this                                                                   
bill. The language evolved because  of litigation in Illinois                                                                   
and Florida in which judgments  against tobacco manufacturers                                                                   
were  so large  that there  was potential  to bankrupt  them,                                                                   
putting  state  revenue  payments  at  risk.  This  provision                                                                   
preserves  the manufacturer's  right  to  appeal while  still                                                                   
securing any  judgment in favor  of a plaintiff who  might be                                                                   
injured   by  a   manufacturer  of   tobacco  products.   The                                                                   
Administration is neutral on this provision.                                                                                    
Representative  Stoltze  pointed  out  that  two  issues  are                                                                   
involved, and asked for guidance in achieving a balance.                                                                        
MARK  HICKEY,   AMERICAN  CANCER  SOCIETY   (ACS),  expressed                                                                   
support for the  bill by the public health  community and the                                                                   
cancer  coalition,   which  includes   the  ACS,   the  Heart                                                                   
Association,  the Lung  Association,  and  the Alaska  Native                                                                   
Health  Board.  He  noted that  although  the  bill  includes                                                                   
provisions  the cancer  coalition  doesn't  support, the  ACS                                                                   
urges that  it be  passed and signed  into law. He  explained                                                                   
that the ACS  doesn't support the appeal bond  provision, and                                                                   
sees no  compelling need  for that  change because  a current                                                                   
court rule  allows a judge  that discretion. He  thought that                                                                   
the  tobacco lobbyists  would agree  that minimal  likelihood                                                                   
exists  of an  issue  being raised  in  Alaska requiring  the                                                                   
appeal bond. Mr.  Hickey reiterated that the  American Cancer                                                                   
Society  doesn't   support  those   provisions  although   it                                                                   
supports the bill.                                                                                                              
Vice-Chair   Meyer   commented    on   tobacco   distributors                                                                   
stockpiling inventory,  and asked if that would  be a concern                                                                   
since tobacco  products have  a shelf  life. Mr. Hickey  said                                                                   
that  the  provision  was  debated  and  deleted  in  earlier                                                                   
legislation,  and  deleted  in   this  version  as  well.  An                                                                   
alternative section has been drafted  to allow the Department                                                                   
discretion  to limit  the number  of sales  of stamps over  a                                                                   
month's  period  if  there  appears   to  be  an  attempt  to                                                                   
stockpile. It  is a significant  revenue issue. He  said that                                                                   
the public  health community feels  that it was  a reasonable                                                                   
provision, but the Department  may have other ideas on how to                                                                   
limit  it. The  effective date  in  this version  is July  1,                                                                   
2004, and the bill includes some regulatory authority.                                                                          
Vice-Chair  Meyer  asked the  estimated  number  of kids  who                                                                   
wouldn't  start  smoking  and  adults who  would  stop  after                                                                   
passage of this  tax.  Mr. Hickey didn't have  those figures,                                                                   
but he said that  the preference would be to see  the $1 [per                                                                   
pack]  impact all  at once.  He thought  that the  statistics                                                                   
would   show  a   7%   reduction  of   children's   cigarette                                                                   
consumption from  the immediate  60-cent tax increase,  which                                                                   
would  amount to a  10% price  increase. A  dollar tax  would                                                                   
have  nearly  doubled  that  reduction  in  consumption.  The                                                                   
Center for Disease Control and  the Campaign for Tobacco Free                                                                   
Kids estimated  that  a $1 tax  would result  in saving  2900                                                                   
kids' lives.  He said that passage  of this bill  would bring                                                                   
Alaska  closer  to  that  number,  and  the  American  Cancer                                                                   
Society views the legislation as a "public policy win."                                                                         
Representative  Chenault noted  that the  last increase  of a                                                                   
dollar a pack  included estimates that 30% of  kids would not                                                                   
smoke. He questioned the rationale  for the new estimate that                                                                   
the dollar a pack  increase would stop only 14%  of kids from                                                                   
Mr. Hickey replied  that it is a function of  price and total                                                                   
change in price.  Since the Master  Settlement Agreement, the                                                                   
industry  has  increased prices  by  about $1.12.  The  total                                                                   
price is  higher now and  the effect  of the dollar  isn't as                                                                   
great.  These numbers  are in  line  with the  study in  1997                                                                   
indicating that a 10% price increase  leads to a 4% or higher                                                                   
general consumption decrease.  The youth consumption decrease                                                                   
is higher  because  ages 12 to  14 are  targeted before  they                                                                   
begin smoking.  He pointed  to a  Department "youth  at risk"                                                                   
behavioral  survey  demonstrating  a 50%  reduction  of  high                                                                   
school  age youth  smoking  between 1995-2003.  He  expressed                                                                   
that this resulted from the 71-cent  tax and the program, and                                                                   
said that the  Legislature played a significant  role in that                                                                   
Representative Chenault MOVED  to ADOPT his Amendment #1. Co-                                                                   
Chair Williams OBJECTED.                                                                                                        
At Ease:     5:34 P.M.                                                                                                        
Reconvene:   5:35 P.M.                                                                                                        
Representative Chenault WITHDREW Amendment #1.                                                                                  
Co-Chair  Harris MOVED  to report  HCS CSSB  368(FIN) out  of                                                                   
Committee   with    individual   recommendations    and   the                                                                   
accompanying fiscal notes.                                                                                                      
HCS CSSB 368(FIN) was REPORTED  out of Committee with a title                                                                   
change,  individual   recommendations,  and   two  previously                                                                   
published fiscal impact notes.                                                                                                  

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