Legislature(2015 - 2016)BELTZ 105 (TSBldg)
02/16/2016 01:30 PM Senate LABOR & COMMERCE
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SB 133-ELECTRNC TAX RETURNS;TOBACCO & E-CIGS TAX 2:01:19 PM CHAIR COSTELLO announced the consideration of SB 133. 2:01:42 PM BRANDON SPANOS, Deputy Director, Tax Division, Department of Revenue (DOR), introduced SB 133 on behalf of the administration, starting with the history. The tobacco tax began in 1949 and cigarettes have always been taxed separately than other tobacco products (OTP). The tax on OTPs was repealed in 1955 and reinstated in 1988 at 25 percent of the wholesale price. The last major change was in 1999 when the OTP tax was raised to 75 percent of the wholesale price. All revenue from this tax goes to the general fund. There are two separate taxes on cigarettes. The first is a dedicated "base" tax of $0.038 per cigarette that is deposited to the School Fund. The second, "additional" tax is $0.062 per cigarette; 8.9 percent of this goes to the Tobacco Use Education and Cessation Fund, subject to appropriation, and the remainder goes to the general fund. The total of both taxes is $0.10 per cigarette. For a pack of 20 cigarettes that is $2.00 and it's paid through a stamp. The proposed increase affects only the second or "additional" tax, increasing it by 5 cents, from $0.062 to $0.112 per cigarette. The total tax rises to $0.15 per cigarette ($3 for per pack of 20, an increase of $1 per pack). The increased tax on other tobacco products (OTP) rises from 75 percent to 100 percent of the wholesale price. The tobacco tax proposal also adds electronic cigarettes to the tax on OTPs, and clarifies the definition of "wholesale price" of a tobacco product or electronic smoking device. The bill also requires electronic filing and an exemption process. MR. SPANOS reported that tobacco taxes in Alaska are higher than th the U.S. average. For cigarettes the tax is 11highest of the th 50 states. For OTPs, Alaska is 8 highest of those states that use the wholesale price for calculating their tax. He noted that some states use weight to calculate the tax on OTPs. SB 133 th would give Alaska the highest OTP tax and 5 highest cigarette tax in the U.S. The Department of Revenue estimates increasing the cigarette tax will raise an additional $24 million per year, 8.9 percent of which (or about $2 million) would go to the Tobacco Use Education and Cessation Fund and the remainder (about $22 million) would be deposited to the general fund. The other tobacco tax increase is estimated to raise an additional $5 million per year and all of it would go to the general fund. The total revenue impact is estimated to be $29 million per year. The revenue estimates are based on the 2015 fall revenue forecast and do not account for changes in tobacco demand or stockpiling to avoid the tax increase. DOR anticipates that this could have a substantial effect in FY 2017. DOR lacks data to estimate the tax from e-cigarette sales but it will bring in additional revenue. The estimated one-time cost to implement SB 133 is $50,000. This will be used to update DOR's tax revenue management system (TRMS) and the revenue online (ROL) component, which allows taxpayers to file a return and apply for a tax license online, and make changes to the tax return and license application forms. No additional costs to administer the program are anticipated going forward. MR. SPANOS displayed a two-part slide to show how the $29 million tobacco tax increase fits into the Governor's plan to close the budget gap. The basic impacts of the tobacco tax proposal are that tobacco will be more expensive to buy so a slight decrease in consumption is anticipated due to the higher prices. There is also the possibility of stockpiling of cigarettes before the tax increase. 2:07:59 PM MR. SPANOS read the following sectional analysis into the record: Sec. 1.Adds a $25 or 1% tax penalty for failure to file electronically unless an exemption is received by the taxpayer. Sec. 2. Requires electronic submission of tax returns, license applications, and other documents submitted to the Department of Revenue. This changes the general tax statutes, AS 43.05, and will apply to all tax types administered by the department. Provides a process to request an exemption if a taxpayer does not have the technological capability to do so. Sec. 3. Conforming language to add electronic smoking devices to the current statute allowing the department to share information with municipalities. Sec. 4. Conforming language to reference the new definition of "electronic smoking device" in Section 13. Sec. 5. Increases the "additional tax levy" on each cigarette from 62 mills to 112 mills. Sec. 6. Increases the tax on tobacco products other than cigarettes from 75% of the wholesale price to 100% of the wholesale price. Adds electronic smoking devices to what is taxed. Sec. 7. Conforming language to add electronic smoking devices to an existing statute referencing federal tax exemptions. Sec. 8. Conforming language to add electronic smoking devices to the license requirement. Sec. 9.Conforming language to add electronic smoking devices to the monthly tax return. Also adds new language to require electronic filing of the return. Sec. 10. Conforming language to add electronic smoking devices to the procedures for issuing tax credits and refunds. Sec. 11.Conforming language to add electronic smoking devices to the requirement to keep complete and accurate records to support the tax return. Sec. 12. Adds language to clarify that a cessation product, tobacco dependence product or modified risk tobacco product are excluded from the definition of a tobacco product for purposes of taxation. Sec. 13. Clarifies the definition of "wholesale price" of a tobacco product or electronic smoking device as the gross invoice price including all federal excise taxes, less any trade discounts or other reductions. Sec. 14. Adds the definition of "electronic smoking device". Sec. 15. Adds that the Act is applicable to tobacco products sold on or after the effective date of the Act and applies to the first monthly return submitted after the first full month after the effective date. Sec. 16. Allows the Department of Revenue to adopt regulations necessary to implement the changes made by this Act but not before the effective date. Sec. 17. Section 16 of this Act takes effect immediately under AS 01.10.070(c). Sec. 18. Except as provided in Sec. 16-17, effective date of July 1, 2016. 2:10:59 PM CHAIR COSTELLO invited Mr. Alper to join Mr. Spanos. 2:11:12 PM KEN ALPER, Director, Tax Division, Department of Revenue (DOR), introduced himself. CHAIR COSTELLO asked if there was any discussion about whether the alcohol and tobacco taxes are regressive and the Alaskans who would be most affected. She asked him to start with the tobacco tax. MR. ALPER suggested the committee ask the Department of Health and Social Services (DHSS) because that agency have records of how tax changes impact smoking rates. His experience from the restaurant industry is that tobacco use trends towards certain social groups and income levels, but use is declining. DOR's baseline estimates for the tobacco tax going forward 2-4 years shows a downward trend. The data indicates that there are fewer smokers in Alaska every year. Nine bills were introduced to the legislature this year. Three are consumption taxes (alcohol, tobacco and motor fuel); three are business taxes (fisheries, mining and commercial passenger vessels); and three are bigger tax bills (income tax, oil and gas tax credit reform, and the Permanent Fund Protection Act). The broad idea of the Governor's fiscal plan is to solve the problem in total with everyone doing their part. There was no intent to single out any particular demographic or user group. CHAIR COSTELLO asked what percentage of the deficit the tobacco tax will attempt to fill. MR. ALPER replied the $29 million estimated revenue is a little less than one percent of the $3.7 billion estimated deficit. CHAIR COSTELLO asked what percentage of the deficit the alcohol tax will fill. MR. ALPER replied the alcohol excise tax brings in $40 million incrementally which is between 1 percent and 1.25 percent of the deficit. Half of that goes to the Alcohol and Other Drug Abuse Treatment and Prevention Fund in the mental health budget, which is supplemented with about $60 million from the general fund. If the additional $40 million were deposited to the general fund, it would be a little more than 1 percent of the budget deficit. 2:15:13 PM CHAIR COSTELLO asked Dr. Butler to respond to earlier questions about who is smoking in Alaska and who would be most affected by the tobacco tax bill if it were to pass. DR JAY BUTLER, Chief Medical Officer, Department of Health and Social Services (DHSS) agreed with Mr. Alper that overall smoking rates are declining, and most rapidly among young people. In general, cigarette smoking is associated with lower education levels and the associated lower socio economic status. Smoking rates are also higher in rural areas and among Alaska Natives, particularly in Western Alaska and the North Slope. CHAIR COSTELLO asked Mr. Alper to define a regressive tax. MR. ALPER explained that it is generally understood to mean that lower income individuals pay a higher percentage of their income toward the tax than a higher income person. CHAIR COSTELLO asked if the tobacco tax is regressive. MR. ALPER confirmed that the effect would be regressive. CHAIR COSTELLO asked how much a pack of cigarettes costs today. MR. ALPER estimated it's between $9.00 and $10.00, $2.00 of which is the current excise tax on tobacco. SB 133 seeks to increase the tax $1.00 per pack. CHAIR COSTELLO requested information on the impact in rural Alaska. 2:18:10 PM MR. ALPER agreed to try to get the information. He added, "It will probably be somewhat different than the cost differences you see in alcoholic beverages because there isn't the local restriction you see in certain parts of rural Alaska for alcoholic beverages and it's a lighter weight product. It's easier to ship around than bottles of alcohol." SENATOR STEVENS commented that he'd be the last to defend the use of tobacco, but he questions the tax on electronic cigarettes. He maintained that they are designed to help end an addiction to tobacco. MR. ALPER offered his understanding that large portions of electronic products contain nicotine and he doesn't think of electronic smoking products as cessation devices. He said a different rate for OTPs could probably be implemented if that's what the committee wishes. He deferred further comment to Dr. Butler. SENATOR STEVENS restated his understanding that people use electronic cigarettes to try and break the addiction to cigarettes. "If that's the case, why would we discourage people from trying to use that form to stop an addiction?" he asked. 2:21:58 PM DR BUTLER agreed that some people have found that e-cigarettes help them stop using combustible cigarettes. He described that as a step in the right direction with a few caveats. One, there is no solid data showing that e-cigarettes have a role in combustible tobacco cessation and there is no FDA approved mechanism for nicotine replacement therapy. Also, a recurring observation is that the greatest impact of increasing tax on tobacco is the decreased uptake among youth. As states increase tobacco tax there is a decreased uptake on youth. However, it is concerning that about 18 percent of Alaska youth report having used e-cigarettes in the last month. He also discussed a study that suggests that there may be a role for taxation as a way to reduce the uptake of e-cigarettes among youth. SENATOR STEVENS asked if he expects the FDA to do further studies on e-cigarettes. DR, BUTTLER opined that the issue will be whether any of the manufacturers choose to file with the FDA for that approval. CHAIR COSTELLO asked Dr. Butler to address the point that the tax bill won't achieve its intended goal if the increased tax results in fewer users. "Can we expect that that 18 percent will stop purchasing?" she asked. DR. BUTLER replied the data on e-cigarettes is limited but for cigarettes there is a linear correlation between increasing taxes and decreasing use. The decrease in uptake by youths is even more pronounced. CHAIR COSTELLO recalled a bill about 20 years ago that intended to decrease youth smoking by increasing the cost of a single cigarette. 2:26:57 PM MR. ALPER pointed out that an FDA approved tobacco cessation product would be exempted from the tobacco tax. SENATOR STEVENS asked if e-cigarettes currently are not taxed. MR. ALPER confirmed they aren't taxed, but the expanded definition of "other tobacco products" brings e-cigarettes under that tax structure. SENATOR STEVENS requested he consider carving out a lower tax for e-cigarettes. MR. ALPER agreed and noted that the administration has revised language for the definition of e-cigarettes for the committee to consider. It clarifies that the product itself is taxed, not the batteries and chargers. 2:29:17 PM CHAIR COSTELLO asked if the driving principle of the Governor's Sustainable Alaska Plan is to touch as many Alaskans as possible and how the tobacco tax increase meets that goal. MR. ALPER said fairness was an overriding principle, trying to spread the impact among all Alaskans. The estimated revenue is $29 million, but if half the smokers quit it might be revenue neutral. CHAIR COSTELLO asked him to provide that information to the committee. MR. ALPER said he'd try but he wasn't sure about its availability. CHAIR COSTELLO asked him to discuss the long-term impact that a tax would have on the economy weighed against the expected revenue. MR. ALPER conceded that the consumption taxes are less essential to the bottom line, but they're important in that they show the intent to share the burden among all Alaskans. CHAIR COSTELLO asked if the administration is thinking more about the budget than the overall economy. "Am I wrong in saying it's the economy, the economy, the economy that we should be focusing on?" she asked. MR. ALPER agreed it's important to consider the impact on the overall economy, but it's also important to consider the danger in running unstainable budget deficits. He recognized that efficiencies could be gained by reducing the size of government, but a too dramatic and immediate change could hurt the overall economy. 2:34:48 PM SENATOR MEYER offered his belief that the more money kept in the private sector the better off the economy will be. He also questioned why a sales tax isn't part of the Governor's tax proposals because that seems to be the fairest way to have everyone pay. MR. ALPER pointed out that a sales tax is inherently more regressive than an income tax, and doesn't account for regional price differences. The Governor also felt there would be uneven impacts in communities that already have a sales tax. 2:38:16 PM SENATOR MEYER asked if he would favor a sales tax if it was introduced. MR. ALPER replied it would be given the same consideration as any other revenue matter. MR. SPANOS, responding to further questions, told the committee that the Stamp Act was passed in 2004 and the cigarette tax was increased to 8 cents per cigarette or $1.60 a pack at that time. 2:38:45 PM SENATOR MEYER asked how much the proposed tax would increase a $1.00 cigar or a can of snuff. MR. ALPER said other tobacco products are taxed as a percentage of the wholesale value so it's difficult to figure out the tax on one cigar, but roughly 43 cents of the $1.00 price is the excise tax under current law. SENATOR MEYER commented that he doesn't know where Alaska stands relative to other states in terms of cigar and snuff consumption but he looks at them as nicotine products. MR. SPANOS said the Federation of Tax Administrators publishes a report showing other tobacco product taxes for each state; it ranges from 25 percent to 100 percent of the wholesale price and others tax it by the ounce. SENATOR MEYER requested a report to show how Alaska compares to other states. 2:42:40 PM CHAIR COSTELLO asked for visuals for both alcohol and tobacco showing the current cost of a variety of products in both urban and rural areas throughout the state and how these tax proposal would affect those prices. SENATOR MEYER stressed the importance of treating Alaskans fairly and then asked if marijuana is taxed differently. MR. SPANOS confirmed that marijuana is taxed under separate statutes. He clarified an earlier response saying the tobacco taxes increased in 2004 and stepped up in 2005-2007 to arrive at $2.00 per pack. CHAIR COSTELLO asked Mr. Alper if he could say that the administration is for, against or neutral on SB 131 and SB 133. MR. ALPER replied the administration supports all the Governor's bills. He related that there was an internal conversation of a need for a statewide, broadly applicable tax and the Governor made the final decision to introduce an income tax rather than a sales tax.