Legislature(1997 - 1998)
02/24/1997 01:37 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 1
"An Act relating to taxes on cigarettes and tobacco
products; and providing for an effective date."
REPRESENTATIVE CON BUNDE, SPONSOR testified in support of HB
1. He maintained that the tobacco tax increase will serve
as an economic barrier in the prevention of young people
from smoking. He emphasized that nicotine is a highly
addictive drug. Testimony in previous committees indicated
that tobacco is more addictive than alcohol and cocaine. He
maintained that the only way young people can be protected
from the ravages of nicotine is to encourage them to not
begin smoking.
Representative Bunde described HB 1 as user fee legislation.
He observed the state cost associated with tobacco related
health care. He estimated that tobacco related health care
costs state residents $360 dollars per person per year.
(Tape Change, HFC 97-38, Side 1)
Representative Bunde emphasized that HB 1 responds to the
demands of the majority of residents. Every poll that he
reviewed showed that 60 to 75 percent of Alaskan residents
support the tax.
Representative Bunde discussed the impacts of cigarette
smoking. He asked members to imagine a head on crash of two
fully loaded 747 airplanes. He maintained that the national
deaths contributed to tobacco use is equal to a crash of
this magnitude every day.
Representative Bunde recounted that his mother started
smoking when she was 16 years old. At that time, smoking
was promoted by doctors. It was considered patriotic to
smoke. His mother died at 55 from a tobacco related
condition.
Representative Bunde recalled testimony by a parent in a
previous committee. The parent suggested that a four
pronged approach is needed. He agreed with the parent's
remarks and summarized them for the Committee: Parents must
do their job as role models; schools must continue to work
with children; laws must be enforced; and HB 1 should be
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passed to increase the tobacco tax. He observed that the
nicotine industry needs to recruit new addicts because the
old ones have a habit of dying. He emphasized that
enforcement costs money. He acknowledged that Eastern
Canada had a huge crime problem when they increased their
tobacco tax. He suggested that the proximity to New York
City may have influenced the Canadian problem. He noted
that there was not a huge crime problem in Western Canada.
He observed that there is concern regarding Indian country.
He emphasized that smuggling will not occur between the
United States and Canada because cigarettes cost more in
Canada. He stated that it is hard for him to imagine people
going to Igiugig or Fort Yukon to buy cigarettes. He said
it was unfair to assume that rural residents would become
black marketeers.
Representative Bunde referred to smokeless tobacco. He
maintained that smokeless tobacco is one of the most abused
drugs in rural communities, with kids as young as 5 and 6
years of age consuming. He did not think that smokeless
tobacco should be exempt from any attempt to create an
economic barrier. He acknowledged that the health impact
from cigar use is only one-third that of cigarettes. He
stressed that an exception for cigars would allow the
industry to create a cigar that for all intent and purpose
would be the same as a cigarette.
Representative Bunde expressed concern for small specialty
shops. He noted that mail order businesses could have an
unfair advantage over local businesses. He stated that this
concern should be addressed in legislation. He maintained
that no mail order business should have an advantage over a
local business.
Representative Bunde discussed the social and economic
consequence of tobacco use. He maintained that the health
care expenditure for tobacco related illnesses costs all
Alaskans a great deal of money. He referred to arguments
that a tax on tobacco would lead to a tax on sugar or other
unhealthy food. He stressed that tobacco is the only
product, when used exactly as prescribed, is guaranteed to
cause health problems.
Representative Bunde countered arguments that the tobacco
tax will not work by pointing to lobbying efforts by the
tobacco industry. He maintained that the industry is
fighting for its right to make a profit. He maintained that
profit should not come at the expense of the citizens of the
State of Alaska.
In response to a question by Representative Mulder,
Representative Bunde stated that he has introduced another
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bill that would restrict youth access. The legislation was
originally introduced to comply with federal law. He
suggested that the penalties for people who illegally sell
tobacco should be raised. He noted that an Anchorage study
demonstrated that attempts by underage children to buy
tobacco products were successful 60 percent of the time.
Representative Mulder spoke in support of greater
enforcement. He observed that there is a built in
escalator. Representative Bunde clarified that the tax will
increase $.24 cents every three years, in an attempt to
address inflation.
Representative Bunde discussed the enforcement problem. He
recounted concerns by a mother whose 15 year old son bought
chewing tobacco at a Quick Stop. After contacting the
police, she was informed that they store could not be
prosecuted because police did not witness the purchase. She
offered to send her younger son and video his purchase.
Police told her that her son would be liable for a charge of
possession and she would be liable for contributing to the
delinquency of a minor. He maintained that enforcement
alone would not work.
Representative Mulder spoke in support of controlled access.
He clarified that there are no other taxes with built in
escalators.
In response to a question by Representative Davies,
Representative Bunde discussed revenues. He observed that
revenues from the sale of cigarettes would be dedicated to
the School Construction and Maintenance Fund. Taxes from
other tobacco products will enter the General Fund. He
explained that a severability clause is contained if the
dedicated portion is found to be unconstitutional. If the
severability clause is activated the tax revenues will be
deposited into the General Fund.
Representative Therriault expressed concern with the
escalator provisions. He expressed a preference for
legislative control over the level of taxation.
Co-Chair Hanley noted that under current law, 2.5 mills are
dedicated to the School Construction and Maintenance Fund
and 12 mills are deposited into the General Fund. The
legislation will increase the dedicated portion to 52.5
mills. If the dedication is found to be unconstitutional
the legisltion will increase the general fund portion to 62
mills.
Representative Davies summarized that, in current statute,
there is a 25 percent tax on the wholesale price of tobacco
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products. Representative Bunde clarified that the
legislation provides an Anchorage CPI escalator on the total
tax. He added that the escalator is an attempt to
acknowledge the reality of inflation. He observed that the
Legislature has worked on the issue for the past two years.
He agreed that the Legislature should be involved.
Co-Chair Therriault noted that there is a national debate
regarding the inflation assumptions contained in the CPI.
He maintained that major spending and taxation programs
should not be on an autopilot mechanism.
Representative Moses observed that vessels departing from
Washington State have access to tax free cigarettes.
Representative Bunde pointed out that they are not available
for resale.
Representative Martin recounted concerns by a citizen that
the high cost of tobacco will increase the use of marijuana.
Representative Bunde observed that statistics show that the
number one gateway drug used by all addicts is tobacco.
Representative Bunde stressed that drugs should not be
legalized because of enforcement problems.
Representative Martin maintained that smoking is one of the
few things that poor people can enjoy. He suggested that
permanent fund dividends should be withheld from minors that
smoke illegally. Representative Bunde clarified that the
intent is to prevent children from smoking. He stressed
that poor people also die from cancer. He observed that
tobacco related health problems account for $21 to $25
million dollars of the Medicaid budget. He emphasized that
the tax is voluntary. "No one has to pay it, all they have
to do is not smoke."
ROD STAMLER, FORENSIC INVESTIGATIVE ASSOCIATES (FIA)
discussed his credentials. Mr. Stamler worked for the Royal
Canadian Mounted Police and headed the drug enforcement
program. He is a consultant to the United Nations.
Forensic Investigative Associates investigates smuggling and
organized crime. He maintained that if government restricts
or increases the price of any product to the point where the
public want a cheaper price there is a consensual crime. He
maintained that if the public is willing to pay the price
for illicit drugs, there will be a supplier and money made.
Mr. Stamler observed that his organization has carried out
studies demonstrating that if the public wants a product at
a certain price that organized crime and enterprising people
will get involved in delivering those products.
Mr. Stamler outlined findings from studies his organization
has conducted regarding illicit sales. He maintained that a
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serious situation occurs when approximately 30 percent of
the market is contraband. He alleged that studies by anti-
smoking groups do not measure some of the contraband market.
He noted that legal sales were reduced in Michigan by 30
percent. His study showed that 22 percent of that market
was from contraband sales. He maintained that in this kind
of situation a parallel illegal market comes into place. He
stated that the issue is the profit on a contraband carton
of cigarettes.
Mr. Stamler discussed potential profit in illegal sales. He
stressed that containers of generic cigarettes can be
purchased in Seattle at $300 dollars a case. There are 50
cartons in a case. The total cost would be $7 to $8 dollars
a carton. There is a profit margin of $17 dollars a carton.
He observed that the product is light and easy to handle.
He alleged that there are sophisticated international
organizations that are involved in the distributions of
illegal cigarettes. He reiterated that vessels can deliver
cigarettes. He maintained that street gangs will be
involved.
Mr. Stamler stated that cigarettes were distributed in
schools by dealers in Canada. He maintained that the same
type of distribution system, as is in place for marijuana,
will become involved.
Mr. Stamler observed that those that have special status
have the potential for involvement. He noted that 80
percent of contraband cigarettes in Michigan come through
Indian reservations in the Northern United States.
Mr. Stamler maintained that store owners will be forced to
participate in the contraband market or lose profits. He
added that money from the sale of illegal cigarettes will
have to be laundered. He asserted that corruption will
occur in Alaska if the tax is approved.
Representative Davies ascertained that Mr. Stamler is funded
by the National Coalition Against Crime and Tobacco
Contraband. He observed that the Coalition is composed of
people and organizations that benefit from the distribution
of tobacco. The Coalition also funded the studies referred
to by Mr. Stamler and his travel to Alaska.
Co-Chair Hanley asked what level of taxation could occur
without a significant increase in smuggling. Mr. Stamler
stated that the "flash point" would occur at approximately
$.36 to $.38 a package. He suggested that another $.05 or
$.06 cents could be added on to the flash point due to
Alaska's location. He estimated that the flash point would
be approximately $.40 cents.
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In response to a question by Representative Mulder, Mr.
Stamler noted that Canada raised the tobacco tax by 122
percent. A tax of approximately $18 dollars was added to a
carton of cigarettes in Canada. He noted that Canadian
cigarettes are made from Virginia tobacco.
Representative Martin asked if there has been an increase in
sales at military bases.
(Tape Change, HFC 97-39, Side 1)
Representative Martin suggested that military personnel may
purchase a greater percentage of their cigarettes on base to
save money. He emphasized that this could affect tax
revenues.
Representative Martin pointed out that Mr. Stamler's
organization works on other issues. Mr. Stamler stressed
that his organization performs forensic work in a wide
range of areas.
Discussion ensued regarding the cost of purchasing
cigarettes in Washington for shipment to Alaska. Cartons of
generic cigarettes could be purchased for as little as $3
dollars. There are 10 packages in a carton. Representative
Davies noted that there is already a $2 dollar per pack
differential on generic cigarettes. He asked if the
existing $2 dollar differential a pack has created
underground sales. Mr. Stamler observed that if the public
is satisfied with the current price of cigarettes that the
average person will not turn to a contraband market. He
emphasized that it is "the straw that breaks the camels
back." He noted that generic cigarettes do not satisfy
every smoker.
Representative Kelly summarized that the additional tax
would be $500 dollars per case. There are approximately 860
cases per container. A container could result in an extra
profit of approximately $40 thousand dollars.
ELMER LINDSTROM, SPECIAL ASSISTANT, DEPARTMENT OF HEALTH AND
SOCIAL SERVICES shared an advertisement from the 1940's to
demonstrate change in public view of tobacco use. The
advertisement stressed the use of tobacco by doctors.
PATRICIA CARR, DIVISION OF PUBLIC HEALTH, DEPARTMENT OF
HEALTH AND SOCIAL SERVICES testified in support of HB 1.
She noted that:
* Tobacco usage is the number one cause of
preventable death and disease in the US,
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accounting for more than 419,000 deaths each year;
and
* 23% of deaths of Alaskans 35 years of age or older
in 1991 were attributable to smoking.
Ms. Carr observed that there were 418,690 thousand deaths
contributed to cigarette smoking in the United States.
There were 1,416 thousand deaths contributed to cigarette
smoking in Alaska. In both cases there were more deaths
contributed to cigarettes smoking than from fires, illegal
drugs, homicides, Aids, suicides, motor vehicle accidents,
and alcohol combined. She also stated that:
* 83% of adult smokers report that they started
smoking before the age of 20;
* 21% of Alaskan high school students reported they
regularly smoked in the last month;
* 25% of Alaskan middle school students reported
smoking at least one cigarette in the last month;
* 64% of Alaska tobacco merchants complied with
tobacco restriction laws in 1996;
* The federal government mandates an 80% compliance
rate by the year 2000 under the Synar Amendment;
* Tobacco vendors refused to sell to 14-15 year
olds 71% of the time, while 16-17 year olds were
refused 58% of the time;
* Today Alaska Natives have some of the highest
rates of tobacco use in the world, 47% for men and
39% for women;
* Alaska Natives account for 23 % of smoking related
deaths while they account for 17 % of the State's
population;
* Alaska Natives have the highest cancer mortality
rate of any Indian Health Service Area;
* The lung cancer death rate among AK Native women
is three times the national average;
* Tobacco use among Alaska Native youth is higher
that non-native youth;
* 41% of Alaska Native boys and 32% of Alaska Native
girls were using smokeless tobacco weekly;
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* Among the boys, 45% started using tobacco before
the age of 8;
* Total direct medical costs for smoking related
illnesses for Alaskans aged 35 years or older in
1993 was $96.5 million;
* $23 million of the direct medical care costs for
smoking related illness was paid by Medicaid in
Alaska;
* Meanwhile, the state collected only $15.6 million
in cigarette tax revenues in 1993 (excludes
taxes on smokeless tobacco);
* The state of Alaska has taxed tobacco since
territorial days, when a 5 cents per pack tax was
levied on cigarettes to help fund school
construction;
* The current tax level of 29 cents per pack has
been in place since 1989;
* In 1989 Alaska ranked 17th among the 50 states and
District of Columbia on the amount of tobacco tax
levied;
* Currently Alaska is ranked 28th among the states
on tobacco taxes levied;
* For every 10% increase in tobacco prices, youth
tobacco consumption will fall by at least 10%;
* For every 10% increase in tobacco prices, general
consumption will fall by 4%;
* At current adult smoking rates, approximately
18,000 of Alaskans currently under the age of 18
will die prematurely of a tobacco related illness;
* A $1.00 per pack tax increase would reduce youth
smoking in Alaska by an estimated 32%; and
* The tobacco tax would prevent 5,700 premature
deaths among Alaskans currently under the age of
18.
Ms. Carr maintained that the groundwork is in place and
that there is broad public support. She noted that 75% of
Alaskans surveyed support the $1.00 per pack tax. This
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included: 75% of conservatives, 75% of moderates, 73% of
liberals and 55% of smokers.
Ms. Carr observed that the tax is also supported by: C.
Everett Koop, MD., former Surgeon General, 280 individuals
and over 50 organizations that make up the Alaska Tobacco
Control Alliance including: the Alaska Native Health Board,
the American Cancer Society, and the American Heart
Association.
Ms. Carr referred to the Alaska Medicine Journal, Volume 38,
Number 1 (copy on file). She noted that studies show a
substantial drop in youth and adult consumption in Canada.
Representative Martin pointed out that millions of dollars
are spent by the federal government to subsidize the tobacco
industry.
Ms. Carr emphasized that a multi-faceted effort is needed to
address tobacco use.
Representative Martin expressed opposition to additional
taxes. In response to a question by Representative Martin,
Ms. Carr observed that eduction alone has not been a
substantial deterrent to use of tobacco by children. She
emphasized that tobacco is an addictive substance.
BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT
DIVISION, DEPARTMENT OF REVENUE discussed the Department's
fiscal note. He observed that the fiscal note is based on
an additional $1 dollar a pack tax. The fiscal note
estimates that the combined revenue to the State would be
approximately $43 million dollars in the first full year of
the tax. This assumes an 18 percent drop in consumption.
He referred to a report entitled, "Estimated Revenue Affects
of a Proposed $1 Dollar per Pack Increase in the Cigarette
Tax Rate in Alaska" prepared by Barents Group LLC of KPNG
Peat Marwick LLP, for the Alaska Cabaret, Hotel, Restaurant
and Retailers Association, dated 2/13/97 (copy on file). He
observed that the report has errors. The Department of
Revenue contacted the firm that produced the report. The
firm acknowledged that their results, which were based on
figures from industry sources, were dramatically overstated.
The updated report assumes that consumption of cigarettes in
the State of Alaska will drop by 49 percent in the next 5
years. The Department of Revenue has based its assumption
on findings by the Surgeon General. The report assumes that
there will be a loss in state and local revenues due to a 49
percent reduction in consumption.
Mr. Bartholomew discussed potential sales on military
installations. He noted that the report, "Impact of Alaska
Cigarette Tax" (copy on file), distributed by the National
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Coalition Against Crime and Tobacco Contraband asserts that
45 percent of all sales in Alaska are on military bases.
The Department of Revenue contacted military officials to
verify this assumption. He stressed that the information
provided by the military indicates that sales on military
installations represent 7.5 percent of the total cigarette
sales in Alaska. The number of Alaskans with privileges to
make purchases at military installations represent 9.7
percent of the State's total population. Military officials
have indicated their willingness to work with the State
regarding the prevention of illegal sales. He observed that
military officials have stated that they have rules and
regulations in place for the appropriate sale of commodities
on base.
Discussion ensued regarding the ratio of sales on bases in
relationship to the percentage of military in the State.
Mr. Bartholomew stressed that the Department is not aware of
illegal sales on military installations.
Representative Davies asked if there is a limit on the
purchase of cigarettes on military installations. Mr.
Bartholomew clarified that there is no cap on purchases on
military installations in Alaska. A cap was placed on
tobacco sales on military installations in Hawaii when that
state raised it's tobacco tax.
Co-Chair Therriault observed that as the tax increases the
person selling the product would continue to deduct the same
percentage of the tax for administrative purposes. Mr.
Bartholomew recommended that the percentage of the tax
deducted to cover the cost of filing with the Department of
Revenue be lowered. Wholesalers who filed with the
Department in FY 97 retained $150 thousand dollars to cover
their costs. If the provision is not changed the same
individuals would receive approximately $550 thousand
dollars.
In response to a question by Representative Davies, Mr.
Bartholomew noted that the Supreme Court ruled that a state
sales tax cannot be placed on a company that does not have a
presence in the State. He observed that one interpretation
to the cigarette tax is that the person receiving the
product in the State would be responsible for the tax. He
acknowledged that it would be difficult to enforce this
interpretation. There have been several court cases that
have precluded implementation of a sales tax on mail order
purchases. #
ADJOURNMENT
The meeting adjourned at 3:53 p.m.
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