Legislature(2015 - 2016)BARNES 124
02/19/2016 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB304 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 304 | TELECONFERENCED | |
HB 304-ELECTRNC TAX RETURNS;TOBACCO & E-CIGS TAX
3:17:05 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 304, "An Act requiring the electronic submission
of a tax return or report with the Department of Revenue;
relating to the taxes on cigarettes and tobacco products; taxing
electronic smoking products; adding a definition of 'electronic
smoking product'; and providing for an effective date."
3:17:45 PM
KEN ALPER, Director, Tax Division, Department of Revenue,
provided a PowerPoint presentation entitled, "Cigarette and
Tobacco Products Taxes HB304." He informed the committee HB 304
is the governor's tobacco tax bill related to cigarette and
tobacco products, electronic tax return filing, and taxing
electronic cigarettes, which are currently exempt from Alaska's
tobacco tax regime [slide 2].
CHAIR OLSON questioned whether only electronic cigarettes (e-
cigarettes) containing nicotine would be taxed.
MR. ALPER said all e-cigarettes would be taxed, except those
containing a marijuana product - which would be taxed elsewhere
- or unless they are declared by the U.S. Food and Drug
Administration (FDA), U.S. Department of Health and Human
Services, to be a tobacco cessation product, which are also
exempt. Tobacco has been taxed in Alaska beginning in 1949,
with one tax on cigarettes and another on other tobacco
products. The tax on other tobacco products was repealed for 33
years and reinstated in 1988, at 25 percent of the wholesale
price [slide 3]. In 1999, taxes on other tobacco products was
raised to 75 percent of the wholesale price. Mr. Alper
clarified that revenue from the other tobacco products tax is
general fund (GF) revenue. There are two separate taxes on
cigarettes: a base tax of $0.038 per cigarette, which is
designated to the School Fund, DOR, and an additional tax of
$0.062 per cigarette, of which 8.9 percent goes to the Tobacco
Use Education and Cessation Fund, and the remainder goes to
unrestricted GF [slide 4]. The bill proposes to increase the
additional tax from $0.062 to $0.112 per cigarette; the previous
taxes totaled $0.10 per cigarette, thus with the addition, the
two taxes would total $0.15 per cigarette, or an increase from
$2 per pack to $3 per pack. The increase to the additional tax
instead of to the base tax means 91 percent of the new revenue
would go to GF. The bill also proposes to increase the tax on
other tobacco products from 75 percent to 100 percent of
wholesale value [slide 5]. Furthermore, HB 304 adds e-
cigarettes to the tax on other tobacco products. Mr. Alper
explained that the current definition of other tobacco products
does not encompass e-cigarettes; therefore, the bill adds a new
definition of electronic products, clarifies the definition of
wholesale price of a tobacco product or electronic smoking
device, and requires electronic filing [slide 6]. Currently,
Alaska's tobacco taxes are higher than the U.S. average:
cigarettes are taxed at the eleventh highest rate of fifty
states, and other tobacco products may be at the eighth highest
percentage, thus HB 304 would rank Alaska's tax rates the fifth
highest on cigarettes, and the highest on other tobacco products
[slide 7].
CHAIR OLSON recalled that in the State of New York, tobacco
taxes were raised $1 per pack, and revenue declined because
consumers purchased cigarettes out of state.
3:23:53 PM
MR. ALPER suggested consumers may purchase products elsewhere,
or change their smoking habits. In further response to Chair
Olson, he acknowledged that Alaska consumers do have cigarettes
shipped by mail; however, if caught by the Tax Division, the
consumer must pay the tax.
REPRESENTATIVE JOSEPHSON questioned whether the U.S. Postal
Service aids the Tax Division in investigations into tax
evasion.
MR. ALPER said DOR has a Criminal Investigation Unit. He
deferred to the deputy director.
3:25:43 PM
BRANDON SPANOS, Deputy Director, Tax Division, Department of
Revenue, said distributors are required to notify the Tax
Division when shipping products into the state. However, online
distributors do not provide information, and the division uses
"other means" such as records of court cases in other states.
REPRESENTATIVE LEDOUX inquired as to the cost of collecting
taxes from an individual who illicitly purchased "a package of
cigarettes over the Internet."
MR. ALPER advised that overall the Criminal Investigation Unit,
DOR, recovers more than its expenses; it also serves as a
deterrent. He gave examples of efforts made by consumers to
avoid tobacco taxes. Returning attention to the revenue impact
of HB 304, he said the amount of new revenue estimated from the
bill is $29 million: of $24 million raised by increasing the
cigarette tax, $2 million would go to the Tobacco Use Education
and Cessation Fund and $22 million to GF; of $5 million raised
by the increase of the other tobacco tax, all would go to GF
[slide 8]. He pointed out that the expected revenue in [Fiscal
Note Identifier: HB304-DHSS-CDPHP-2-18-16] shrinks in the
future, because the use of tobacco in Alaska is declining.
3:29:02 PM
REPRESENTATIVE HUGHES asked whether the School Fund referred to
on slide 4 can be used for any educational purpose.
MR. ALPER explained that the base tax is not raised by the bill
and thus "avoids the School Fund issue." The new money would be
split between GF and the Tobacco Use Education and Cessation
Fund.
MR. SPANOS said he was unable to explain how the School Fund is
used.
MR. ALPER said he would provide information in that regard.
MR. SPANOS, referring to Representative LeDoux's earlier
question, said the Tax Division is required, under the [Master
Settlement Agreement of 1998] between the state and the tobacco
manufacturers, to enforce assessments or lose payments from the
participating manufacturers.
REPRESENTATIVE LEDOUX restated her interest in knowing the cost
versus revenue from investigations.
MR. ALPER informed the committee that the master settlement
agreement garners the state a lot of money from the tobacco
industry; in order to receive the settlement money, the state is
required to diligently investigate untaxed cigarette use.
Returning to the subject of revenue, he said the revenue
estimates are based on the 2015 fall revenue forecast and do not
reflect changes in behavior, such as stockpiling. Furthermore,
DOR lacks data to estimate revenue from the e-cigarette portion
of the bill [slide 9].
REPRESENTATIVE JOSEPHSON asked if DOR has a stance on whether e-
cigarettes are safe and help wean smokers from tobacco.
MR. ALPER said DOR is silent in this regard; however, in
existing language, if a substance is declared a tobacco
cessation product by the federal government, such as a nicotine
patch, the state does not impose a tax.
REPRESENTATIVE HUGHES expressed her understanding that in
England, e-cigarettes are classified as a cessation device.
MR. ALPER pointed out that the proposed tax on e-cigarettes is
increasing from zero to 100 percent, which would have a
substantial impact on a new and growing industry. E-cigarettes
are the subject of an ongoing debate.
3:34:40 PM
REPRESENTATIVE LEDOUX observed that the presentation does not
provide analysis on whether increased taxes affect consumption,
and yet indicates that there would be a slight decrease in
consumption due to higher prices. She questioned this
contradiction.
MR. ALPER acknowledged that slide 13 should say "potential
impacts" as DOR economists are aware that taxes change behavior,
although the impact is unknown. Furthermore, he noted that the
state accumulates health costs associated with the consumption
of tobacco, thus there may be health care savings, also unknown.
In further response to Representative LeDoux he said, "We are
calculating the money based upon our existing formulas and
expectations of consumption ... we are aware - at a second order
level of analysis - that it's likely there could be reductions
in consumption, which would be hopefully more than offset by
reductions in health care costs."
REPRESENTATIVE LEDOUX suggested DOR change its slides.
REPRESENTATIVE HUGHES asked whether DOR consulted health care
providers prior to its decision to tax e-cigarettes; she related
reports from physicians in Alaska that are concerned about the
bill because e-cigarettes are useful smoking cession aids.
MR. ALPER stated DOR consulted with the office of Dr. Jay
Butler, Director, Division of Public Health, Department of
Health and Social Services (DHSS). He expressed a desire to
research this issue.
3:39:27 PM
REPRESENTATIVE HUGHES asked whether other states are taxing e-
cigarettes.
MR. SPANOS answered yes. He added that other states are taxing
through statute, or through regulation, by stating that unless a
manufacturer proves that the nicotine used in a product is not
derived from tobacco, it is taxed. In response to Chair Olson,
he said he would provide a list of the taxing states.
REPRESENTATIVE LEDOUX questioned whether the entire kit of an e-
cigarette would be taxed, noting that the kits are expensive.
MR. ALPER said Representative LeDoux's question relates to the
definition of an electronic smoking product within HB 304. He
explained [HB 304, Version 29-GH2106\A] does not tax the device
because the intent is to tax the concentrate liquid that is
smoked, which can be sold as a refill, or as a standalone
product. Furthermore, the second part of the definition relates
to a product that is an integrated unit. Mr. Alper described
various means of taxing disposable e-cigarettes, devices, and
"starter kits," which include nicotine cartridges.
REPRESENTATIVE HUGHES expressed her understanding that a 100
percent tax increase on kits would raise their cost to $150
each.
MR. ALPER pointed out the tax is based on the wholesale value.
The intent of the proposed legislation is to tax the refill
product; in fact, components in a kit without a nicotine product
would not be taxed.
REPRESENTATIVE HUGHES directed attention to page 5 of the bill
which read [in part]:
to deliver nicotine or other substances
REPRESENTATIVE HUGHES asked whether other substances purchased
for the device, but that are not nicotine, will be taxed.
MR. ALPER said it is difficult to determine whether products
contain nicotine because packaging is not required to indicate
ingredients. The bill intends to tax herbals and non-nicotine
products that are sold to be smoked through the products, except
that any marijuana which is manufactured into a concentrate in
the state, will have already been taxed.
3:45:24 PM
REPRESENTATIVE LEDOUX asked how much additional tax would be
collected on e-cigarettes.
MR. ALPER estimated $2 million to $3 million.
REPRESENTATIVE JOSEPHSON questioned whether it is possible to
deliver marijuana through an e-cigarette kit.
MR. ALPER said yes, and described the process.
REPRESENTATIVE TILTON surmised DOR is taxing "out of existence"
a product that is potentially better for people than smoking
cigarettes.
MR. ALPER advised that the Tax Division is not making social
policy, and does not desire to tax a product out of existence.
The division seeks to craft a reasonable definition for how to
tax a new product that exists in many forms.
3:48:31 PM
REPRESENTATIVE KITO stated that nicotine is a highly-addictive
drug; in addition, it is now known that tobacco products
increase the rates of cancer and heart disease. However, the
effects of the long-range consumption of vapors is unknown. The
U.S. Federal Drug Administration has approved nicotine cessation
products, and if vapor nicotine products are also approved as
cessation devices, the products will be tax-exempt. He recalled
cigarette advertising targeted to children in the '50s, '60s,
and '70s, and said it is important to protect children from
future unknown and possibly negative impacts. Representative
Kito urged for caution at this point in time.
REPRESENTATIVE LEDOUX said her experience is that the
ingredients in products are labeled.
MR. SPANOS responded that capsules containing nicotine are not
regulated by FDA and are not required to be labeled as such.
The states that are taxing these products have found fraudulent
labeling.
REPRESENTATIVE HUGHES asked whether there is a list of the other
substances provided through the vaping devices; in other forms,
herbs are considered to be harmless and even healthy.
MR. ALPER offered to provide a list through contact with the
industry in Alaska. However, without a labeling requirement,
DOR must tax all of the substances, because the nicotine content
is unknown.
REPRESENTATIVE HUGHES questioned when FDA will "have more of a
handle on this."
3:54:04 PM
JAY BUTLER, M.D., Chief Medical Officer, Office of the
Commissioner, and Director, Division of Public Health, DHSS,
informed the committee that FDA approval of an e-cigarette
product as a cessation device is dependent upon the industry
submitting applications. In England, one product has been
approved by England's regulatory authority as a cessation
device; he acknowledged there are anecdotal reports suggesting
that e-cigarettes promise a new delivery system for nicotine
replacement therapy which aids those who have not been
successful with other methods.
MR. ALPER reminded the committee that DOR has a new tax
management system which requires reprogramming each time changes
are made to the tax system. He estimated that the reprogramming
would cost $50,000 for the Tax Revenue Management System (TRMS)
and the Revenue Online (ROL) system. No additional costs above
a one-time implementation cost of $50,000 is anticipated [slide
10]. In response to Chair Olson, he said the online systems
were implemented about one and one-half years ago.
CHAIR OLSON asked whether changes to the systems will create
problems similar to those at DHSS.
MR. ALPER said no.
REPRESENTATIVE HUGHES observed that the proposed legislation
would require one to use the online system. She inquired as to
why fuel taxes were exempted from required electronic filing.
MR. ALPER expressed his understanding that there is intent to
revisit the issue of the motor fuel bill related to the
mechanism of the waiver for those without the technical means to
file online.
REPRESENTATIVE HUGHES surmised there would be the same problem
with HB 304.
MR. ALPER acknowledged that the language is identical to that of
AS 43.5 Administration of Revenue Laws, which is the general tax
administration statute, and not specific to the tobacco tax. He
restated DOR's intent to impose an electronic filing requirement
in order to phase out the existing paper data processing.
4:00:00 PM
REPRESENTATIVE HUGHES asked whether DOR completed analysis on
how the bill may increase smuggling and other illegal activities
that may impact local businesses and communities, jobs, the law
enforcement workload, and other impacts to the private sector.
MR. ALPER said there was not an economic analysis. Although
there could be more illegal activity, large fines act as a
deterrent. Only criminal activity on a large scale is
investigated.
REPRESENTATIVE HUGHES restated her concern about the
administration's failure to consider economic impact in
communities and across the state.
REPRESENTATIVE TILTON questioned whether the new taxes assessed
on electronic smoking devices would require additional
administration costs.
MR. ALPER explained that the taxpayers largely will be the same
group of distributers and wholesalers, although there may be
some new vape supply businesses. At this time, the tax division
expects to absorb any additional duties within its existing
staff.
4:03:16 PM
REPRESENTATIVE LEDOUX said, "I think I heard you say that you're
only looking at people who are doing this as a side business."
4:03:28 PM
MR. ALPER responded, "No, we're concentrating on the people who
we've become aware of who're bringing in larger numbers of
cartons. That's the sort of thing a 'larger number of carton
person' might be doing."
4:04:01 PM
REPRESENTATIVE LEDOUX expressed her understanding that the
demographics of smoking are that those in higher income brackets
smoke less than those in lower income brackets.
MR. ALPER agreed. He added that HB 304 is a somewhat regressive
tax.
REPRESENTATIVE TILTON commented that "the Alaska tobacco facts"
stated that smoking in the lower socioeconomic status is three
times the rate.
CHAIR OLSON questioned whether the implementation cost of
$50,000 applies to each tax bill or is an aggregate.
MR. ALPER clarified that the electronic filing happens once,
however, each tax increase takes a team of programmers and "is a
project unto itself."
4:05:43 PM
MR. ALPER presented slide 11 entitled, "Closing the Budget Gap."
He advised that the fiscal year 2016 (FY16) budget was $5.2
billion and proposed legislation related to the Alaska Permanent
Fund, revenue from existing taxes and fees, and earnings on
savings total over $4.2 billion. Proposed spending reductions,
reforms to oil and gas tax credits, and net priority investments
total $0.5 billion. The bill adds $29 million in new revenue,
and along with other components, reductions and new revenue,
totals $457 million. Added together reductions and new revenue
balances the budget with a total of $5,242 billion [slide 12].
Impacts of the tobacco tax proposal are: (1) more expensive to
buy tobacco; (2) possible slight decrease in consumption; (3)
possible stockpiling of cigarettes before tax increase [slide
13]. Mr. Alper paraphrased from the following written sectional
analysis [slides 14-17] [original punctuation provided]:
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
products to the current statute allowing the
department to share information with municipalities.
Sec. 4. Conforming language to reference the new
definition of "electronic smoking product" 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
products to what is taxed.
Sec. 7. Conforming language to add electronic smoking
products to an existing statute referencing federal
tax exemptions.
Sec. 8. Conforming language to add electronic smoking
products to the license requirement.
Sec. 9. Conforming language to add electronic smoking
products to the monthly tax return. Also adds new
language to require electronic filing of the return.
Sec. 10. Conforming language to add electronic smoking
products to the procedures for issuing tax credits and
refunds.
Sec. 11. Conforming language to add electronic smoking
products 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 product 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
product".
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.
4:13:16 PM
The committee took a brief at ease.
4:13:54 PM
MR. ALPER directed attention to the fiscal note attached to HB
304, Identifier: DOR-TX-02-04-16. Shown on page 1 were
estimated revenues of $29,100 in FY17. Revenues were reduced
slightly from FY18 through FY22, and he explained the reductions
reflected economic modeling of reduced tobacco consumption,
which is an ongoing trend. Also reflected in the fiscal note
was the onetime supplemental cost of $50,000.
REPRESENTATIVE LEDOUX questioned whether there really is a
decrease in tobacco purchases, or if tobacco purchases are being
made in a manner that circumvents the state's tax system.
MR. ALPER said he assumed that because national consumption
trends are declining, Alaska's trend would be consistent with
the national trend. He offered to investigate.
REPRESENTATIVE JOSEPHSON directed attention to a document found
in the committee packet entitled, "Cigarette Taxes and Cigarette
Smuggling by State, 2013," which was provided by an opponent of
the proposed legislation, the Tax Foundation. Page 4 of the
document was entitled, "Table 1: 2013 Cigarette Tax Rates,
Smuggling Percentages, and Changes Since 2006," and he observed
Alaska is ranked fourth from the bottom and New York is ranked
first. He surmised that Alaska's ranking is due to its
geographic location.
MR. ALPER was unsure whether the rankings were based on volume
or percentage of the volume, which would incorporate other
factors such as population, nearby states, and tax rates.
Alaska and Hawaii do not have contiguous borders, and Hawaii
also has restrictive agricultural inspection processes.
4:17:34 PM
CHAIR OLSON inquired as to how much revenue has been recovered
from those who brought in cigarettes by mail during the last
three to five years.
MR. SPANOS offered to research this matter.
REPRESENTATIVE HUGHES noted that the proposal is a regressive
tax which would garner $29 million, but that may hurt families
by reducing the amount of money they have to spend for their
children's benefit. She asked whether the administration would
withdraw the bill if $29 million in cuts were found.
MR. ALPER stated he was not in a position to say. He agreed the
proposed tax is somewhat regressive, and affects a higher
percentage of those in the lowest socioeconomic levels. Because
tobacco has relative uniformity in price, an excise tax on
alcohol is more regressive.
REPRESENTATIVE HUGHES related that research by her staff
revealed that the total in salaries of executive leadership
administration employees making over $145,000 per year totals
$60 million. She restated her concern for children and
families.
REPRESENTATIVE JOSEPHSON observed that parents who spend money
on tobacco instead of "something productive for their children
have already made the decision to sort of, go the other way."
MR. ALPER agreed.
CHAIR OLSON pointed out tobacco is an addictive product.
MR. ALPER agreed.
4:23:04 PM
DR. BUTLER stated that all are well aware of the adverse health
effects of cigarette smoking; in terms of the impact of the tax
on rates of smoking, smoking rates in Alaska are currently
decreasing by 3.7 percent per year. Based on the experience of
other states, he said he anticipates an additional decrease of
7.4 percent over a two-year period. Regarding medical
expenditures related to Alaska's proportion of Medicaid
spending, about 15 percent is estimated to be for diseases
caused by smoking, which equals about $6.5 million in Medicaid
savings to the state. Dr. Butler advised that the state would
see savings; in addition, he opined that this is a regressive
tax in that those in a lower socioeconomic status have the
higher rates of smoking, and there are higher rates in Western
Alaska and on the North Slope. The accepted definition of an
addiction is "something, whether it's heroin or whatever, that
we do to such an extent that it begins to compromise our
relationships with other people and how we are able to take care
of ourselves." He said the question is whether the state policy
is enabling an addiction that hurts others, or is providing an
additional driver to help people stop smoking. Regarding e-
cigarettes, he said much is unknown; although the original
concept is 50 years old, a modern e-cigarette has existed for
about 10 years and its long-term effects are unknown. In
England, there was a report [report not provided] that said e-
cigarettes are 95 percent safer than combustible cigarettes,
however, the report is not well-documented. Dr. Butler
discussed the use of e-cigarettes as a cessation device. In the
U.S., three other states currently tax e-cigarettes: in
Minnesota, the products are taxed at 95 percent of their
wholesale value; North Carolina and Louisiana tax the fluid
based on either its volume or its nicotine content.
4:29:45 PM
CHAIR OLSON has read that battery-powered devices have caused
fires.
DR. BUTLER cautioned that those events are rare.
REPRESENTATIVE HUGHES noted that vape use is rising among youth
which may be addressed by pending legislation that restricts use
by minors. Regarding the "overlap" between Medicaid and the
smoker population, she inquired as to whether the state has
considered "funneling the tax dollars to really direct it to the
work of the state in regard to the health care of these people
that ... have heart disease and lung cancer and things that are
caused by the smoking."
DR. BUTLER said he was unsure of the exact proportion of
Medicaid beneficiaries who smoke, but it is known that there are
higher rates of cigarette smoking among Medicaid beneficiaries
and among those of lower socioeconomic status; however,
regarding directing tax monies specifically to the treatment of
smoking-related diseases among Medicaid beneficiaries, he opined
a better approach is to use tobacco tax funds as a prevention
tool or for cessation activities.
REPRESENTATIVE HUGHES asked whether the portion of the tax
directed for cessation is limited to school-aged residents, and
is not used for adults.
DR. BUTLER expressed his belief that the School Fund goes to the
Department of Education and Early Development; the Tobacco Use
Education and Cessation Fund supports direct services through
DHSS. In further response to Representative Hughes, he
clarified that the funds disbursed through DHSS are available to
all ages.
4:34:00 PM
REPRESENTATIVE TILTON questioned whether those who have
addictions are price-sensitive.
DR. BUTLER stated that it is clear that economics are an
important driver in addiction; for example, a driver in the
increased use of heroin - over the use of prescription opioids -
is the cheaper price of higher quality heroin.
REPRESENTATIVE LEDOUX remarked:
If the justification of these so-called sin taxes,
alcohol, tobacco ... is because somehow or other,
society has decided that these products aren't good
for us and therefore, it's OK to tax them. ... One of
the biggest problems we've got in this state is
obesity, I mean, why aren't we taxing ... junk food?
4:36:06 PM
MR. ALPER stated that most of the governor's tax package relates
to adjusting existing taxes, and the administration is not
suggesting any new taxes. He stated that the Tax Division has
data on the potential revenue that could be raised from taxes on
sugared soft drinks.
4:37:10 PM
CHAIR OLSON announced that public testimony would remain open.
[HB 304 was held over.]