Legislature(1997 - 1998)
02/26/1997 01:58 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 26, 1997
1:58 P.M.
TAPE HFC 97-42, Side 1, #000 - end.
TAPE HFC 97-42, Side 2, #000 - end.
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 1:58 p.m.
PRESENT
Co-Chair Hanley Representative Kelly
Co-Chair Therriault Representative Kohring
Representative Davies Representative Martin
Representative Davis Representative Moses
Representative Foster Representative Mulder
Representative Grussendorf
ALSO PRESENT
Representative Norman Rokeberg; Representative Con Bunde;
Robert Bartholomew, Assistant Director, Income and Excise
Audit Division, Department of Revenue.
SUMMARY
HB 1 "An Act relating to taxes on cigarettes and
tobacco products; and providing for an effective
date."
CSHB 1 (FIN) was reported out of Committee with a
"do not pass" recommendation and with a fiscal
impact note by the Department of Revenue.
HB 51 "An Act relating to the Department of
Environmental Conservation."
HB 51 was HELD in Committee for further
consideration.
HOUSE BILL NO. 51
"An Act relating to the Department of Environmental
Conservation."
Representative Davies provided members with a package of
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amendments for HB 51 (copy on file). Representative Davies
MOVED to adopt Amendment 13. Representative Mulder
OBJECTED. Amendment 13 would delete the existing language
on page 4, line 24 through page 5, line 2 and insert new
language. Representative Davies explained that Amendment 13
would set in place a new set of conditions. Amendment 13
defines the terms; water quality criteria, standards,
natural conditions, and background condition. He stated
that the definitions were taken from a letter by Michelle
Brown, Commissioner, Department of Environmental
Conservation. He maintained that definitions of these terms
are inconsistent in the bill. "Water quality criteria" are
defined as scientific information regarding the maximum
concentrations of specific chemicals or other pollutants in
water which are consistent with the protection of aquatic
life or human health. "Natural condition" would mean the
condition of a water body before human impact. He noted
that the State adopts criteria used by the Environmental
Protection Agency. He maintained that the State does not
have the scientific apparatus to perform the research
necessary to establish criteria independently. He explained
that the definitions in Amendment 13 provide the basis for
other amendments. Representative Davies noted that
Amendment 13 was not reviewed by the Legal Services
Division, Legislative Affairs Agency.
Co-Chair Hanley asked the rationale of including "legally
enforceable state-established requirements" in the
definition of "standards". Representative Davies noted that
the language was used by the Department of Environmental
Conservation. Representative Davies pointed out that a
"standard" is something that is legally enforceable. Co-
Chair Hanley noted that "standards" are state-established
requirements. He questioned if "legally enforceable" is
necessary under law.
Representative Rokeberg objected to Amendment 13. He
observed that he had not had sufficient time to review the
amendments. Discussion ensued regarding further review of
the amendments. Representative Grussendorf suggested that
the legislation be reviewed in subcommittee. Representative
Rokeberg urged Committee action. Representative Mulder
requested review by the Legal Services Agency.
Representative Rokeberg noted that Amendment 13 is
conceptual. He suggested the amendment may have drafting
problems.
Co-Chair Therriault observed that members would like time to
further review the proposed amendments.
HB 51 was HELD in Committee for further consideration.
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HOUSE BILL NO. 1
"An Act relating to taxes on cigarettes and tobacco
products; and providing for an effective date."
Co-Chair Therriault provided members with a letter from the
Department of Revenue dated 2/26/97 (copy on file). He
observed
that nicotine gum or patches would not be subject to the
tobacco tax.
Co-Chair Therriault MOVED to adopt Amendment 1 (copy on
file). He explained that the intention of the amendment is
to prevent someone from stocking cigarettes prior to the tax
increase and then selling them, after implementation, with
the addition of the tax.
Representative Grussendorf noted concerns that wholesalers'
present floor stock will be taxed. He observed that
wholesalers will have to pay tax to the State on their
current floor stock.
BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT
DIVISION, DEPARTMENT OF REVENUE explained that the effective
date is October 1, 1997. He observed that cigarettes have a
fairly short shelf-life. The tax is paid 30 days after the
liability becomes due. Taxes are paid in February for
purchases in January. He pointed out that cigarettes will
be sold at the higher price after the effective date. He
maintained that the amendment would prevent wholesalers from
inappropriately profiting from the sale of cigarettes at a
higher price if the tax was not paid. He acknowledged that
people with a large stock pile could undersell their
competitors.
In response to a question by Representative Martin, Mr.
Bartholomew explained that the tax is liable upon
distribution. It is possible to pay the tax before
distribution. He observed that the collection process does
not change.
Representative Moses clarified that the tax is handled by
the wholesalers.
Representative Davies observed that, by statute, the tax is
due at the end of the month following the month that it was
incurred. He asked if a transitional provision would solve
the cash follow problem. Mr. Bartholomew suggested that
private financing may be instituted for a deferred payment.
Co-Chair Therriault noted that the legislation empowers the
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Department of Revenue to implement the statute. He
suggested that the Department could handle the transition
through regulations.
In response to a question by Representative Kelly, Mr.
Bartholomew noted that the wholesalers contacted by the
Department indicated that they take delivery on cigarettes
once or twice a week. Wholesalers must pay for delivers
they receive in as little as seven days.
Representative Kelly maintained that the retailers would
implement an increase greater than $1 dollar. Mr.
Bartholomew noted that there are fixed costs at the
wholesale level. He argued that retailers should not have
to raise the price beyond $1 dollar. Representative Kelly
stressed that the profit margin would decreased. Discussion
ensued regarding the potential profit margin. Mr.
Bartholomew emphasized that buying levels will reflect
demand.
Representative Kelly reiterated his belief that the
incremental increase to the consumer will be higher than $1
dollar.
Representative Moses stated that merchants would not be
interested in trading dollars. He agreed that merchants
will add a profit margin to the dollar. He observed that
cigarettes have a low profit margin. He asked if the tax
will be refunded if a merchant goes out of business. Mr.
Bartholomew questioned if the merchant would sell out his
inventory. Representative Moses asked if there is a method
to separate inventories. He observed that some inventory
would have been assessed the old tax and some the new. Mr.
Bartholomew replied that some states utilize a state stamp.
Alaska does not have a state stamp at this time.
Co-Chair Hanley noted that returns must be filed by the last
day of the month following the month in which the product is
received and the tax must be remitted at that time. Mr.
Bartholomew replied that the there are wholesalers that file
their return but only pay half of their tax. He emphasized
that the Department does not shut them down the first day
that the tax is overdue. He observed that there are
penalties and interest. The Department has not offered a
deferred payment plan.
(Tape Change, HFC 97-42, Side 2)
Mr. Bartholomew stated that some distributors pay the tax
the day the product is received and others wait until the
product is distributed. Co-Chair Hanley pointed out that
the tax is applied to the sale. He summarized that they
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cannot sell cigarettes cheaper because they would have to
pay the tax. He referred to AS 43.50.080 (a) and (b). He
maintained that the tax is assessed at the time of the sale.
Mr. Bartholomew stated that the problem occurs when
wholesalers are related to retailers. He observed that an
amendment may be needed on the retail level to affect
stockpiling. Cases could be distributed on September 29,
1997 to retailers that would not have to pay or charge the
tax. Mr. Bartholomew stated that he would confer with
operations personnel that collect the tax.
Co-Chair Therriault WITHDREW Amendment 1.
Co-Chair Therriault MOVED to adopt Amendment 2 (copy on
file). Representative Mulder OBJECTED. Co-Chair Therriault
observed that the percentage deducted by wholesalers for
administrating the tax is not changed by the legislation.
Wholesalers who filed with the Department in FY 97 retained
$150 thousand dollars. If the provision is not changed the
same individuals would receive approximately $550 thousand
dollars.
Representative Mulder asked if the cost of administrating
the tax is affected. Mr. Bartholomew observed that the
mechanics of filing a return and processing the paperwork
will not change. Representative Mulder stressed that it is
difficult to ascertain the affect to wholesalers.
Co-Chair Hanley noted that the amendment assumes that the $1
dollar increase will not change. He observed that if the
tax amount changed then the ratio would need to be adjusted.
In response to a question by Co-Chair Hanley, Mr.
Bartholomew observed that the tobacco tax was last changed
in 1989. The 1 percent deduction did not change at that
time. He noted that inflation has gone up.
Representative Davies expressed concern that there may be
some additional cost to the wholesaler. Co-Chair Therriault
observed that the mechanics would remain the same. Co-Chair
Hanley asserted that there will be additional insurance and
bonding costs.
Representative Davies MOVED to AMEND Amendment 2, delete
"three-tens" and insert "four-tenths." There being NO
OBJECTION, it was so ordered.
Representative Mulder stressed that it is presumptuous to
assume that the Committee knows what business practices and
unintended side effects will occur. Co-Chair Therriault
spoke in support of the amendment. He did not think that
the cost of administrating the tax would increase five-fold.
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Representative Moses noted that a Seattle wholesaler would
not have to pay the tax until the tobacco products are
shipped to Alaska.
A roll call vote was taken on the MOTION to adopt Amendment
2 as amended.
IN FAVOR: Moses, Davies, Grussendorf, Foster, Therriault,
Hanley
OPPOSED: Mulder, Davis, Kelly, Kohring, Martin
The MOTION PASSED (6-5).
Co-Chair Therriault MOVED to adopt Amendment 3 (copy on
file). He explained that Amendment 3 would remove the
automatic escalator and reduce the tax increase to $.71
percent. He expressed concern with inclusion of escalators.
He maintained that the issue should be reviewed by the
Legislature on a periodic basis. He observed that the
Legislature can review the tax at anytime. He referred to
concerns that an increase would trigger the flash point on
contraband sales. Representative Mulder OBJECTED for
purposes of discussion.
In response to a question by Representative Mulder, Mr.
Bartholomew discussed the mill rate. A mill is a tenth of a
cent per cigarette. He explained that 38 mills equates to
3.8 cents per cigarette. There are 20 cigarettes in a pack.
Co-Chair Therriault explained that section 2(a) and (b)
would only apply if the severability clause comes into
effect. Representative Davies explained that the 2.5 mills
would be subtracted from the 38 mills to get to $.71 cents
on a pack.
Representative Bunde acknowledged Co-Chair Therriault's
philosophical concern regarding escalators. He spoke in
support of retaining the $1 dollar a pack tax. He
emphasized that lowering the tax will lower the economic
barrier for prevention. He stressed that adults that choose
to smoke collectively cost the State a great deal of money
in health care expenses. He asserted that by lowering the
tax, the tax on the rest of the citizens that have to pay
for the health care costs will be greater. He spoke against
the amendment. He emphasized that those that oppose the tax
will not be made more comfortable by lowering the tax. He
maintained that the potential effectiveness will be
decreased by lowering the amount.
Representative Mulder asked why a $1 dollar increase was
chosen. Representative Bunde agreed that if all the medical
expenses were to be captured the tax would have to be
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higher. He stressed that "the longest journey begins at a
single step." He acknowledged that compromise is necessary
to achieve the goal. He emphasized that the public is
comfortable with a $1 dollar increase.
In response to a question by Representative Davis,
Representative Bunde stated that he did not have other taxes
in mind.
Representative Grussendorf spoke in support of eliminating
the escalator. In response to a comments by Representative
Mulder, Mr. Bartholomew agreed that a $1 dollar increase
would mean that Alaska would have the highest tobacco tax in
the United States. The next highest state would be
Washington with a tax of 82.5 cents. Maine has legislation
pending that would raise their tobacco tax to $1 dollar.
Representative Mulder summarized that the current Alaskan
tobacco tax rate would be tripled.
Representative Davies stated that there would be a 43
percent increase in total price. Mr. Bartholomew observed
that for every 10 percent increase in price there would be a
4.2 percent decrease in consumption. An increase of $1
dollar would result in a decrease in consumption of
approximately 18 percent. A $.72 cent increase would result
in a decrease in consumption of approximately 12 percent.
Representative Davies noted that instead of a decrease of 18
kids in a 100, there would be 12 out of 100 fewer kids
smoking.
Representative Davies MOVED to AMEND Amendment 3 to raise
the tax back to $1 dollar a pack (page 1, line 4 insert 52.5
mills and page 1, line 20 62 mills.) He clarified that the
tax will remain and the escalator would be removed.
Representative Mulder OBJECTED. A roll call vote was taken
on the MOTION.
IN FAVOR: Davies, Grussendorf, Kelly
OPPOSED: Mulder, Davis, Foster, Kohring, Martin, Moses,
Hanley, Therriault
The MOTION FAILED (3-8).
A roll call vote was taken on the main MOTION to adopt
Amendment 3. Representative Therriault explained that the
escalator would be removed and the tax lowered to $.71
cents. Representative Kohring spoke against any additional
taxes.
IN FAVOR: Foster, Moses, Mulder, Therriault, Hanley
OPPOSED: Davies, Davis, Grussendorf, Kelly, Kohring, Martin
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The MOTION FAILED (5-6).
Representative Davies WITHDREW Amendment 4.
Co-Chair Therriault MOVED to adopt Amendment 5 (copy on
file). He explained that the amendment would retain the $1
dollar tax and remove the escalators. Representative Mulder
OBJECTED. A roll call vote was taken on the MOTION.
IN FAVOR: Davies, Davis, Grussendorf, Hanley, Therriault
OPPOSED: Foster, Kelly, Kohring, Martin, Moses, Mulder
The MOTION FAILED (5-6).
Co-Chair Therriault MOVED to adopt Amendment 6 (copy on
file). He explained that Amendment 6 would reduce the tax
to $.71 cents. The escalator would remain. Representative
Davis OBJECTED. A roll call vote was taken on the MOTION.
IN FAVOR: Foster, Grussendorf, Davies, Therriault, Hanley
OPPOSED: Davis, Kelly, Kohring, Martin, Moses, Mulder
The MOTION FAILED (5-6).
Co-Chair Hanley MOVED to report CSHB 1 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal note. Representative Kohring OBJECTED.
He spoke in opposition to the legislation. He asserted that
it is not clear that a majority of his constituents support
the bill. He maintained that the bill would tax an illegal
activity. He was not convinced that an increase in the tax
would result in a decrease in the use of tobacco products by
teens. He suggested that there are alternatives in lieu of
taxes. He suggested that advertising could be restricted,
driver's licenses of kids that are caught using tobacco
products could be revoked or they could loose their
permanent fund dividends. He maintained that the tax is
dictating social behavior.
Representative Kohring WITHDREW his OBJECTION. There being
NO OBJECTION to MOVE CSHB 1 (FIN), it was so ordered.
CSHB 1 (FIN) was reported out of Committee with a "do not
pass" recommendation and with a fiscal impact note by the
Department of Revenue.
ADJOURNMENT
The meeting adjourned at 3:37 p.m.
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