Legislature(2003 - 2004)
05/18/2003 11:20 AM 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 FINANCE COMMITTEE
May 18, 2003
11:20 AM
TAPE HFC 03 - 101, Side A
TAPE HFC 03 - 101, Side B
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 11:20 AM.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Ethan Berkowitz
Representative Mike Chenault
Representative Richard Foster
Representative Mike Hawker
Representative Beth Kerttula
Representative Carl Moses
Representative Bill Stoltze
Representative Jim Whitaker
MEMBERS ABSENT
None
ALSO PRESENT
Senator Con Bunde, Sponsor; Senator Gary Wilken, Sponsor;
Senator robin Taylor, Sponsor; Johanna D. Bales, Tax
Auditor, Department of Revenue; Tom McKay, Sr., Vice
President, Costco Wholesale; Eddy Jeans, Manger, School
Finance and Facilities Section, Department of Education and
Early Development; Carl Rose, Association of Alaska School
Boards; John Alcantra, National Education Association of
Alaska; Jim Foster, Assistant Superintendent, Galena City
School district; Kelly Huber, Staff, Senator Taylor,
Sponsor.
PRESENT VIA TELECONFERENCE
Mike Elerding, Northern Sales; John Ayers, Keystone
Distribution Services, Anchorage; Chris Mish, Forester,
Department of Natural Resources.
SUMMARY
CSSB 149(RES)
"An Act relating to timber, to the sale of timber by
the state, and to the management of state forests."
CSSB 149 (RES) was REPORTED out of Committee with a "do
pass" recommendation and one zero fiscal note from the
Department of Natural Resources.
CS SB 168(FIN) am
"An Act relating to issuance and revocation of licenses
for the importation, sale, distribution, or manufacture
of cigarettes and tobacco products; relating to a tax
refund or credit for unsaleable, returned, or destroyed
tobacco products; relating to restrictions on and
penalties for shipping or transporting cigarettes;
relating to records concerning the sale of cigarettes;
amending and adding definitions relating to cigarette
taxes; relating to the payment of cigarette taxes;
relating to penalties applicable to cigarette taxes;
relating to the definition of the wholesale price of
tobacco products; relating to payment of cigarette
taxes through the use of cigarette tax stamps; relating
to provisions making certain cigarettes contraband and
subject to seizure and forfeiture; relating to certain
crimes, penalties, and interest concerning tobacco
taxes and stamps; relating to cigarette sales; and
providing for an effective date."
CSSB 168 (FIN) (am) was REPORTED out of Committee with
"no recommendation" and two fiscal notes: one new
fiscal impact note from the Department of Revenue and
zero fiscal note #2 from the Department of Law.
CSSB 202 (RES)
"An Act relating to school transportation; relating to
the base student allocation used in the formula for
state funding of public education; and providing for an
effective date."
CSSB 202 (FIN) was heard and HELD in Committee for
further consideration.
CS FOR SENATE BILL NO. 168(FIN) am
"An Act relating to issuance and revocation of licenses
for the importation, sale, distribution, or manufacture
of cigarettes and tobacco products; relating to a tax
refund or credit for unsaleable, returned, or destroyed
tobacco products; relating to restrictions on and
penalties for shipping or transporting cigarettes;
relating to records concerning the sale of cigarettes;
amending and adding definitions relating to cigarette
taxes; relating to the payment of cigarette taxes;
relating to penalties applicable to cigarette taxes;
relating to the definition of the wholesale price of
tobacco products; relating to payment of cigarette
taxes through the use of cigarette tax stamps; relating
to provisions making certain cigarettes contraband and
subject to seizure and forfeiture; relating to certain
crimes, penalties, and interest concerning tobacco
taxes and stamps; relating to cigarette sales; and
providing for an effective date."
SENATOR CON BUNDE, SPONSOR, provided information about the
bill. He noted that the bill is not "anti tobacco"
legislation, nor was it the intent to address taxation. The
genesis was a radio spot by an Eastern company, which
advertised the sale of tax-free cigarettes that would not be
reported to the state [for tax purposes]. The Department of
Revenue has been trying to address the leakage in the state
of Alaska's tax law on cigarettes. The Department has
indicated that they cannot enforce the tax law effectively
without a tobacco tax stamp. The Department of Revenue,
during litigation proceedings, was able to obtain a list of
companies that do pay their tax. The federal government will
not join the state in the enforcement of federal law
[Jenkins Act] without a tobacco tax stamp. He referenced the
state of Michigan, which also has a tobacco tax, and noted
that tax revenues in Michigan increased 9 percent when they
added a tax stamp. Hawaii saw a 25 percent increase with a
tax stamp. He stated that for every one percent that tax
revenues increase, Alaska would gain $400 thousand. He
stated that distributors acknowledged that the increase in
tobacco price decreases use by youth. Distributors are
concerned with fair business practices and have asked for a
minimum price, which would prevent sales to youth and
undercutting prices. He concluded that selling tobacco below
price was poor public policy.
Senator Bunde noted that the Heart Association and the
Alaska Tobacco Distributors both supported the bill.
Vice-Chair Meyer expressed support for the legislation but
questioned if it were possible to put the burden on the
distributor. Representative Bunde noted that other states
have forced the industry to bear the full tax burden. The
legislation allows the industry to deduct the costs of
collecting the tax, for example investment in equipment
needed to stamp the cigarettes.
Vice-Chair Meyer observed that even though the bill will
cost the state some money, it would increase tax revenues.
Representative Bunde predicted a $3 million net gain or
more.
Representative Hawker asked if the bill changed the timing
of the tax collection. Representative Bunde speculated that
it did not.
JOHANNA D. BALES, TAX AUDITOR, DEPARTMENT OF REVENUE
testified via teleconference. She noted that she was the
auditor for the state cigarette excise tax. She confirmed
that the tax would continue to be collected monthly. In
response to a question by Representative Hawker, Ms. Bales
noted that the stamp would be purchased up front.
Distributors could post a bond, which is what most
distributors do, to put the actual payment of the tax off
for a month and a half. This is the current practice of the
reporting system. The tax payment is due about a month and a
half after cigarettes are imported.
In response to a question by Representative Stoltze,
Representative Bunde noted that his motivation is to make
tobacco less assessable to teenagers. The motivation of
tobacco distributor is to ensure a fair playing field.
Representative Stoltze asked if using tools for unfair trade
practices might be a more appropriate vehicle, rather than
focusing on a particular industry. Representative Bunde
maintained that a great number of under-priced cigarettes
would be sold before another tool would be effective.
Representative Berkowitz noted that Hawaii and Michigan
achieved different revenue results, and asked if their
statutes were different. Representative Bunde stated that
Hawaii had an aggressive enforcement program.
Ms. Bales confirmed that Hawaii hired eleven enforcement
individuals. She stated that the proposed bill was modeled
after the state of Hawaii's. She added that the amount of
tax collected in Hawaii resulted in an initial increase of
25 percent, the final numbers showed a 50 percent increase,
from $40 million to $61 million in tax.
Co-Chair Harris noted his support of the bill, but reference
complaints by wholesalers. Representative Bunde stated that
smaller companies complained that larger wholesalers, like
Costco, could sell tobacco under cost. He acknowledged that
every business wants to preserve their advantage, but
emphasized that every carton sold below cost promotes
smoking, since it has been proven that price affects
consumption, especially by young people. He also noted that
imposing a minimum might affect fairness across the market.
Co-Chair Harris stated that wholesalers had threatened to
close their stores in Alaska if the bill passes.
Representative Bunde speculated that a company whose profit
margins were so narrow might not be doing viable business.
Representative Kerttula asked if the tax was the same
regardless of price. Representative Bunde noted that the tax
was $1 per pack, regardless of price. He clarified that
companies would now have to meet the minimum price.
Ms. Bales explained that the minimum price stated that
cigarettes could not be sold for less than the wholesale
purchase price, plus tax, plus cost of doing business.
Companies could use a 4.5 percent for wholesale or 6 percent
at retail above wholesale to determine price. The price is
not a dollar figure.
BOBBY SCOTT, JAN'S DISTRIBUTING, ANCHORAGE, testified via
teleconference in support of the bill. He noted that his
company had worked on the bill with Representative Bunde and
Ms. Johanna D. Bales, Tax Auditor, Department of Revenue.
MIKE ELERDING, NORTHERN SALES, testified via teleconference
in support of the bill. He summarized his written testimony
(copy on file.) He discussed the history of the bill, and
noted favorable testimony received along the way. He
concluded that the legislation: provides increased revenue
with no new taxes, provides a reasonable profit margin,
creates a level playing field for Alaskan distributors, and
ends predatory pricing that attracts youth consumption. He
pointed out that 25 other states have similar laws.
JOHN AYERS, KEYSTONE DISTRIBUTION SERVICES, ANCHORAGE,
testified via teleconference in support of an amended
version of the bill. He noted that his company provides
storage and distribution for tobacco companies. He asked
that the bill be amended to remove the requirement for a
customs bonded warehouse. He stated that it would cost his
company $100 thousand to become a customs bonded warehouse.
He maintained that the requirement would result in products
being distributed from Seattle. He also questioned the need
for a minimum price. He asked what would happen if other
products were sold at a loss, whether legislation would fix
those prices. He also noted that tribal entities were
exempted and questioned what would happen to the revenue
stream if tribal status were enlarged.
TOM MCKAY, SR., VICE PRESIDENT, COSTCO WHOLESALE expressed
concerns regarding minimum pricing and discounts for fixing
stamps. He noted that he was responsible for the operations
and purchasing for the three Alaskan stores. He noted that
Costco had been unaware of the attachments regarding minimum
pricing. He referred to page 9, line 22, which would allow a
discount to some for fixing stamps. He noted that Costco did
not oppose tax stamps, but questioned the need for discounts
for certain distributors. He stated that under this
provision, those distributing through Costco would be
penalized, and asked that this be addressed.
Mr. McKay referred to the wholesale level of distribution,
and stated that Costco was a wholesaler as well as retailer.
He stated that they supplied small operations, and noted
that the price affected where these businesses chose to buy.
He noted that if this provision were enacted, there would be
a loss of 68 jobs in Anchorage, and a great loss of business
in Juneau. He observed that Costco has a strict policy of
never selling goods below cost. He maintained that tobacco
is not generally sold below cost by anyone. He noted that
markups range around 14 percent. The marketplace and
efficiency in sales determine price. The cost of selling
tobacco is below other products.
Mr. McKay explained that the cost for a carton of cigarettes
was $2 thousand; on this they are discounted 2 percent for
paying in a prompt fashion, which is built into their price,
as they do with all products. Under the bill, these savings
cannot be passed on. He referred to page 20, line 21,
Section 3, and quoted: "exempts the customary discount for
cash". He explained that he must now take a markup of $90
for this exemption. He contrasted this to lower markups for
other products, and stressed that the State was now going to
monitor these markups.
Mr. McKay noted a provision that might also force Costco to
prove a higher cost of doing business. He stated that his
labor costs were 4 percent, rent was 1 percent, depreciation
and selling costs (which he stated was ambivalent) and
licenses, and taxes, were all included in costs of doing
business. He noted that their costs were 80 percent. He
concluded that the bill was onerous and difficult from a
business standpoint. He maintained that to discourage
smoking, the tax should simply be raised. He stated that he
was aware of only one other state has minimum pricing on
tobaccos: Montana. He suggested that the legislation be
changed to state that the product cannot be sold below cost,
and allow cost to be set in a fair fashion.
Representative Berkowitz observed that a rational business
response might be to set up a subsidiary to handle
exclusively tobacco products. Mr. McKay acknowledged that it
would be a possibility, but questioned the implications of
such a practice.
Vice-Chair Meyer asked if the competitors were retailers or
wholesalers. Mr. McKay noted that wholesalers were their
competitors, and noted that they handled 15 percent of the
cigarettes distribution market. Vice-Chair Meyer asked how
Alaska would differ from Hawaii and Washington. Mr. McKay
noted that these states did not have a minimum price
requirement.
TAPE HFC 03 - 101, Side B
In response to a question by Representative Whitaker, Mr.
McKay clarified that they purchase from RJR and Brown
Williamson through a bonded warehouse in Alaskan, which is a
different class than a distributor.
Representative Whitaker observed that there would be a
sliding scale paid for stamps based on volume, and asked the
effect on Costco. Mr. McKay noted that they would not get
the discount due to their volume and observed that the
sliding scale was inverse of the normal economy of scale.
Representative Hawker clarified that in large volumes for
significant distributors; there would be no discount
available for those purchasers at lesser levels. He referred
to Page 9, Line 27:
The discount under this subsection is equal to the sum
of the amounts calculated using the following
percentages of denominated value of stamps purchased by
a licensee under this section in a calendar year:
(1) $1,000,000 or less, three percent;
(2) The amount that is more than $1,000,000 but
not more than $2,000,000, two percent;
(3) The amount that is over $2,000,000, zero
percent., regarding the discount, and speculated
that all distributors were availed of the same
discount.
Representative Hawker summarized that everyone is availed of
an equal discount. Mr. Kay acknowledged that he
misunderstood the provisions. Representative Hawker
concluded that there is no objection.
Representative Hawker refuted the statement that only one
other state has minimum pricing on tobacco products.
According to the Minnesota House of Representative Research
Department there are 25 states that prohibit the sell of
cigarettes below cost. An additional seven states have
general fair trade law that prohibits the sell of cigarettes
below cost. Mr. McKay reiterated that he was only aware of
the state of Montana.
Representative Hawker MOVED to report CSSB 168 (FIN) am out
of Committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION it was so
ordered.
CSSB 168 (FIN) (am) was REPORTED out of Committee with "no
recommendation" and two fiscal notes: one new fiscal impact
note from the Department of Revenue and zero fiscal note #2
from the Department of Law.
CS FOR SENATE BILL NO. 202(FIN)
"An Act relating to school transportation; relating to
the base student allocation used in the formula for
state funding of public education; and providing for an
effective date."
SENATOR GARY WILKEN, SPONSOR, spoke in support of SB 202.
The legislation raises the Base Student Allocation (BSA) and
addresses pupil transportation through a grant system. He
noted that learning opportunity grants that had accumulated
over the last three years were converted into the student
dollar, which added $2.2 million [to the BSA]. He provided
members with a chart of pupil transportation costs from FY
97 to FY 04 (copy on file). Pupil transportation was funded
at $32.8 million in FY97. The request for FY04 is $58.1
million. The cost of pupil transportation has increased 77
percent; the increase in student population, over the same
time, has increased by 5 percent. The Anchorage Cost of
Living has gone up 14 percent.
Senator Wilken gave a brief history of attempts to address
pupil transportation. In 2000, Senator Torgerson, while he
was the Co-Chair of the Senate Finance Committee, proposed a
grant program, which was not accepted by the Administration.
A second approach was developed to split the increase, which
was not agreed on by the school districts. So nothing was
done. The next Administration issued cuts of 20 percent,
which held. The current grant proposal is a response to
those reductions. He maintained that the issue is one of
managing money. He observed that school districts have been
asked to manage pupil transportation costs, but maintained
that because the school districts have not had their "toes
held to the fire" that there was no motivation to reduce
costs. Under the legislation, school districts would be
asked to present their bills. The rates would be calculated
based on their costs and the number of students. School
districts would be able to keep any savings, which could be
used for other district funding.
EDDY JEANS, MANGER, SCHOOL FINANCE AND FACILITIES SECTION,
DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT provided
information on the legislation. He explained that the costs
are being passed on to the state of Alaska under the current
reimbursable system. Providers know that the state is
holding the checkbook. He felt that contractors would be
more disposed to bargain if they knew that school districts
had a limited amount of funding.
Vice-Chair Meyer asked how the formula would take into
account special needs children. Mr. Jeans explained that
districts are currently being reimbursed for these routes
and maintained that they would continue to be reimbursed.
Representative Berkowitz asked how the goods and services
that go into cost increases would differ from the basket of
group of goods and services that go into a consumer price
index. Mr. Jeans observed that the Anchorage CPI is built
into every transportation contract. Contracts are negotiated
on a five-year cycle and contractors are aware that it is
100 percent reimbursable by the state. He pointed out that
insurance and fuel costs were built into contracts over the
five-year period.
Representative Berkowitz noted that there was a 77 percent
increase in costs, with only a 5 percent increase in
students. Mr. Jeans responded that the five-year contracts
contain a reimbursement for new buses, which were not offset
later.
CARL ROSE, ASSOCIATION OF ALASKA SCHOOL BOARDS, testified in
support of the current version of the bill, as opposed to
the March 6 Governor's proposal. He emphasized that adequacy
was not enough, and stated that every school district was
currently reducing programs and opportunities for children.
He pointed to the No Child Left Behind Act and the Alaska
Quality Initiative and urged legislators to support the
educational system. He stressed that the future of Alaska's
young citizens are at stake.
JOHN ALCANTRA, NATIONAL EDUCATION ASSOCIATION OF ALASKA,
spoke in support of the legislation. He noted that putting
funding into the BSA allows districts stability of funding
and helps them meet some of the requirements of state
standards. He observed that NEA-Alaska has advocated for a
BSA of $4,280 per student since July of last year.
Mr. Alcantra maintained that $4,280 is a conservative
estimate. It asks for one year of inflationary costs and one
year of unmet needs as identified by business leaders such
as Roger Con, Jim Palmer and Carl Marrs in a report
published two years ago. These leaders asked for a BSA
increase of about $365 per pupil over 5 years plus increases
to deal with the erosion caused by inflation. He noted that
NEA recognizes the budgetary situation of Alaska, but
pointed out that there is a constitutional mandate to fund
education. He concluded that the legislation is another step
closer to the goal of adequately funding K-12 education for
FY 04.
Mr. Alcantra observed that the budget for FY 03 was based on
$20.50/barrel oil and a CBR draw of approximately $950
million. Oil averaged over $28/barrel for the first 10
months of this Fiscal Year, which means the CBR draw will be
about $400-450 million less than anticipated. He pointed out
that K-12 education needs just $28 million or 6 percent of
the CBR savings.
Mr. Alcantra stressed that the increase in the Base Student
Allocation is a short term, one-year fix. He noted that NEA-
Alaska believes the education community should take the
remainder of the school year to identify pupil needs under
the state standards and the No Child Left Behind law. This
data would be the basis for a long-term fix to education
funding. He suggested an addition of $23 million to increase
the pupil allocation. He suggested that the CBR draw had
been decreased due to increased oil prices, and emphasized
this might provide the short-term fix to the foundation
formula. He summarized that the bill would add only about
$2.2 million in new funding for K-12 education in FY 04 and
observed that it would fall short of the needs of the next
year.
JIM FOSTER, ASSISTANT SUPERINTENDENT, GALENA CITY SCHOOL
DISTRICT addressed the affects of the bill on his school
district. The Galena City School District would lose $459
thousand [if the legislation were enacted without
amendment]. There are twelve losers in under the proposal.
The next largest loser is the Valdez School District, which
loses $60 thousand. There were 41 "winners". He noted that
learning opportunity grants in his district pay for a number
of important programs. He requested a provision to hold
districts that would stand to lose harmless. He maintained
that a hold harmless provision would have a minimal cost to
the state.
Co-Chair Harris asked what would happen if student
allocation were increased and the learning opportunity
grants were eliminated in the next year. Mr. Foster stated
that the problem would still exist. He noted that Galena had
3,600 children in the Correspondence Program, outside of the
foundation formula. They would only receive 80 percent of
this funding if it were rolled into the formula, which is a
considerable loss, especially in view of the timing of the
action. He noted that they were not informed about the
change until May 14, after planning and contracts had been
implemented.
Co-Chair Williams stated that they would work on these
provisions with Mr. Jeans.
CSSB 202 (FIN) was HELD in Committee for further
consideration.
CS FOR SENATE BILL NO. 149(RES)
"An Act relating to timber, to the sale of timber by
the state, and to the management of state forests."
KELLY HUBER, STAFF, SENATOR TAYLOR, SPONSOR, provided
information on the bill. She observed that the legislation
promotes resource development for timber management in
Alaska's two state forests. There is a zero fiscal note
attached.
CHRIS MISH, FORESTER, DEPARTMENT OF NATURAL RESOURCES
testified via teleconference. He provided a brief overview
of the bill. He noted that Section 2 would delete the
reference to considerations under the forest land use plan
section, and place them in a section under the forest
management plan, which is a broader planning document. He
noted that the document for forest timber sales would be
biennial rather than annual. Timber sales would still be
required to appear in at least one five-year schedule prior
to sale. Individual sales would still be reviewed through
the forest planning process. Sections 8 and 9 address
management plans within the Haines State Forest. Sections
11, 12 and 15, would change the management emphasis in
legislatively designated state forests: Haines (270,000
acres) and Tanana State Forest (1.8 million). The emphasis
on timber management would allow for other beneficial uses,
which are compatible with timber. The primary purpose of
state forests would be changed from multiple uses to "timber
management that provides for the production, utilization and
replenishment of timber resources while allowing other
beneficial uses".
Mr. Mish observed that they are currently required to review
plans every five years. The legislation would allow plans to
be reviewed as necessary. He added that Section 10 would
only allow more stringent standards [than those under
section (a)] if they were in the state's interest.
Representative Berkowitz questioned what would happen in the
case of a conflict between fishing and timber. Mr. Mish
noted that they would refer to the state Forest Practices
Act, which establishes minimum protection standards for
different stream standards. He speculated that if the
conflict was not related to commerce, it might place timber
on a higher level of consideration. He stressed that all
parties agreed that the standards would protect habitat and
clean water.
Representative Kerttula summarized that the bill would
prioritize timber. Mr. Mish noted that the priority would
only occur in time of conflict. Representative Kerttula
asked what burden would have to be proved to show that
timber is not the first use in a conflict. Mr. Mish noted
it would depend on the merits of each use, but that timber
would be weighted more heavily. Representative Kerttula
questioned the reason for the bill. Mr. Mish stated that
other conflicts had arisen and been resolved.
Representative Kerttula asked if the legislation would aid
more timber development. Mr. Mish acknowledged that he had
heard that justification from the timber industry.
Representative Kerttula asked about impact on other uses.
Mr. Mish predicted no additional impact on other uses in the
short-term. He speculated that there would have to be a
great increase in harvest levels before it would impact
other uses.
Vice-Chair Meyer MOVED to report CSSB 149 (RES) out of
Committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION it was
so ordered.
CSSB 149 (RES) was REPORTED out of Committee with a "do
pass" recommendation and one zero fiscal note from the
Department of Natural Resources.
ADJOURNMENT
The meeting was adjourned at 1:08 PM
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