Legislature(2015 - 2016)BARNES 124

02/19/2016 03:15 PM LABOR & COMMERCE

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Audio Topic
03:16:58 PM Start
03:17:05 PM HB304
04:37:48 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 304 ELECTRNC TAX RETURNS;TOBACCO & E-CIGS TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                       February 19, 2016                                                                                        
                           3:16 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Kurt Olson, Chair                                                                                                
Representative Shelley Hughes, Vice Chair                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Cathy Tilton                                                                                                     
Representative Andy Josephson                                                                                                   
Representative Sam Kito                                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Jim Colver                                                                                                       
Representative Mike Chenault (alternate)                                                                                        
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
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."                                                                                           
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 304                                                                                                                  
SHORT TITLE: ELECTRNC TAX RETURNS;TOBACCO & E-CIGS TAX                                                                          
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/08/16       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/16       (H)       L&C, FIN                                                                                               
02/19/16       (H)       L&C AT 3:15 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION   STATEMENT:     Provided   a  PowerPoint   presentation                                                             
entitled,  "Cigarette  and  Tobacco  Products  Taxes  HB304"  and                                                               
answered questions.                                                                                                             
                                                                                                                                
BRANDON SPANOS, Deputy Director                                                                                                 
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions  during the hearing on HB                                                             
304.                                                                                                                            
                                                                                                                                
JAY BUTLER, M.D., Chief Medical Officer                                                                                         
Office of the Commissioner; Director                                                                                            
Division of Public Health                                                                                                       
Department of Health and Social Services                                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions  during the hearing on HB                                                             
304.                                                                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:16:58 PM                                                                                                                    
                                                                                                                                
CHAIR KURT  OLSON called  the House  Labor and  Commerce Standing                                                             
Committee meeting to  order at 3:16 p.m.   Representatives Olson,                                                               
Hughes,  Kito, Tilton,  and LeDoux  were present  at the  call to                                                               
order.   Representative Josephson arrived  as the meeting  was in                                                               
progress.                                                                                                                       
                                                                                                                                
        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.]                                                                                                         
                                                                                                                                
                                                                                                                                
4:37:48 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Labor and Commerce Standing Committee meeting was adjourned at                                                                  
4:37 p.m.                                                                                                                       

Document Name Date/Time Subjects
HB304 ver A.PDF HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Sponsor Statement-Governor's Transmittal Letter.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Fiscal Note-DOR-TAX-02-04-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email Kenneth Martin 02-14-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email Seth Payfer 02-14-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email Tristan Taliesin 02-14-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Letter-Ang Carroll Feb-2016.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email David Parrott 02-14-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email Jamie Chilton 02-15-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Email John VanZandt 02-14-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article- Stateline.org-Cigarette Smuggling cuts states' per-pack tax revenues 05-31-13.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article-Alantic Cities-Here's How Often New Yorkers Pay Full Price for Illegal Cigarettes 08-27-15.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article-DailyCaller.com 12-28-15.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article-Feasibility of Electronic Nicotine Delivery Systems in Surgical Patients 2015.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article-Tax Foundation_FF450 02-06-15.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article-The Atlantic_Web Edition-4 Raeasons Tobacco Taxes is a Bad IDea.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Clear Stream Air Project 09-01-2012.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Dr. Burstyn-Drexel Univ-School of Public Health-Tech Report 2013.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents- KFF-State Cigarette Excise Tax Rates 08-2015.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Article NewYork Post 12-27-2015.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Report-Nielsen Tobacco All Channel Data Period Ending 12-26-15 (1).pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Safety Evaluation of E-Cigs 2014.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Mayo Clinic ProceedingsJan2015Vol90Issue1PP71-76.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Opposing Documents-Report-Ecigarettes-Public Health England 2015.pdf HL&C 2/19/2016 3:15:00 PM
HB 304
HB304 Presentation-Dept of Rev-Tobacco Tax 02-19-16.pdf HL&C 2/19/2016 3:15:00 PM
HB 304