Legislature(2003 - 2004)
03/24/2004 07:05 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 24, 2004
7:05 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Bruce Weyhrauch, Vice Chair
Representative Vic Kohring
Representative Dan Ogg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
OTHER LEGISLATORS PRESENT
Representative Paul Seaton
COMMITTEE CALENDAR
HOUSE BILL NO. 538
"An Act relating to taxes on cigarettes and tobacco products;
relating to tax stamps on cigarettes; relating to forfeiture of
cigarettes and of property used in the manufacture,
transportation, or sale of unstamped cigarettes; relating to
licenses and licensees under the Cigarette Tax Act; and
providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 493
"An Act relating to adoption and revision of a long-term fiscal
plan for the State of Alaska."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 538
SHORT TITLE: TOBACCO TAX; LICENSING; PENALTIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
03/18/04 (H) READ THE FIRST TIME - REFERRALS
03/18/04 (H) W&M, L&C, FIN
03/24/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
WILLIAM CORBUS, Commissioner
Office of the Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Encouraged positive consideration of HB
538.
JOHANNA BALES, Excise Audit Manager
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Explained HB 538 and answered questions on
behalf of DOR.
MICHAEL BARNHILL, Assistant Attorney General
Commercial/Fair Business Section
Civil Division
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: Testified during the discussion of HB 538
and answered questions on behalf of DOL.
JOEL GILBERTSON, Commissioner
Office of the Commissioner
Department of Health and Social Services (DHSS)
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 538 and answered
questions on behalf of DHSS.
JOHN MIDDAUGH, M.D.
Chief of Epidemiology
Division of Public Health
Department of Health and Social Services
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538 and answered
questions.
BOB URATA, M.D., Board Member
Pacific Mountain Affiliate
American Heart Association
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 538.
MIKE ELERDING, Owner
Northern Sales
Ketchikan, Alaska
POSITION STATEMENT: Testified during the discussion of HB 538.
TIM SCHRAGE, Operations Manager
Brown Jug
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 538.
EMILY NENON, Alaska Advocacy Manager
American Cancer Society
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
MARIAH WARREN
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 538.
STEVE WARREN, Member
Alaska Tobacco Control Alliance
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 538.
PAT LUBY, Advocacy Director
AARP
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
KATTARYNA STILES
Alaska Native Health Board
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
JENNIFER APP, Alaska Advocacy Director
American Heart Association
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
BILL BOUWENS, Tobacco Educator
Alaska Native Medical Center
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
JOELLE HALL
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
SHELLEY WALLACE
Dillingham, Alaska
POSITION STATEMENT: Testified in support of HB 538.
JEAN MARIE CRUMB, Chair-elect
Alaska Tobacco Control Alliance
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
CAROLINE RENNER
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 538.
ACTION NARRATIVE
TAPE 04-15, SIDE A
Number 0001
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:05 a.m. Representatives Hawker,
Samuels, Kohring, Wilson, Moses, and Ogg were present at the
call to order. Representatives Weyhrauch and Gruenberg arrived
as the meeting was in progress. Representative Seaton was also
present.
HB 538-TOBACCO TAX; LICENSING; PENALTIES
Number 0157
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 538, "An Act relating to taxes on cigarettes and
tobacco products; relating to tax stamps on cigarettes; relating
to forfeiture of cigarettes and of property used in the
manufacture, transportation, or sale of unstamped cigarettes;
relating to licenses and licensees under the Cigarette Tax Act;
and providing for an effective date."
CHAIR HAWKER announced, due to an error regarding public notice,
that no action on the bill will be taken today and public
testimony will be extended until Friday.
Number 0231
WILLIAM CORBUS, Commissioner, Office of the Commissioner,
Department of Revenue (DOR), introduced HB 538 on behalf of the
Office of the Governor. The governor, in the 2005 budget,
specified a need for over $100 million for new revenue
enhancements and has suggested this tobacco tax bill as part of
the solution, he said. He urged the committee to positively
consider HB 538.
Number 0400
JOHANNA BALES, Excise Audit Manager, Tax Division, Department of
Revenue, mentioned that she has been the program manager for
cigarette and tobacco tax since 1997. She explained that [in HB
538] the cigarette tax would increase from $1 to $2 for a pack
of 20 cigarettes. For other tobacco products (OTP), the tax
would increase from 75 percent to 100 percent of the wholesale
cost. The cigarette tax increase in the past was dedicated to
the school fund, but this time all of the increase will go to
the general fund, she said.
MS. BALES related that the cigarette tax is fairly old and has
been around since 1949. Some technical corrections were needed
to avoid double taxation, she said. As an example, she
indicated, "If I were to hold a buyer's license and bring
product in, the definition of a buyer says that I have to pay
tax unless I buy from another licensee, and it defines those
licensees; however, it left out our licensees that we have that
are from out of state."
Number 0559
MS. BALES explained that the bill would allow, during
enforcement, the state to seize assets that are used in the
commission of a crime that violates the Cigarette Tax Act. That
provision is currently not in place, and only cigarettes that
are unstamped can be seized, she noted. The language in the
bill comes directly from Title 4, the Alcoholic Beverage Control
Board statutes, which says assets can be seized when used to
violate those provisions, she said.
MS. BALES went on to say that another significant part of the
bill would institute a floor stock tax, the difference between
the old and new tax rates on the date of enactment. In 1997
there was no floor stock tax, and there were significant amounts
of stockpiling and losses estimated to be $7 million in revenue
because retailers and distributors brought in large quantities
of cigarettes to avoid paying tax at the new rate. Those
savings were not passed along to the consumer, and there were
multiple complaints. She pointed out that most states and the
federal government have floor stock taxes when they institute
new taxes.
Number 0809
MS. BALES remarked that there will need to be an aggressive
enforcement program in place to curb black-marketing,
bootlegging, and Internet sales due to the large increase in the
tax. She pointed out that Alaska will not have the highest tax.
Rhode Island will have a $2.45 per pack tax beginning July 1,
and New Jersey's tax is $2.05 per pack. Since the tax is a
large increase, an incentive for bootlegging and black-
marketing, aggressive enforcement will be needed to protect
revenues and businesses that are complying with the law.
CHAIR HAWKER noted the presence of Representatives Weyhrauch and
Gruenberg.
Number 0937
REPRESENTATIVE SAMUELS asked if there are minimum amounts
regarding confiscated property.
MS. BALES answered that there are some minimum amounts, but they
are very low. Importing less than 1,000 cigarettes is a Class A
misdemeanor, importing 1000 or more cigarettes is a Class C
felony and would subject the person to seizure of their
property, she related. She noted the bill has provisions that
state, if the vehicles are in villages and are the sole means of
transportation, they would not be seized.
CHAIR HAWKER announced that Mike Barnhill from (DOL) is
available to answer questions about the bill.
Number 1100
REPRESENTATIVE GRUENBERG requested that Mr. Barnhill come
forward to testify because the bill would not be going to the
House Judiciary Standing Committee, and he said he has concerns
about the forfeiture provisions.
Number 1156
MICHAEL BARNHILL, Assistant Attorney General, Commercial/Fair
Business Section, Civil Division, Department of Law (DOL),
introduced himself.
REPRESENTATIVE GRUENBERG asked if Internet sales are clearly
covered under this bill.
MS. BALES replied that they are. She reported that the
cigarette tax statutes were enacted in 1949, and the taxes were
levied on the importation of cigarettes for sale or personal
consumption, which would include cigarettes purchased from the
Internet.
REPRESENTATIVE GRUENBERG inquired, "What about the person who is
selling cigarettes [on the Internet]?"
MS. BALES said the person who imports pays the tax, and [Alaska]
has limited ability to go after out-of-state sellers because of
jurisdictional problems. [Alaska] only has jurisdiction over
the in-state purchaser. She noted that there are federal laws
that require the out-of-state seller to provide information to
the state regarding the sales made to individuals and others in
the state, but those federal laws are violated constantly. She
said it is an area where, with federal help, violators could be
prosecuted.
Number 1336
CHAIR HAWKER requested that Ms. Bales explain the difference
between cigarettes and OPT.
MS. BALES defined cigarettes as anything that is wrapped in
paper, and, under excise tax laws, if cigarettes are imported
for sale or personal consumption, the tax is levied on import.
Other tobacco products (OTP) are cigars, snuff, chew, and loose-
leafed tobacco, and are covered by a different area of statute.
The tax on OTP is levied when product is brought into the state
for sale, but there is no tax on product that is brought into
the state for consumption, she said.
CHAIR HAWKER noted that is a point that will be addressed again
later in the meeting.
Number 1443
REPRESENTATIVE GRUENBERG inquired if someone who uses the
Internet to buy cartons of cigarettes would know to fill out a
tax form. He asked, practically, what would happened in that
case.
MS. BALES responded that this is an issue that has been
addressed since the last tax increase, and assessments to over
1,000 individuals who have purchased cigarettes through the mail
by Internet mail order have been sent out. She said
Representative Gruenberg's point is well taken about the
additional seizure provisions and how that would work. She
explained:
Generally, in practice, what we've done, we've
received information showing that they've brought
product into the state, and we've sent out
assessments. We, by law, are required to charge
interest, but we have some discretion in charging
penalties. We've agreed to waive penalties if they'll
come forward and pay the tax and interest. It's a
great educational tool.
MS. BALES continued to say that when a tax is raised or
instituted, there are businesses in the state that are in
compliance, and if people are forced to buy out of state and not
pay the tax, those businesses are harmed. She noted that this
is an argument for aggressive enforcement.
Number 1650
REPRESENTATIVE GRUENBERG asked how the individual Alaskan will
know to pay the tax and how much it is.
MS. BALES replied there will be public notices and retailers
will post notices.
REPRESENTATIVE GRUENBERG asked how the person will know how to
pay the tax.
MS. BALES said the person could contact DOR to get the
information and, also, could look at the website. Public
notices have contact numbers, she added.
REPRESENTATIVE GRUENBERG related that last year, during
testimony on the sales tax, there was discussion about the
difficulty merchants would have in collecting the tax. He
raised the issue that now, potentially, every smoking Alaskan is
being asked to go through a fairly complicated process of
getting forms and then remitting the tax. He asked Ms. Bales
how widespread evasion of this tax would be prevented.
MS. BALES responded that it is a problem area, but that this law
has been on the books since 1949, and individuals have already
been required to obtain a license, fill out forms, and pay taxes
to DOR for a product that has been brought into the state. When
DOR discovers that people have made purchases over the Internet,
letters are sent, forms are given out, and education is provided
for a long-standing law.
Number 1945
REPRESENTATIVE GRUENBERG asked how many packs 1,000 cigarettes
is and then said, "Fifty packs." He questioned if someone
bought 50 packs and inadvertently didn't pay the tax, would they
be committing a felony.
MS. BALES replied that is correct.
REPRESENTATIVE GRUENBERG opined that the amount is pretty steep,
and not that many people are obeying the law.
MS. BALES said Representative Gruenberg's point is well taken,
but stated some people say they are not aware of the tax, when,
in fact, they are. She argued that the responsibility is on the
people to become aware of the taxes they are subject to.
Number 2000
CHAIR HAWKER asked for clarification whether the bill is
changing the classification of the offense.
MS. BALES answered that it does not.
CHAIR HAWKER offered that many of the issues being raised by
Representative Gruenberg are items at issue under current
statute that are not being addressed by this bill, as well.
MS. BALES agreed.
REPRESENTATIVE GRUENBERG asked if anyone has ever been
prosecuted for a felony [for cigarette tax evasion].
MS. BALES replied, one person.
REPRESENTATIVE GRUENBERG asked if it was recently.
MS. BALES said yes, there was a felony conviction against an
individual who brought in cigarettes on multiple occasions, even
after being given notice of a first offense. The tax interest
and penalties were well over $500,000, she said.
Number 2147
REPRESENTATIVE WILSON asked what the tax increase on 5 cartons
of cigarettes would be.
MS. BALES replied $100, at the new rate.
REPRESENTATIVE WILSON asked how much a pack of cigarettes would
cost.
MS. BALES said the average cost right now is $4.50 a pack.
REPRESENTATIVE WILSON said [with the increase in tax] it would
be $5.50 a pack, which is quite a bit of money, especially if
people are reselling them. She asked what would happen to an
industrious 16-year-old who decides to buy cigarettes over the
Internet and resells them.
MS. BALES said it is a good question, and explained that on the
first offense, the first step is to give notice and assess the
tax and penalties. Generally, she said, there have not been
repeat offenders.
Number 2452
CHAIR HAWKER questioned Ms. Bales on some of the technical
aspects of the bill. He referred to page 1, [line 8] where it
says the license issued to a direct-buying retailer is increased
to $50. He noted, when looking at the statute this provision
affects, there are a number of categories of license fees: a
manufacturer, a distributor, a vending machine operator, direct-
buying retailer, and personal use or buyer's license. Leaving
out the personal use category, under current statute, the
manufacturer has a $5 license, the distributor-wholesaler has a
$50 license, the vending machine operator has a $25 license, and
the direct-buying retailer has a $25 license. He remarked that
the only category that is being raised in the bill is the
direct-buying license, and he wondered if Ms. Bales has
considered making all commercial categories consistent at a $50
level. He asked how other states handled commercial licenses.
MS. BALES replied that Alaska license fees are minimal compared
to other states. She said the reason DOR considered raising
only direct-buying retail licenses is, because of the cigarette
stamp tax, there are long-standing licensees who have the
direct-buying retail license that will no longer be selling
cigarettes, but who will be continuing to import OTP for sale.
The OTP license is $50, so there is now a class of direct-buying
retailers who will have to buy that license. She said this will
level the playing field, and, also, there is no significant
difference between a wholesale distributor license and a direct-
buying retail license because they all make cigarette sales in
the state. She said Representative Hawker's point is well taken
because any effort to make the fees equal makes sense.
Number 2807
CHAIR HAWKER predicted an amendment to that issue would be
forthcoming. He asked when the floor tax would be assessed,
due, and payable.
MS. BALES replied that under the language in the bill, any
person who makes sales of cigarettes in the state would have to
take an inventory on the effective date of the act and remit the
difference in tax to the department within 30 days.
CHAIR HAWKER remarked that it could be a substantial amount for
retailers who have commercial quantities on hand.
MS. BALES agreed it could be.
CHAIR HAWKER asked if DOR might consider phasing in the floor
stock tax payments over a period of time.
MS. BALES stated there would be no opposition from DOR over that
possibility, adding that DOR does not want the floor stock tax
to be a hindrance to anyone's business.
CHAIR HAWKER related that [phasing in] would also be considered
at a later time [for a possible amendment]. He asked for
clarification on the forfeiture provisions and wondered if they
mirrored the provisions currently in place for alcohol
violations in the state.
Number 3000
MR. BARNHILL responded that [the forfeiture provisions in HB
538] don't mirror the [alcohol violation provisions], but are
very similar. He mentioned that DOL began with AS 04.16.220 and
worked to update those provisions, adding enhancements.
MS. BALES noted that the forfeiture provisions would not apply
to individuals that bring product into the state for personal
consumption, and only apply to businesses that do resale.
Number 3131
REPRESENTATIVE GRUENBERG asked Mr. Barnhill if there are
constitutional problems with taxing out-of-state vendors.
MR. BARNHILL spoke about nexus, the power of the state to tax
extraterritorial entities. If a company is selling cigarettes
over the Internet, and has no physical presence in the state,
and all they do is direct cigarettes through the steam of
commerce, the state has no power to access a tax over that
entity, he reported.
REPRESENTATIVE GRUENBERG asked Mr. Barnhill if he is familiar
with the provision in the California code that extends "their
long-arm statute" to the maximum extent permitted under the
Constitution.
MR. BARNHILL said Alaska has the same "long-arm statute."
REPRESENTATIVE GRUENBERG asked Mr. Barnhill what he thought
about having a provision in [HB 538] which would allow the tax
to reach to the maximum extent permitted under the Constitution,
so that the manufacturers can be taxed, rather than making
felons out of Alaskans.
MR. BARNHILL responded that he is not sure it is necessary,
because under current law there already is the ability to go to
that extent.
Number 3414
REPRESENTATIVE GRUENBERG asked Mr. Barnhill to elaborate on the
issue of nexus.
MR. BARNHILL said he didn't know what else to say.
CHAIR HAWKER opened public testimony.
Number 3441
REPRESENTATIVE OGG asked Ms. Bale if the states that didn't have
a forfeiture provision, and have instituted one, showed an
increase in compliance.
MS. BALES said she has no knowledge of that information.
REPRESENTATIVE OGG asked how people who purchase by Internet are
discovered.
Number 3525
MS. BALES answered that federal assistance is required because
there is a long-standing federal law called the Jenkins Act
which requires out-of-state sellers who ship cigarettes to
provide information to the taxing authority in the state where
those cigarettes end up. It gives the name of the person who
purchased the product, where it was shipped, and the number of
cigarettes. She explained that DOR has used that law and has
worked with the [United States Attorney General's Office] to get
that information from the seller.
REPRESENTATIVE OGG asked if federal law requires people who are
selling tobacco products to file a form that shows they are
entering into a state's taxable commerce.
MS. BALES replied that there are rampant violations of the
Jenkins Act, so DOR looks for cases where it is known that an
out-of-state seller has shipped cigarettes into the state. The
[Alcohol and Tobacco Tax Trade Bureau] provides assistance and
has jurisdiction over those laws, she said.
REPRESENTATIVE OGG asked, "So, you're after both the out-of-
state supplier, on the federal side, and the in-state
purchaser?"
MS. BALES said that is correct. She added, "There have been two
recent state court cases in federal court where the federal
court has stated that the state has the ability to sue, in
federal court, those interstate sellers, out of state, to obtain
that documentation."
Number 3722
REPRESENTATIVE WEYHRAUCH asked what the public policy basis for
having a tax like this is, and whether it is to discourage
smoking or gain revenues. He asked why tobacco is being singled
out, and what the public is being told.
Number 3749
MR. CORBUS replied that the bill has a revenue factor and is
trying to discourage smoking.
REPRESENTATIVE WEYHRAUCH said that is what he figured.
CHAIR HAWKER called on Commissioner Gilbertson to testify.
Number 3847
JOEL GILBERTSON, Commissioner, Office of the Commissioner,
Department of Health and Social Services (DHSS), responding to
Representative Weyhrauch's question, said that one of the
driving reasons for supporting this legislation is because of
the public health impact of tobacco use in Alaska. He mentioned
a new report done by the Epidemiology Section of the Division of
Public Health that would soon be available to the committee
called Tobacco in the Greatland: A Portrait of Alaska's Leading
Cause of Death. He relayed:
Tobacco use in the state of Alaska is our leading
public health threat, and it's also our number one
cause of death, disability, and chronic illness in
this state. Historically, we have seen, through a
number of econometric studies and also work by our
department, that the increasing in revenues - tax - on
tobacco products is an effective policy tool in
improving public health around tobacco consumption.
In Alaska increased tobacco tax has already been
associated with a drastic reduction in tobacco
utilization. In 1997 when the tobacco tax was raised,
[until] 2002, we saw a 30 percent decline in tobacco
utilization attributed to the tax being implemented.
Increasing the unit price for tobacco is a very
effective tool, as I mentioned, in terms of
controlling utilization of tobacco products, but it's
most effective amongst youth. A $1 per pack cigarette
tax increase will directly help the state in reducing
the utilization of tobacco products by minors. We
have seen a precipitous decline in tobacco consumption
amongst minors - 50 percent since 1995. We did a
youth risk behavior survey in 1995 that was
statistically valid. We did another one in 2003, and
in those studies we've seen almost a 50 percent
decline in utilization of tobacco products. We
believe a further drop in use of tobacco rates will
occur as a result of this tax increase, and we believe
it will lead to a 15 percent decline from current
levels, which will translate into 1,800 lives saved
from the effects of premature death due to tobacco
utilization.
Number 4020
COMMISSIONER GILBERTSON continued:
As I said, increasing the tobacco product tax is an
effective tool. It's also an effective tool for
adults. It's estimated that the increase cost of
purchasing cigarettes from this tax increase will lead
to 3,500 adult smokers in the state of Alaska finally
quitting the addiction of tobacco. We also will see
from that, 800 individuals whose lives will be saved
from a smoking-related death. There are other
vulnerable populations. From this tax we would expect
to see, in terms of smoking decreases by expectant
mothers, 850 babies being spared from exposure to
maternal smoking.
As we look at where there are health disparities
continuing to exist in the state of Alaska, [one
exists] largely between the Alaska Native population
and the general population. We believe that Alaska
Natives will have the most to gain from this tax
increase. We see, right now, that Alaska Natives
smoke at almost twice the average of the state's
general population, and we also see, amongst high
school students, that Alaska Native smoking prevalence
is four times that of other students. An increase tax
will disproportionally provide an additional benefit
to lower income brackets which sometimes tend to be
most at risk for these health diseases.
The Campaign for Tobacco Free Kids did an analysis,
and their assumption is that within five years the
health care savings from pregnancies and births that
have damage resulting from tobacco product
consumption, will save the state $1.6 million, and
that, in terms of fewer smoking-related heart attacks
and strokes, the savings would be $1.8 million. But
the long-term health care savings from adult and youth
smoking declines would be $146 million, and that's not
just to the State of Alaska, but also in terms of
overall health care costs in the state.
Number 4254
COMMISSIONER GILBERTSON continued to say that the previous tax
raised $47 million, and this tax increase will raise over $30
million. A study in 1997 of the actual cost of tobacco to the
state found $133 million in tobacco-related medical expenditures
and $137 million of lost productivity because of tobacco-related
illness and death, he related. There were 17 econometric
studies done on the effect of price increases on tobacco use,
and every study found a decrease of use with an increase in tax,
a 1.5 to 4 percent decline for every 10 percent increase in the
tax. He termed the tax an appropriate tool to help make inroads
on the greatest public health threat in the state.
Number 4438
CHAIR HAWKER asked Ms. Bales to join Commissioner Gilbertson to
answer questions. He asked them about the revenue changes of
$35.5 million per year on a linear basis going forward in the
fiscal note, and wondered if they had considered the elasticity
in the market that this increase would generate. He asked them
to reconcile the fiscal note.
MS. BALES responded that they did consider elasticity, and $35.5
million is the average between the lowest and highest
elasticity. She said they did factor in the reductions of
smoking due to the increased price.
Number 4606
CHAIR HAWKER asked if Commissioner Gilbertson's estimates are in
line with what is being used for high and low estimates.
MS. BALES replied that they are in line.
CHAIR HAWKER asked if they had discussed this issue previously.
MS. BALES replied that they hadn't, but the information about
price elasticity in the revenue is widely distributed by DOR.
COMMISSIONER GILBERTSON added that these are well-published and
generally-accepted econometric studies on the correlation
between tobacco consumption and the increase in tobacco tax.
CHAIR HAWKER requested documentation that the fiscal note is
based on agreement of the parameters of the elasticity model.
TAPE 04-15, SIDE B
REPRESENTATIVE WEYHRAUCH asked Commissioner Gilbertson, "Given
the data you've cited, why not introduce a bill that outlaws
cigarettes?"
Number 4600
COMMISSIONER GILBERTSON said he responds from a public health
perspective and believes that tobacco consumption does not bring
much to society and causes tremendous damage as the number one
health threat in Alaska. He pointed out that it is not against
the law to consume tobacco products and said, "We believe that
the $1 increase in tax is an appropriate step towards
discouraging tobacco product consumption in the state."
CHAIR HAWKER asked Representative Weyhrauch if that was an
appropriate answer.
REPRESENTATIVE WEYHRAUCH replied that he didn't know why "we're
nickel and diming it up to where we're going to go," and
suggested Alaska be "number one."
Number 4439
REPRESENTATIVE SAMUELS mentioned other sin taxes, and compared
the small amount of drinkers that drive to the larger number of
social drinkers. He asked if it was similar in the health-care
arena where there are a small number of smokers with high-dollar
claims.
COMMISSIONER GILBERTSON suggested Dr. Middaugh answer that
question because he has done studies on both alcohol and tobacco
conditions.
Number 4328
JOHN MIDDAUGH, M.D., Chief of Epidemiology, Division of Public
Health, Department of Health and Social Services, replied that
there certainly is a smaller number of individuals who smoke and
have more serious, adverse health consequences that account for
a greater cost in terms of medical care and lost productivity.
He said it is not a one-to-one relationship, but all smokers
increase their risk of different adverse health effects and also
contribute to the exposure of nonsmokers to second-hand smoke.
REPRESENTATIVE SAMUELS said he was trying to compare smoking to
alcohol where a small number of drinkers create problems. He
asked if every smoker is going to have a health problem.
DR. MIDDAUGH replied that the question is an excellent one, but
it can't be simply answered because it is not possible to
predict which individuals who are heavy smokers will have health
problems. He mentioned George Burns as an example of a life-
long smoker who suffered no health-related problems. He related
that most individuals will have some level of adverse health
consequences, and some will have devastating and early
consequences. Science is not yet able to predict who those
individuals will be, he noted. Individuals who smoke and then
stop, substantially reduce their future risks, he said.
Number 4049
REPRESENTATIVE OGG, following Commissioner Gilbertson's
suggestion to raise the tax one more dollar, said that would put
[Alaska] at the top [of those states charging a tobacco tax].
He suggested there may be an increase of out-state-purchases by
habitual smokers, and inquired if Mr. Gilbertson has any records
from other states to show what happens when taxes are raised in
neighboring states. He offered an example of growing up in
Maine where there was a fairly heavy tax, but New Hampshire had
no tax, and so people would go there to purchase cigarettes.
COMMISSIONER GILBERTSON deferred to DOR to answer the question.
He related that in Alaska it is more expensive to travel to
another state to purchase cigarettes.
Number 3917
MS. BALES responded to Representative Ogg's question by stating
that there are widespread problems with that issue when certain
states have raised their taxes. For example, she noted that in
New York City the tax is $1.50 a pack, the state tax is $1.50,
and in less than five hours a person could drive to Virginia
where the tax is 2.5 cents a pack. New York has had severe
smuggling problems, she said. In Alaska, "in five hours you're
still in Alaska, but in two days you can be in Whitehorse,
Yukon, and in Canada you have to look at the combination of
their federal and provincial taxes," she explained. That tax is
$2.91 a pack, whereas, currently in Alaska, the tax rate is
$1.81 a pack. If there is an increase of $1, it would still be
cheaper to purchase cigarettes in Alaska, she concluded. A
greater concern to Alaska is mail-order fraud, she pointed out,
when a common carrier knowingly ships cigarettes into the state
to someone who is not properly licensed. Part of the stamp
legislation that became effective in January has provisions for
shipping restrictions, which is an enforcement tool. Aggressive
enforcement is the answer, she emphasized.
REPRESENTATIVE OGG said a lot of people travel from Alaska to
other states and may purchase large quantities of cigarettes on
their trips. He suggested having the amount of tax increase be
similar in value to the price in states most frequented by
Alaskans, like Washington, in order to prevent a new class of
criminals from being created. He asked why the tax is so high.
COMMISSIONER GILBERTSON replied that there is an incremental
health benefit for each percent of tax increase, so a $1
increase is twice as effective as a 50-cent increase. He said
the bill is a strong effort to address the number one public
health threat in the state.
Number 3532
REPRESENTATIVE WILSON said the health aspect is very important.
She related that after she studied the health ramifications of
smoking, even as a nurse, she was surprised at the size of the
problem in lost work productivity. She read, "Cancer is
currently the second leading cause of death to all Alaskans and
the leading cause of death for Alaska Natives." She remarked
that more Alaska Native teens smoke [than all other races].
CHAIR HAWKER asked what Representative Wilson was citing.
REPRESENTATIVE WILSON replied it is a letter from the American
Cancer Society [in the committee members' packets]. She
continued to read:
Research shows that one-third of all cancers are
tobacco-related and almost all tobacco-users first
become addicted as children. By increasing the
state's tobacco tax, it is a known correlation to
reducing youth smoking, and we are taking a critical
step in stemming the tide of rising health care costs
to the state and needless death and disability in our
communities.
REPRESENTATIVE WILSON referred to the State of Alaska
Epidemiology Bulletin and read:
Tobacco attributable disease in Alaska accounts for
approximately 600 deaths per year, more than five
times as many caused by motor vehicle crashes, and
nearly 100 times as many deaths as those caused by
AIDS, and 120 lives are lost each year because of
secondhand smoke.
REPRESENTATIVE WILSON next quoted in part from the Alaska
Tobacco Control Alliance letter:
Alaska has had tremendous success rate in reducing
youth smoking. Increasing the tobacco tax is a sound
public health decision. Affects on youth consumption
are, it decreases by 15 percent youth smoking,
increases the total number of youth alive today who
will not become smokers, like 9,000 of them. The
number of youth alive today saved from premature
smoking-caused death, almost 3,000.
REPRESENTATIVE WILSON emphasized that the key fact is that
adults do not start smoking, children do, and virtually all
smokers today started before they were 19 years old. The future
smokers of Alaska are our children, she concluded.
Number 3100
BOB URATA, M.D., Board Member, Pacific Mountain Affiliate,
American Heart Association, explained that he is a family doctor
practicing in Juneau. He stated that the mission of the Pacific
Mountain Affiliate is to reduce death and disability from heart
disease and stroke by 25 percent by 2010. He said the purpose
of his testimony is to give examples from his practice this past
year of tobacco-related diseases. He mentioned that he has been
in practice since 1984 and has known these people for many
years.
DR. URATA described several of his patients:
A man in his eighties who has smoked for 65 years,
beginning at age 18. He quit in 1999, and among his
diseases are carotid artery disease which required him
to have an endarterectomy, which is a roto-rooter to
clean out his arteries. He also had an abdominal
aneurysm which is a ballooning of the big aorta, the
big vessel that goes down to the legs. He had that
repaired. He also then developed, in 1999, one in his
chest called a thoracic aortic aneurysm. That was
treated with medicines. Then, earlier this year, we
discovered that he had right lung cancer that had
spread throughout his body and he's currently dying
from that.
A 77-year-old man who smoked for 45 years, since 18
years of age - he quit in 1989. He has had coronary
disease that required balloon angioplasty twice, in
1989 and in 2001. He also had lung cancer and
emphysema diagnosed in 1995 and then another cancer in
his left lung in 1996. But, he has continued to be a
survivor due to good medical care. He now has
problems with walking and shortness of breath from
these cigarette-related disabilities.
A 61-year-old man who smoked for 40 years. He started
at 18 years of age and quit in the year 2000. He had
a stroke in 1990 and he had a heart attack and balloon
angioplasty in 2000. He currently is disabled,
paralyzed on the right side, living at home, though.
A 77-year-old woman who smoked two packs a day for 35
years. She started at age 17 and quit in 1978 but
then developed left lung cancer in 2001 and then the
next year they found cancer in her left kidney, which
is a cancer that is associated with smoking. She
currently lives in a nursing home because of these
disabilities.
We have a younger woman, 49-years-old, who smoked a
pack a day for 20 years since she was 27, and she quit
when she was discovered to have left lung cancer that
traveled to her brain. She currently can't work and
has seizure disorder.
And, finally, I have a 66-year-old gentleman who
smoked for 32 years - since about age 25. He
currently still smokes, he can't quit, and, as a
result, he has had an acute heart attack, and had a
balloon angioplasty in 1994, and then in 2002 he had a
coronary bypass. He also has had a small stroke in
1998 and in 2000, and in currently - in late 2003 - we
discovered him to have colon cancer. He's continuing
to undergo chemotherapy.
DR. URATA said he hopes these examples show that smoking can be
a very devastating disease, and he emphasized that it doesn't
just affect one organ system, but multiple organ systems.
Modern medical care helps people survive, but can't make them
whole again, he said. He related:
Smoking increases the risk to stroke, sudden cardiac
death, heart attacks, aortic aneurysms, and peripheral
vascular disease. Smoking is responsible for 85
percent of lung cancers that occur. It is also
associated with ten different cancers: mouth, throat,
larynx, esophagus, stomach, pancreas, cervix, kidney,
urethra, and bladder. It also accounts for 30 percent
of all cancer deaths.
The biggest thing that we can do is to prevent our
young people from ever starting to smoke. You've
heard statistics that describe how effectively the
price of cigarettes reduces consumption. In order to
reduce total consumption of cigarettes, we have to
prevent the smoking habit from starting and that is
why we target the teenagers. I believe that this bill
will help reduce new teenage smokers. I hope you will
support this bill because I believe it will lead to a
healthier and more productive Alaska.
Number 2525
REPRESENTATIVE WILSON thanked Dr. Urata for bringing examples
for the committee to hear, and spoke of her own personal
experience with her father who smoked for 50 years and quit when
he was 65. Eight years later he died from emphysema at age 72.
She said her brother died last year at 52 from smoking-related
cancers. She restated her strong feelings about this issue.
DR. URATA, in response to Representative Weyhrauch's comment
about outlawing cigarettes, said if the cigarette was a new
product and had to go through the Food and Drug Administration
(FDA), it would never be approved because of the fact that it
causes so much cancer. He maintained that because of the
current political climate, cigarettes will never be eliminated,
but legislation such as this bill can make it harder for people
to start smoking.
Number 2336
REPRESENTATIVE MOSES asked if the use of marijuana has the same
adverse health effects as tobacco.
DR. URATA said he isn't sure, but, personally, he is opposed to
its use. He mentioned he has read studies that show that
marijuana can cause problems, but he has never read anything
that says it causes cancer.
REPRESENTATIVE MOSES said Unalaska recently had a drug bust and
$20,000 worth of marijuana was confiscated. He wondered if it
makes sense to legalize marijuana, although he said he wouldn't
advocate for it.
DR. URATA had no comment.
CHAIR HAWKER drew the committee's attention to written documents
in their packets prepared by Mike Elerding from Northern Sales.
Number 2140
MIKE ELERDING, Owner, Northern Sales, explained that even though
47 percent of his business is with cigarettes and OTP, he is not
opposed, in principle, to HB 538 because he recognizes the
health risks associated with tobacco products. He also said he
agrees with the idea to restrict youth access to these products
and that the price increase in the bill would act as a deterrent
to youth smoking. He asked the committee to remember that
tobacco is a legal adult product and adults have the right to
make independent decisions. He said he does not want government
or other well-intentioned groups telling him what to do. He
said he thinks it is appropriate for the government to tax
tobacco products, but that the degree of taxation and unintended
consequences of the proposed tax are the issues. As a licensed
dealer of tobacco goods, he stated his concern about the
unintended consequences of the bill.
MR. ELERDING explained that he has been selling cigarettes and
OTP, as well as paying and collecting the excise tax, since
1962. Last year alone, he stated, his business paid $4 million
in tobacco tax. He spoke of October 1997 when the state raised
the tax from $2.90 to $10.00 a carton and there were a number of
unintended consequences. The first consequence was a problem
with break-ins causing an additional need for security measures
at a cost to the business, and the second consequence was an
increase in the carrying costs of inventory, which meant an
increase in the line of credit, costs of carrying accounts
receivable, and insurance. Last year his business worked with
DOR to facilitate the cigarette tax stamp legislation which had
a bonding requirement consequence. He said it was difficult to
secure a bond from the insurance company. Now he said he has a
$1 million bond secured, but the higher tax would require a $2
million bond to be secured which will be very difficult.
MR. ELERDING related, "Like it or not, we're partners with the
state in collecting and remitting the tax to the state," he
said. He emphasized that the state is collecting and making
much more money on the sale of tobacco products than private
industry in Alaska is. He stated a concern about the OTB tax, a
75 percent excise tax which is charged, at present, to tobacco
distributors doing business within the state, and not to mail
order businesses or Internet companies. He said it is
impossible for Alaska distributors to compete under these terms.
Number 1540
MR. ELERDING says he believes that this tax will cause Alaska
distributors to seek alternate sources of supply through the
Internet and other non-traditional distribution channels, which
will cause more tax evasion and bootlegging. He said he
supports the state's increasing its enforcement efforts and the
hiring of six new enforcement staff. He stated his intent to
work with the state to insure that he is in compliance with
Alaska tax laws and that youth access is restricted.
CHAIR HAWKER thanked Mr. Elerding for his continuing efforts to
work with the state on this matter. He said he is committed to
working with DOR to clean up the major issues mentioned: OTP
mail order, bonding, and floor tax.
Number 1320
TIM SCHRAGE, Operations Manager, Brown Jug, shared his concerns
about HB 538. He spoke of his business's zero tolerance policy
of selling alcohol and tobacco products to minors. He opined
that the tax increase will drive consumers to underground retail
channels such as the Internet, and the state has not been
effective in collecting taxes on such sales. In Anchorage there
is a wholesale municipal tax on top of the cigarette tax which
forces people to drive to the [Matanuska-Susitna Valley] to buy
cigarettes, he said. He predicted there will be new jobs in
trafficking illegal "grey market" cigarettes, which are made to
look like popular brands, and noted that the potential for
profit is huge. He expressed lack of confidence in the state's
ability to manage bootlegging and illegal smoke shops. He said
it is his understanding that illegal tobacco is the number one
product seized by the U.S. Custom Service.
MR. SCHRAGE related other concerns about the economic impacts of
the tax on businesses. He said the potential impact of an
additional $1 to the floor tax will cause his company to pay
over $200,000 for inventory for the rest of his economic career.
He said he also pays a retail floor tax to the city of
Anchorage, and an increase in the cost of inventory increases
the insurance cost. He maintained that this tax increase will
not solve the fiscal problems and will increase criminal
activity.
CHAIR HAWKER thanked Mr. Schrage for his testimony and noted
that his written document is included in the record.
Number 0754
EMILY NENON, Alaska Advocacy Manager, American Cancer Society,
said she is based in Anchorage and has been in Alaska all of her
adult life.
CHAIR HAWKER mentioned that Ms. Nenon's materials were also
included in the members' packets.
MS. NENON said the issue at hand is not a complicated one. The
American Cancer Society's mission is to eliminate cancer as a
major health problem by preventing cancer, saving lives, and
diminishing suffering from cancer, she said. One-third of all
cancers are tobacco related, and smoking accounts for at least
30 percent of all cancer deaths, she related. She said, "What
it really boils down to is, whose brother is it? Whose mother
is it?" She called tobacco use a pediatric epidemic; it's kids
who start smoking. When the price of tobacco increases, kids
and pregnant women are the first ones affected, and that's where
[this bill] can start making a difference on this issue, she
said.
MS. NENON submitted testimony from the American Lung
Association.
CHAIR HAWKER replied if it is not in the packet he will make
certain it gets into the record.
MS. NENON pointed out that Alaskans recognize that [cigarette
smoking] is a problem, and that there is a link between
increasing tobacco taxes and saving lives, as reported in a
survey done in February. Over two-thirds of Alaskans support
this increase in tobacco tax.
CHAIR HAWKER asked if the survey was a voluntary survey.
MS. NENON replied that it was a statistically valid survey done
by a group called QEV Analytics based in Washington, D.C., and
the results were consistent across the country and contained no
surprises. She said the issue of Internet sales - black-
marketing - is a big red herring in this committee meeting. She
suggested the committee get a copy of Tobacco in the Greatland:
A Portrait of Alaska's Leading Cause of Death and check out page
100 which explains where people buy their tobacco. It says that
only 4 percent of adult smokers reported that they bought
cigarettes over the Internet, through mail order, or through
other 800-number sources over the past year. She reported that
90 percent of adults who smoke say they usually buy cigarettes
within their community, while 98 percent buy them in Alaska.
Most smokers want to quit and they buy their cigarettes one pack
at a time, she pointed out, and 34 percent get them from
convenience stores or gas stations, 25 percent from grocery
stores, and 7 percent from liquor or drug stores. She said
there is also the issue of Internet sales that was addressed in
the tobacco tax stamp bill last year, and she hopes that DOR
will address further the measures they are taking to stem that
tide. She emphasized that the tide she is most interested in
stemming is the tremendous health care cost and burden on the
state by allowing the tobacco epidemic to continue. "It's
killing our kids and we can't let that happen," she concluded.
Number 0032
MARIAH WARREN identified herself as born in Alaska and a full-
time college student working part-time at a supermarket in
Juneau. In her experience in both of those venues, she said it
is very apparent that there is a direct link between the cost of
cigarettes and who's smoking. She shared a story about a young
woman who came into the store to purchase cigarettes who said,
"I wish they would raise the tax. If they get just a little
more expensive, I'm going to have to quit."
TAPE 04-16, SIDE A
MS. WARREN continued to say that selling cigarettes is her least
favorite part of working in retail because her employers are
making a profit from "dealing in death."
Number 0116
STEVE WARREN, Member, Alaska Tobacco Control Alliance, said he
has worked to help people stop smoking his whole life. He said,
"We have to face up to the fact that the tobacco industry,
despite their claiming that they are selling a legal product for
adults, are working very hard at addicting our children." He
thanked the committee for their past actions in helping reduce
the rate that teens are smoking by 50 percent. The new $1 per
pack tax increase will reduce teen tobacco use, despite what is
being said to distract from that issue. "Every other kid that
we can help keep from starting smoking is going to be saved from
a premature death from that addiction," he pointed out.
Number 0326
PAT LUBY, Advocacy Director, AARP, related that AARP is the
largest organization of grandparents in the world. He said he
is confident that no grandparents would be happy to know that
their grandchildren have started to smoke. Many AARP members
smoke, or used to smoke, and know how difficult it is to quit.
If raising the cost of tax on cigarettes helps prevent Alaska's
youth from starting to smoke, [AARP] is very strongly in favor
[of the bill], he said. He said [AARP] is very impressed with
the data in the governor's transmittal letter indicating that
Alaska Natives, and particularly Alaska Native high school
students, smoke at much higher rates than non-Native
populations. He strongly recommended that some of the money
generated by the tax increase be used to target cessation
efforts for Native smokers, especially Native youth. He called
the bill good economic policy and good health policy that makes
sense and is fair. On behalf of AARP, he strongly recommended
the passage of HB 538.
CHAIR HAWKER said the letter Mr. Luby faxed to the committee has
been included in the packet.
Number 0449
KATTARYNA STILES, Alaska Native Health Board, characterized this
bill as important legislation because it will save lives, raise
money, and reduce health care costs. She said she appreciates
Commissioner Gilbertson's comments that Alaska Natives have the
most to gain by passage of this legislation. She explained
that, according to the [2003 Youth Risk Behavior Survey], 55
percent of Alaska Native youth smoke, and measures need to be
taken to keep tobacco out of the hands of Native youth. Raising
the price of cigarettes and tobacco products so that kids can't
afford them would be a tremendous step in the right direction,
she remarked. She mentioned that another serious problem is
that 29 percent of pregnant Alaska Native women smoke, which
causes devastating health effects to the unborn children. In
western Alaska, that figure goes up to 57 percent, she said.
She concluded by saying that the estimated annual cost of
smoking to the Alaska Native health care system is $48 million,
and this bill will save money by reducing health care costs as
well as generate money and save lives.
Number 0713
JENNIFER APP, Alaska Advocacy Director, American Heart
Association, reported that the American Heart Association is a
national voluntary health agency whose mission is to reduce
disability and death from cardiovascular disease and stroke, and
it strongly supports this bill. Smoking is the leading
preventable cause of cardiovascular disease in Alaska and is
responsible for one out of every five deaths in the state. The
Alaska public subsidizes the significant cost associated with
smoking of over $260 million a year. These expenses don't
include health costs caused by exposure to second-hand smoke,
spit tobacco, pipes, or cigars. Other non-health care costs
from tobacco include property loss from smoking-related fires.
She noted that the Anchorage fire department reported that every
house fire in the past year was caused by a burning cigarette.
The cost of smoking to the public is about $6.38 per pack, she
said. She called the bill a "win, win, win" situation.
Number 1123
BILL BOUWENS, Tobacco Educator, Alaska Native Medical Center,
said in October 1997, when the first tobacco tax went into
effect, his classes were very full. He said the purpose of the
bill is to prevent youth from starting to smoke. As an Alaska
Native he said he has seen the effects of smoking on his people.
He said his dad quit smoking 24 years ago, but currently has
lung cancer. He urged the passage of this bill to help prevent
youth from starting to smoke.
Number 1250
JOELLE HALL, mother of two, said she is able to testify today
because her mother is taking care of the kids. She stated her
support for the increase in the tobacco tax on behalf of all of
the parents who couldn't testify today. She urged the committee
to keep children in mind when debating the bill. She said that
talking to kids about smoking is an effective way to prevent
smoking. She spoke in strong support of the bill asking the
committee to implement public health policy to help parents
prevent their kids from smoking
Number 1522
SHELLEY WALLACE said she is shocked by the number of kids who
use tobacco in Dillingham and Bristol Bay. She said she has no
grandparents because of tobacco. "Stopping our kids from
starting is the most important thing we can do," she said. She
urged passage of the bill.
CHAIR HAWKER replied that there are members of the committee
from Ms. Wallace's area who understand what she is saying about
the problem of youth smoking in rural Alaska.
Number 1649
JEAN MARIE CRUMB, Chair-elect, Alaska Tobacco Control Alliance
(ATCA), spoke as a life-long Alaskan and Alaska Native, and
reported that ATCA is a coalition of health care providers
representing over 200 organizations and individuals. She
encouraged support of HB 538, saying, "There is no single action
that you could take to protect the health of Alaskans than to
raise the tobacco tax." She related her opinion that if this
legislation were to pass, fewer young people would begin
smoking, fewer babies would die of Sudden Infant Death Syndrome
[SIDS], and more adults would quit. She urged passage of the
bill.
Number 1816
CAROLINE RENNER said she was born and raised in Alaska and spoke
of her personal experience both in Anchorage and when working in
Bethel. She spoke about developing nicotine dependence
treatment programs around the state in primary health care
centers and in clinics. She said an unknown factor is how many
children are using tobacco because children younger than middle
school are not surveyed about their tobacco use, which she said
is of great concern. She also discussed her concern about
prenatal exposure to nicotine and said that those babies are
more likely to become addicted. She mentioned a paper she has
written in Preventive Medicine about children as young as three
becoming addicted to tobacco. She asked the committee to pass
the bill and save lives.
Number 2148
CHAIR HAWKER asked if there was any more public testimony.
Number 2248
REPRESENTATIVE OGG asked Commissioner Gilbertson if he would
provide a graph to show the relationship between the tax and the
consumption rate in Alaska, similar to the graph provided by the
National Center for Tobacco Free Kids in the packet.
CHAIR HAWKER said it would be requested.
[HB 538 was heard and held.]
[HB 493 was scheduled but not heard.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:05 a.m.
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