Legislature(1997 - 1998)
02/14/1997 09:03 AM Senate HES
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SENATE HEALTH, EDUCATION & SOCIAL SERVICES COMMITTEE
February 14, 1997
9:03 a.m.
MEMBERS PRESENT
Senator Gary Wilken, Chairman
Senator Lyda Green
Senator Jerry Ward
Senator Johnny Ellis
MEMBERS ABSENT
Senator Loren Leman, Vice Chairman
COMMITTEE CALENDAR
SENATE BILL NO. 13
"An Act relating to taxes on cigarettes and tobacco products, and
to the use of the proceeds of those taxes; and providing for an
effective date."
- MOVED CSSB 13(HES) OUT OF COMMITTEE
SENATE BILL NO. 61
"An Act relating to taxes on cigarettes and tobacco products, and
to the use of the proceeds of those taxes; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS SENATE COMMITTEE ACTION
SB 13 - See Senate Health, Education & Social Services Committee
minutes dated 2/5/97 and 2/10/97.
SB 61 - See Senate Health, Education & Social Services Committee
minutes dated 2/5/97 and 2/10/97.
WITNESS REGISTER
Jack Chenoweth, Attorney
Legislative Legal Counsel
Legislative Affairs Agency
130 Seward Street, Suite 409
Juneau, Alaska 99801-2105
POSITION STATEMENT: Discussed the legislative findings and the
retroactive protection in the CS.
Bob Bartholomew, Deputy Director
Income & Excise Audit Division
Department of Revenue
PO Box 110420
Juneau, Alaska 99811-0420
POSITION STATEMENT: Discussed changes in the CS and answered
questions.
Elmer Lindstrom, Special Assistant
Office of the Commissioner
Department of Health & Social Services
PO Box 110601
Juneau, Alaska 99811-0601
POSITION STATEMENT: Answered questions.
Senator Sharp, Prime Sponsor
State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: Believed the CS strengthened the legislation.
ACTION NARRATIVE
TAPE 97-13, SIDE A
SB 13 INCREASE TOBACCO TAXES
SB 61 INCREASE TOBACCO TAXES
Number 001
CHAIRMAN WILKEN called the Senate Health, Education & Social
Services Committee (HES) to order at 9:03 a.m. and introduced SB 13
and SB 61 as the only order of business before the committee.
SENATOR WARD moved that CSSB 13(HES) be adopted as a working
document. Without objection, it was so ordered.
CHAIRMAN WILKEN noted that the committee packet included the CS
with the changes highlighted in yellow. The CS is a blending of SB
13 and SB 61 as well as some new additions. Chairman Wilken
identified the following areas of change and addition: the
legislative findings, establishment of the school construction
savings fund, tax collection and administrative fee, tax increase
tied to the CPI, the public notice of tax change, and the
retroactive protection of the revenue collected. After discussion
of these six changes, a 'stockpile amendment' will be discussed.
JACK CHENOWETH , Legal Counsel in the Legislative Affairs Agency,
explained that discussion with the committee staff resulted in the
six paragraphs in Section 1. Section 1 indicates what the
Legislature believes that it is constitutional to change the rate
of a tax whose proceeds are dedicated. Section 1 recognizes the
possibility of litigation, but finds that it is in the best
interest of the state to change the rate of the tax. There are
contingencies in the bill in the event that litigation occurs and
in the event that litigation is successful. This strengthens the
state's position.
Number 098
Mr. Chenoweth moved on to Section 14, the retroactive provision, of
the CS which is a new provision. This is based upon a letter from
Assistant Attorney General Jim Baldwin to Senator Sharp regarding
the possibility of protractive litigation over the adjustment of a
tax that supports a dedicated fund. The letter suggested that the
alternative tax be made retroactive to October 1997 and provide
that any tax increase paid under the primary tax be taken as a
credit against the retroactive alternative tax. The Department of
Law is trying to ensure that extraneous questions apart from the
main constitutional challenge are not made the excuse for extending
litigation; there would be no question about how these proceeds
would be accounted for and used if that litigation occurs.
CHAIRMAN WILKEN explained that the school construction savings fund
which effects Sections 2,3,4,7, and 8 was placed in the bill at his
request. Chairman Wilken hoped that over a couple of generations
this tax would be zero. If this legislation is found
unconstitutional through the dedicated fund, a new fund - the
school construction savings fund- is established. The money would
be deposited in that fund and only earnings after inflation
proofing could be spent. Chairman Wilken projected that 10 years
from now around $25-$40 million would be available every year for
school construction, repair, and rehabilitation. Given the
temporary nature of the tax, it provides indefinite benefits.
Chairman Wilken noted that the main problem with this issue is that
the Legislature is being seen as wanting to increase the revenue of
the state, therefore increasing government. The creation of the
school construction savings fund eliminates the argument that the
Legislature is trying to fund the general fund to which Chairman
Wilken objected.
Number 174
BOB BARTHOLOMEW , Deputy Director in the Income & Excise Tax
Division of the Department of Revenue, discussed changes in
Sections 5, 10, and 11 that effect the fiscal note. Currently the
wholesaler of the company liable to the state for the tax is
allowed to keep one percent of the total tax to cover his/her total
cost of preparation of the tax returns. If the provision was not
changed in Section 5, these tax payers would receive a dramatic
increase without a change in the work load. Section 5 intends to
keep the revenue neutral. Under the decrease from one percent to
three-tenths of one percent, the tax preparers will still receive
the same amount as now to cover their costs. Section 5 and 10
accomplish this; one for the cigarette tax and the other for the
tobacco products tax. Section 5 would result in a net increase in
state revenue of $400,000 and an additional $35,000 resulting from
Section 10.
Mr. Bartholomew pointed out that Section 11 establishes an
inflation adjustment to the rate every two years. The department
estimates that the first year, 2000, this is in place would raise
the tobacco tax rate by approximately $.04 and would increase
revenue by $1.6 million. That is based upon a three percent
inflation rate. In the year 2000, the fiscal note will reflect
that CPI adjustment. The CPI adjustment of three percent on the
tobacco products tax would result in $200,000 of additional tobacco
products tax revenue. In the year 2000, the total of those three
changes would increase the revenue by $2.2 million.
Number 230
SENATOR GREEN asked if there was a chart projecting the per pack
tax per year. BOB BARTHOLOMEW clarified that the change would
occur every even year. The fiscal note is being completed and page
four of that will show the actual tax rate for each year. Mr.
Bartholomew hoped to have the completed fiscal note by the end of
the hearing. In response to Senator Green, Mr. Bartholomew said
that with the initial $1.00 increase the total tax rate would be
$1.29. After the first CPI adjustment, there would be a $.04
increase and the tax rate would total approximately $1.33 per pack.
BOB BARTHOLOMEW spoke to Section 14, the retroactive provision. If
the school fund is challenged in court and the state was to lose,
the Attorney General requested that the fall back provision be
retroactive. The main intent is to make it retroactive back to the
original date of the increase. As Mr. Chenoweth indicated, there
is an offset clause. Mr. Bartholomew explained that if this
legislation passes this session effective October 1st, the tax will
increase and the tax will be collected until there is a challenge.
If the challenge took two years, the tax would be collected during
that time and placed in the school fund. If the retroactivity
clause takes effect, the tax becomes a general fund tax that goes
back two years. The offset provision says that anything paid under
the school fund increase can be used to offset the increase in the
general fund; this is merely a paper transaction. Mr. Bartholomew
pointed out that a bill with a similar retroactive provision was
passed last year which amended the Fisheries landing tax. That is
currently under a court challenge.
Number 279
SENATOR ELLIS explained that the CPI adjustment was proposed in
order to have the price of nicotine products keep up with
inflation. Senator Ellis asked Mr. Bartholomew how the notice
requirement would be carried out to the public and the sellers of
tobacco products.
BOB BARTHOLOMEW believed there would be two steps under Section 12.
One step would be to notice the taxpayers and provide amendments
with changes in the tax return itself. Mr. Bartholomew did not
have the exact protocol for public notice, but indicated that
standard public notice through newspapers and the internet would be
published prior to each rate change.
In response to Senator Ellis, Mr. Bartholomew said that a
discussion would be held regarding whether the announcement of the
change in price would be used to remind the tax payer of the
penalties. If compliance problems were noticed, a specific
announcement would be sent to all taxpayers notifying them of
violations and penalties.
SENATOR ELLIS commented that in the debate over this issue there
seems to be common ground regarding the need to enforce the current
laws regarding selling tobacco to minors. The notice of the change
provides the opportunity for the department to remind people of the
violations and respective penalties. Senator Ellis requested that
the department think about that prospect. The Federal Synar
Amendment would withhold funds from the state if a certain
compliance is not met. Compliance checks with minors have resulted
in better than the national findings, but still not to the level of
the Synar Amendment.
SENATOR GREEN remembered a bill last year that authorized teens to
be used by adults in compliance checks, but she recalled that
legislative authorization was necessary. Further, that bill did
not pass. SENATOR ELLIS said that he would check on that.
Number 366
ELMER LINDSTROM , Special Assistant in the Department of Health &
Social Services (DHSS), said that the department continues to work
with the local organizations that do compliance checks. Since the
bill to which Senator Green referred did not pass, DHSS consulted
with the Department of Law's Criminal Division. The Department of
Law determined that the youth participating in the compliance
checks are not in possession of tobacco in a criminal sense and are
not in violation of the law. Mr. Lindstrom acknowledged the
anxiety on the part of some law enforcement agencies which he
assumed was the reason for the reintroduction of that legislation
again this year.
SENATOR GREEN seemed to recall that the bill addressed the
protection of the adult who supervised the child to buy in the
compliance checks. ELMER LINDSTROM did not recall the legislation
addressing the adult. Mr. Lindstrom offered to follow up on this
issue.
CHAIRMAN WILKEN noted that 64 percent of the stores in the
compliance checks did not sell to minors which means that 36
percent did which is the percent on which to focus. Chairman
Wilken believed that part of CSSB 13(HES) did involve enforcement
of existing laws as well as education. Chairman Wilken passed out
an amendment dealing with stockpiling and said he would entertain
a motion to place the amendment before the committee.
Number 407
SENATOR GREEN moved to adopt Amendment 1 for purposes of
discussion.
BOB BART HOLOMEW explained that the tobacco tax is currently applie
to anyone who imports or purchases cigarettes for resale in Alaska
which primarily takes place at the wholesale level. A business
would have 30 days to file the tax return noting the quantity of
cigarettes and payment of the appropriate tax. Mr. Bartholomew
informed the committee that the concern with the increase in the
tax was that there may be incentive for the purchase of large
quantities of cigarettes just before the tax increase. That large
purchase would be subject to the current tax. The concept would be
to have some type of inventory or floor tax stating that the tax
would be raised on a certain date. Any cigarettes in possession as
of that date are subject to the increased tax. There would not be
an incentive to purchase large quantities of cigarettes before a
tax increase. Mr. Bartholomew noted that the Department of Revenue
would like to contact wholesalers and distributors and discuss the
effect this would have in order to work with them regarding the
implementation of such a tax increase.
SENATOR GREEN asked if such was done on other products. BOB
BARTHOLOMEW was not familiar with this being done in Alaska, but
other states have implemented similar specifications at the time of
significant increases on tobacco. Mr. Bartholomew offered to
discuss this with the department in order to find out information
regarding other products. Mr. Bartholomew interjected that the
amendment would be a one time action at the initial increase.
CHAIRMAN WILKEN said that the amendment was a preventative method.
He informed the committee that he had spent a number of years in
the wholesale business. The incentive and opportunity to purchase
large quantities before the tax increase is present without a
protective measure.
SENATOR GREEN asked if CSSB 13(HES) was silent on this issue, then
would one assume that the date of the effective date of the tax
this would occur anyway. BOB BARTHOLOMEW clarified that the tax is
triggered by the date of possession of the cigarettes, the
purchaser is liable for the tax. Therefore, cigarettes that were
filed and taxes paid previous to the tax increase would not be
subject to the increase. Mr. Bartholomew did not believe that the
cigarettes purchased prior to a tax increase would be subject to
the increase without an amendment.
SENATOR GREEN commented that there is something bothersome about
the amendment.
Number 468
SENATOR WARD inquired as to the point at which the first taxation
contact for the State of Alaska on a cigarette product occurred.
BOB BARTHOLOMEW specified that the date the cigarette is brought
into the state, the first transaction or the first purchase or
importation would be the first taxation contact. The first person
who brings the cigarette into the state must be licensed. Those
cigarettes brought in for resale, the date the cigarettes come in
is the date the tax is triggered. In response to Senator Ward, Mr.
Bartholomew believed that there were approximately 80 licenses to
bring cigarettes into Alaska.
SENATOR WARD asked if the concern was that, in anticipation of a
tax increase, an electronic purchase of a year's supply would
occur. BOB BARTHOLOMEW said that was the potential. Mr.
Bartholomew recognized that other ramifications such as the
additional money necessary to purchase large quantities and the
possibility of the cigarettes becoming stale could be disincentives
to a large purchase. Other states have implemented similar
measures to prevent such action.
CHAIRMAN WILKEN clarified that the cigarette does not necessarily
have to be in the state, the invoice only need indicate the
wholesaler has 'constructive possession.'
SENATOR WARD asked if this was an attempt to control the purchasing
of the 80 licensed people. BOB BARTHOLOMEW replied, no. The
intent is to make everyone subject to the same tax on the same date
in order to avoid a disparity regarding which taxation level
charged on cigarettes. Mr. Bartholomew said that he was not very
familiar with the practices in the cigarette industry to say
exactly what would happen.
In response to Senator Green, BOB BARTHOLOMEW said that Alaska does
not have a state tax stamp on cigarettes indicating a price or a
date. There are no identifying marks indicating that the Alaska
tax has been paid. Also there is no provision for such in the
bill.
CHAIRMAN WILKEN asked if there was objection to the stockpile
amendment. SENATOR GREEN objected.
Upon a roll call vote, Senators Wilken and Ellis voted "Yea" and
Senators Green and Ward voted "Nay." The amendment failed.
Number 540
SENATOR SHARP , Prime Sponsor of SB 13, believed that the changes
encompassed in the CS strengthens the legislation.
CHAIRMAN WILKEN informed the committee that the packet included a
flow chart regarding the process of this legislation and the
process if a court challenge occurs. Chairman Wilken asked if
there was any other discussion on CSSB 13(HES).
SENATOR GREEN commented that this was the most difficult issue to
hear. Senator Green said that she would not support this
legislation, but did not intend to keep it from moving out of
committee. This legislation illustrates the tendency towards
taxing items that are disliked. Senator Green understood that when
the Legislature votes to tax it does so with a vote of the people
who agree to tax themselves. She did not know where this would
lead the Legislature with regard to taxing. This legislation began
as a revenue source and continues as such although, it drew from
the health issue involved which she did not doubt. Senator Green
indicated her dislike of smoking and tobacco. She informed the
committee of her experience with her father's death from smoking
and his work as a chemist, but in conclusion Senator Green
emphasized that this legislation is wrong.
TAPE 97-13, SIDE B
Number 586
SENATOR WARD noted that he had given an amendment to the Chair.
Senator Ward expressed misgivings about taxing people on something
that is considered legal. At the Chair's request, Senator Ward did
not offer his amendment, but requested that his amendment be
forwarded to Senate Finance. He did not intend to recommend a "Do
Pass" nor did he intend to hold the bill in committee. Senator
Ward commented that everyone is discussing raising $40 million in
revenue, however no one can show that more than $3 or $4 million
comes from children and the remaining from the citizens of Alaska.
Senator Ward agreed with the testimony that some 400,000 people die
from cigarettes a year. Senator Ward said that his amendment was
simple, but did have a fiscal note attached. If tobacco is worse
than alcohol, as Senator Ward believes, then the same penalties
should apply. Senator Ward's amendment would change the sale of
cigarettes to a minor from a misdemeanor to a Class C felony with
a $50 to $2,000 fine and jail for a year. Senator Ward applauded
the efforts, but did not believe this would get to the root of the
problem. In order to stop children from smoking, license the
sellers of cigarettes the same as an alcohol beverage license.
This legislation will not stop teen smoking. Senator Ward stressed
that his amendment would stop teen smoking because any violation of
selling to a minor would be the same as selling alcohol to a minor;
the violator would lose his/her license. In conclusion, Senator
Ward emphasized that he did not support this legislation without
some manner in which to stop the smoking of teens. This
legislation before the committee does nothing more than enhance
revenue and may stop some smokers.
CHAIRMAN WILKEN recognized that he did receive Senator Ward's
amendment. Chairman Wilken noted that he campaigned on very few
campaign promises, but he did campaign on the $1 tax increase on
cigarettes. To this day, Chairman Wilken has not heard an argument
as to why he should not support that increase. Chairman Wilken
said that the data clearly illustrates that cigarette smoking and
tobacco use is not good for Alaskans nor Americans. As a result,
each one of us pay a $336 tax for those who choose to smoke. This
legislation is a message that tobacco smoking is not good.
Chairman Wilken was compelled by the data finding that 83 percent
of smokers form their habit before age 20. Chairman Wilken did
believe the studies indicating that an increase in cost will
decrease consumption. The revenue of this issue is merely a
byproduct, and with education being the number one priority the
money should be placed in education. Chairman Wilken hoped the tax
would go away, and the tax revenue would provide a future in
education in Alaska. Chairman Wilken emphasized that he was in
favor of this legislation, but remained open to discussion until
the vote on the floor. This legislation is a way for the state to
realize the problem of smoking and put the solution to good use.
Number 525
SENATOR ELLIS appreciated Chairman Wilken's comments. Senator
Ellis moved to report CSSB 13(HES) out of committee with individual
recommendations and accompanying fiscal notes. Without objection,
it was so ordered. There being no further business before the
committee, the meeting was adjourned at 9:55 a.m.
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