Legislature(1997 - 1998)

02/14/1997 09:03 AM HES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                       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               
 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             
  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                    
  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                
  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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