MINUTES SENATE FINANCE COMMITTEE April 26, 1994 9:10 a.m. TAPES SFC-94, #72, Side 1 (213-end) SFC-94, #72, Side 2 (575-end) SFC-94, #74, Side 1 (000-542) CALL TO ORDER Co-chair Drue Pearce convened the meeting at approximately 9:10 a.m. PRESENT In addition to Co-chairs Pearce and Frank, Senators Kelly, Rieger, and Sharp were present. Senator Kerttula arrived soon after the meeting began. Senator Jacko did not attend. ALSO ATTENDING: Jim Baldwin, Assistant Attorney General, Dept. of Law; Deborah Vogt, Contract Attorney, Dept. of Law; Larry E. Meyers, Director, Income and Excise Audit Division, Dept. of Revenue; Chris Christensen, Staff Counsel, Alaska Court System; Patrick Sharrock, Director, Alcoholic Beverage Control Board, Dept. of Revenue; Rod Mourant, Deputy Commissioner, Dept. of Revenue; Ken Swisher, Executive Director, Alaska Municipal League; Resa Jerrel, Local Representative, National Federation of Independent Businessmen; Jerry Burnett, aide to Senator Phillips; Kevin Sullivan, aide to Senator Robin Taylor; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 56 - REPAYMENT OF BUDGET RESERVE FUND Discussion was had with Jim Baldwin. The bill was subsequently HELD in committee for development of amendment language. SB 161 - INTEREST RATES: JUDGMENTS/TAXES/ROYALTIES Discussion was had with Deborah Vogt, Larry Meyers, and Chris Christensen. The bill was subsequently HELD in a subcommittee consisting of Senator Rieger and Senator Sharp. SB 372 - ALCOHOLIC BEVERAGES: LOCAL OPTION & MISC. Discussion was had with Patrick Sharrock, Kevin Sullivan, and Ken Swisher, and Amendment No. 1 was adopted. CSSB 372 (Finance) then FAILED to MOVE from committee. (See minutes of May 5, 1994, for further action on this bill.) SJR 52 - BUDGET RESERVE FUND AMENDMENT Discussion was had with Jim Baldwin in conjunction with SB 56. The resolution was HELD in committee pending passage of the bill. SENATE JOINT RESOLUTION NO. 52 Proposing amendments to the Constitution of the State of Alaska relating to the budget reserve fund. Co-chair Pearce directed that SJR 52 be brought on for discussion. She then explained that Jim Baldwin of the Dept. of Law worked with members on language for both SB 56 and SJR 52 to bring both pieces of legislation into compliance with the state argument presently before the supreme court. The Co-chair further advised that the House is working on similar legislation. (Senator Kerttula arrived at this time.) Co-chair Pearce next directed attention to a proposed Amendment No. 1 and asked that Mr. Baldwin speak to the amendment. JIM BALDWIN, Assistant Attorney General, Dept. of Law, explained that the amendment would remove reference to "funds" and insert "revenue of the state." The Dept. of Law argued in court that the amount referred to in 17(b) was "revenues of the state" and not an amount that was "accessible" to the legislature. Use of the words "revenue of the state" excludes federal funds which were not intended to be included in the mix. Mr. Baldwin suggested that the original resolution was deficient in one respect. The term "funds" appears nowhere else in the Constitution whereas the term "revenue" does and is better understood. The term "unrestricted revenue of the state" was also used since that terminology is used in the Dept. of Revenue revenue forecast. It is a familiar term and should be given the same meaning as applied by the department. Mr. Baldwin further advised: [I] also added the idea that . . . even though . . . it was general fund money that it not be considered to be held in trust upon receipt. And I think that this would pick up the mental health trust money which is subject to a first call trust under federal law . . . . "Unrestricted money of the state" means money in the general fund from state sources (the intent is to exclude federal funds) that is not held in trust or has not been appropriated for a particular purpose or to a separate fund or account established by law within the general fund. That would exclude special general fund account group funds. Rather than repeal the repayment obligation, Sec. 2 of the resolution is in line with the Dept. of Law argument before the court that the source of money for repayment was intended to be the general fund carry-forward. In terms of the annual financial report that means the "unreserved fund- designated balance of the general fund at year end." Carry- forward amounts for continuing appropriations, capital appropriations, etc. would not be included. The foregoing reflects language used in the annual financial report. The hope is that in construing this section, reliance will be placed upon use of terminology in that report. The report is required by law and issued by the Dept. of Administration. Senator Rieger asked if, under Sec. 1, the carry-forward balance would fall under the label "unrestricted revenue of the state." Mr. Baldwin responded affirmatively. Referring to proposed language for Sec. 2, Senator Rieger asked how it would tie into ongoing litigation. Mr. Baldwin noted a policy call by the legislature whether or not it wants to propose repeal. He explained that, in drafting amendment language, he was asked to "bring forward a bill that was consistent with the state's position." Proposed language highlights Dept. of Law arguments. He stressed that he was not attempting to talk the legislature out of repeal. Senator Rieger noted that House legislation mirrors the original Senate approach and continues to contain repeal language. Co-chair Frank asked how amendments proposed by the resolution would appear on the ballot. Mr. Baldwin responded, "That's a good question . . . . He further remarked, "I've never seen one quite like this, where just a word is being changed or a line is being deleted." He acknowledged that it would be difficult to present the issue to the voters and voiced his belief that voters concentrate on the ballot description--the ballot language put together by the Attorney General and Lt. Governor. Discussion followed between Mr. Baldwin and Co-chair Frank regarding the process involved in developing ballot language. Senator Rieger observed that the first portion of Amendment No. 1 contains a definition for "unrestricted revenue of the state." He then asked if there was need for definition of "undesignated balance" as well. Mr. Baldwin explained that the term is used by "generally acceptable government accountants." It is also used in the state financial report. He acknowledged that he struggled with the concept of attempting to use both terms in the same sense, but they are different. Mr. Baldwin explained that when viewing the general fund at the end of the fiscal year, there are "reservations" and "designations." They are not the same as an encumbrance or an obligation. Funding contained within capital appropriations which continues for two or three years is not obligated or encumbered. Those moneys are, however, designated balances for appropriations made by the legislature. They are thus not included in the year-end balance. Co-chair Frank asked if a constitutional amendment could include findings to further explain the issue on the ballot. Mr. Baldwin attested to limited duration transition provisions "in the back of the Constitution." Co-chair Frank voiced need to provide a brief description of what the legislature is attempting to do. He then expressed a preference for moving toward requiring the three-quarter vote and repealing repayment provisions. Senator Rieger concurred in need for clarification and simplification. Mr. Baldwin suggested that a simple fix for the problem might consist of a provision saying that "The legislature shall implement 17(b) by law." Trade-offs and other issues could then be dealt with next session. Co-chair Frank concurred in that approach. Co-chair Pearce suggested that SJR 52 be HELD in committee for development of simplified language that can be concurred in by the House. SENATE BILL NO. 56 An Act relating to the budget reserve fund established under art. IX, sec. 17, Constitution of the State of Alaska. Co-chair Pearce directed that SB 56 be brought on for discussion, referenced a draft CSSB 56 (Fin) (work draft 8- LS0453\U, Cook, 4/25/94), advised that the draft had been approved by Senator Phillips, and noted that Jim Baldwin worked with Legislative Legal Services to develop language that reflects the state's position. Co-chair Frank MOVED for adoption of CSSB 56 (Fin), "U" version, and requested unanimous consent. No objection having been raised, CSSB 56 (Fin) was ADOPTED. JIM BALDWIN, Assistant Attorney General, Dept. of Law, and JERRY BURNETT, aide to Senator Randy Phillips, came before committee. Mr. Burnett explained that the Finance draft repeals "the section from HB 58 and reenacts it with new numbers." Mr. Baldwin said that the bill was constructed to protect against the fact that a court may find the interpretation in HB 58 to be valid but not severable from other provisions. If passed, CSSB 56 (Fin) would clearly state the legislature's intent that it be separately enacted from HB 58 provisions found to be unconstitutional. In response to a question from Co-chair Frank, Mr. Baldwin said that language within the Finance draft is "fairly equivalent" to that within Amendment No. 1 for SJR 52. He acknowledged that language within CSSB 56 (Fin) does not answer "the succeeding fiscal year question." The bill merely defines the source of funding but does not solve the timing issue. Under art. IX, sec. 17(d) of the state Constitution, repayment to the constitutional budget reserve fund is to be made from the balance of the succeeding fiscal year. Under a literal interpretation, that means that repayment of 1994 withdrawals would be made from the remaining balance at the end of 1995. Mr. Baldwin noted that need to withdraw moneys from the budget reserve fund would indicate there would be no balance at the end of that fiscal year. Language thus speaks to the succeeding year when there possibly could be a balance. The state has argued that Judge Reese should be reversed on that point. Directing attention to language within CSSB 56 (Fin), Mr. Baldwin noted the definition of "unreserved, undesignated general fund balance" and the fact that transfer is to be made on or before December 16 of the following fiscal year. The bill requires that once the state has determined it has a surplus, payment be made by December 16 of the year following the year in which the surplus was determined. Co- chair Frank presented a scenario whereby the legislature withdrew moneys from the reserve to balance FY 94. The price of oil subsequently increased, and there is a balance of unrestricted revenues at the end of FY 94. He then voiced his understanding that bill language would "not necessarily sweep it in until FY 95 was finished, and we saw whether or not we had a balance after FY 95." Both Mr. Burnett and Mr. Baldwin acknowledged that that was the intent. Mr. Baldwin voiced his understanding that the amendment contemplates waiting "for another fiscal year to see if there was going to be a surplus." The amendment thus means that "If there is any outstanding obligation to the budget reserve fund, you're going to have to use that surplus to repay it." Both Co-chair Frank and Mr. Baldwin acknowledged that while the amendment might mean as above stated, that is not necessarily what it says. The amendment simply says, "When you have a surplus, you compute it and pay it by a certain date." Co-chair Frank asked if it is within legislative power to implement language to resolve the question. Mr. Baldwin responded affirmatively. The Co- chair than suggested that the issue be resolved at this time. End, SFC-94, #72, Side 1 Begin, SFC-94, #72, Side 2 Mr. Baldwin advised that he would develop language to accomplish that end. Co-chair Frank asked that the language cover situations where there are remaining balances in the fiscal year during which a withdrawal is made as well as succeeding fiscal years. He suggested that it would most likely "take years and years to pay back the budget reserve fund." Mr. Baldwin concurred. Co-chair Frank directed that CSSB 56 (Fin) be HELD in committee pending development of the new language. SENATE BILL NO. 161 An Act relating to interest rates and calculation of interest under certain judgments and decrees and on refunds of certain taxes, royalties, or net profit shares; and providing for an effective date. Co-chair Pearce directed that SB 161 be brought on for discussion and referenced the original bill, CSSB 161 (STA), CSSB 161 (Jud), a $39.3 fiscal note from the Alaska Court System, four zero fiscal notes, the Governor's transmittal letter, and a position paper from the Dept. of Transportation and Public Facilities. She then directed attention to two amendments. DEBORAH VOGT, Contract Attorney for the Dept. of Law, and LARRY MEYERS, Director, Division of Oil and Gas, Dept. of Revenue, came before committee. Ms. Vogt explained that the bill was introduced by the Governor to address two issues: 1. Pre-judgment and post-judgment interest in civil litigation. The current rate is 10.5%. That is dramatically out of proportion to the current market. 2. Interest on back taxes and royalties. Speaking to pre- and post-judgment interest, Ms. Vogt explained that the original bill proposed to calculate interest on judgments in accordance with the system used by federal courts: a market-rate indicator tied to sales of federal treasury bills. Interest rates on judgments would then be tied to a realistic market rate that will fluctuate over time so that the statute does not subsequently have to be amended as the market rises and falls. Since the state is frequently the defendant in litigation, it seeks the new calculation because the current 10.5% is too high. Ms. Vogt noted that the legislature amended statutes dealing with interest on back taxes and royalties in 1991, setting a rather high floating market rate of five points above the federal discount rate, with an 11% floor. The taxpayer thus pays whichever is higher. The rationale for the relatively high rate of interest is the fact that taxes and royalties are the life-blood of the state. It is thus important that payments be timely made. The high rate encourages prompt payment and provides an incentive to resolve large, outstanding disputes. Since enactment of amendments in 1991, it has been perceived that the high interest rates could provide an incentive for "people to intentionally overpay" taxes in order to take advantage of a rate of return that could not be achieved in the market. That is the reason the issue is addressed in this legislation. Ms. Vogt next directed attention to CSSB 161 (Jud) and said that it accomplishes neither of the Governor's purposes. It sets a rate for pre- and post-judgment interest of five points above the federal discount rate--the intentionally high rate chosen for taxes and royalties. That is substantially higher than the rate proposed by the Governor. It is also higher than what the state can earn on its investments. The short-term rate of return for the past twelve to twenty-four months has been "in the three to four percent neighborhood rather than the eight percent" required under CSSB 161 (Jud). The state is opposed to the floating market indicator selected by Senate Judiciary. On the tax and royalty side, CSSB 161 (Jud) no longer does what the Governor intended. It does not establish a disparate rate between underpayments and overpayments. The Governor proposed the legislation to establish a differential--an element of federal tax law and tax law in many states. The Senate Judiciary Committee removed that provision as well as the 11% floor. That substantially lowers accruing interest on large, outstanding taxes and royalties. As the legislation presently stands, the administration can no longer support it. Ms. Vogt next spoke to Amendment No. 2. She explained that current law and proposed amendments submitted by the Governor use the language "percentage points above the federal discount rate." CSSB 161 (Jud) uses "percent above." That could be construed to mean that if the discount rate is three percent, five percent of three percent is .15 percent--a tremendous difference from the original intent. Amendment No. 2 thus replaces "percent" with "percentage points above" throughout the legislation. Senator Rieger asked if constitutional issues would be raised by application of differential rates of interest. Ms. Vogt explained that legislation proposed by the Governor did not differentiate between "types of civil suits." It differentiates between underpayment and overpayment of taxes and royalties. She further acknowledged that royalties involve civil dispute. That question was addressed in 1991 when royalties were separated out of other civil litigation and "lumped together with taxes," for purposes of interest rates. Discussion followed between Senator Rieger and Mr. Meyers regarding differential rates. Mr. Meyer noted that the Internal Revenue Services and ten states use different rates for underpayment and overpayment. Rates average 15% for underpayment and 9% for overpayment. In response to an additional question from Senator Rieger, Ms. Vogt explained that AS 45.45.010 sets both the legal rate of interest and the usury rate. The legal rate is currently 10.5%. Usury statutes speak to five points above the federal discount rate. That was not changed in 1991. Those provisions were merely incorporated into the tax and royalty statute. Further discussion of the usury rate followed. Responding to a question from Co-chair Frank, Ms. Vogt advised that CSSB 161 (STA) is similar to the Governor's bill, with minor changes. In further discussion of changes within CSSB 161 (JUD), Ms. Vogt explained that the Governor proposed interest equating to the federal reserve discount rate, plus two, for overpayments. Senate Judiciary changed that to five points- -current law. For underpayments current law requires "fed plus five or 11%, whichever is higher." Co-chair Frank asked why the federal reserve discount rate was not used for pre- and post-judgment interest as well. Ms. Vogt said that the administration based judgment interest on federal treasury bills since that standard is used by the federal court system. It is currently 3.49%. She then distributed a tabulation (copy on file) listing judgment interest rates under the federal discount rate, CSSB 161 (Jud), and treasury coupons. Co-chair Pearce referenced an arrangement whereby the former attorney general lowered the interest rate on taxes owed by a taxpayer in exchange for other considerations (statute of limitations was mentioned). Noting that that action was outside of statutory authority, the Co-chair then asked if changes in the proposed bill would allow that flexibility. Ms. Vogt said that if the action was improper under current law, it would be improper under the proposed bill. Statutory amendments contained therein do not address changes in discretion for enforcement of interest provisions. As a final issue, Ms. Vogt expressed concern that provisions of CSSB 161 (Jud) may no longer be consistent with the title because the legislation is no longer confined to judgments and refunds of taxes and royalties. It also addresses underpayments of those items since it removes the 11% floor and changes the manner in which interest changes and is compounded. Current law tracks the federal rate quarterly and is compounded quarterly. CSSB 161 (Jud) tracks annually and is compounded annually. Discussion followed between Co-chair Frank and Ms. Vogt regarding pre- and post-judgment interest. Ms. Vogt explained that, under current law, interest accrues from the date a suit is filed. Under both Senate Committee Substitutes, interest would accrue from the date of injury. Both the original bill and CSSB 161 (STA) set the interest rate as of the initial event (the date of injury or the date on which a suit is filed). That rate remains in effect until the date of judgment, at which time a new post- judgment rate is set and continues until payment of the judgment. Under the Senate Judiciary version, the rate changes. Ms. Vogt advised that the court system staff would speak to that impact. In response to further comments by Senator Frank regarding interest rates and inflation, Ms. Vogt said that the administration seeks to find "that number" which neither benefits nor penalizes the party "who didn't have the money who was supposed to have the money." It is not the intent to make pre- and post-judgment interest either a benefit or penalty to the litigant. It should provide neither an incentive to settle nor incentive to drag out a lawsuit in the hope that interest will continue to accrue at an unusually high rate. The administration believes that the treasury coupon rate is close. Five points above the federal discount rate is too high. Co-chair Frank noted that the treasury rate generally reflects the market while the federal discount rate may be used to effect the market. Senator Rieger voiced support for two separate rates of interest. He noted that in commercial transactions, the value of possession of the cash is much higher. In commercial transactions the five percent premium is probably necessary as an inducement to avoid dragging out the case. Ms. Vogt advised that the original bill and both Senate versions leave in current law provisions that allow parties to contract for different rates. That is likely to cover commercial litigation and is different from the default rate set in statutes. Mr. Meyers noted that refunds from the treasury currently earn between 3 and 4%. Those refunds are presently paid out at 11%. Lack of fluctuation and variance of the two rates is costing the state a considerable amount. The administration is proposing to do no different than banks which use different types of rates. Since the 11% floor was established in 1991, the state collected over $1.7 billion in settlements. The interest rate was a primary motivator in reaching agreements. Mr. Meyer expressed concern that if rates are too low, there will be no incentive for parties to "get together." The floating floor is intended to provide inducement. The department has over $3 billion in interest, relating to outstanding settlements, on the books. In response to questions from Senator Rieger, Mr. Meyer advised of "provisions for failure to file or failure to pay of 5% a month, not to exceed 25%." There are thus penalties in addition to interest. Penalties only arise in instances relating to filing and compliance in payment of tax returns. They do not apply to settlements whereby taxpayers have filed and paid what they believe they owe, and the amount is in dispute. Penalties are not imposed in those instances. Co-chair Frank inquired regarding overpayments following 1991 interest rate changes. Mr. Meyers said for the period commencing July 1, 1991, and ending March 15, 1992, the state paid out $8.8 million. For the same period through 1993, a total of $22 million was paid. From July 1, 1993, to March 15, 1994, payments total $65 million. In one instance for which the department "paid out a refund of the tax of $31 million, interest was $8 million." On that $8 million in interest, the state treasury earned $2 million. The taxpayer earned 11% on the refund which sat in the state treasury for two years, and the interest payment cost the state $6 million. CHRIS CHRISTENSEN, General Counsel, Alaska Court System, next came before committee. He explained that CSSB 161 (Jud) establishes an immediate effective date for the legislation. At the request of the Court System, CSSB 161 (STA) provided a delayed effective date of sections relating to court judgments. Mr. Christensen directed attention to proposed Amendment No. 1 and explained that it changes the effective date for judgment interest to January 1, 1995. At the present time, court system computers cannot perform the interest calculations required by the bill. They will have to be reprogrammed, associated forms and booklets provided to litigants will have to be revised, and personnel will have to receive additional training. A six-month window would be helpful. Reviewing the amendment, Mr. Christensen noted need to change the January 1, 1995, date to January 2, 1995. He said that would be in keeping with a further change within CSSB 161 (Jud), requiring that the interest rate change on January 2 of every year. Mr. Christensen further remarked that additional changes made by Senate Judiciary have the effect of doubling personal services costs on the fiscal note from $7.4 per year to $19.5. Proposed Amendment No. 1 would reduce the note by approximately $10.0 for FY 95 since new interest rates would only be in effect for half of the fiscal year. The Senate State Affairs bill calls for two interest calculations: one for pre-judgment interest and one for post-judgment interest. CSSB 161 (Jud) calls for the interest rate to be recalculated every year for ongoing cases. An individual who is injured and files suit two years thereafter and receives a judgment three years hence is entitled to pre-judgment interest for five years. The specific rate will be different for each of the five years. Further if payment on the judgment is not made for approximately three years, post-judgment interest will also be different for each year. In a number of cases, instead of performing two interest calculations, the court system will perform six or eight or ten. That translates into extra clerical time. The court system presently makes approximately 10,000 calculations annually. Most are small claims cases, however it takes equally as long to calculate interest on small amounts as it does for larger cases. Further, the court system is responsible for recalculating figures presented by attorneys. If this is not done, and an incorrect interest figure is applied, the state may be liable for the difference. Co-chair Pearce queried members concerning disposition of the bill. Co-chair Frank voiced a preference for the original bill. Senator Rieger acknowledged that he also was more comfortable with the original version. Senator Sharp termed the Senate Judiciary version "too fat" because of provisions allowing for 5 points over the federal discount rate. That more than doubles the market interest rate for the past several years. He voiced a preference for the Senate State Affairs bill. Co-chair Pearce asked that Senators Rieger and Sharp work on an alternate draft to bring back to the next meeting. SB 161 was thus HELD in subcommittee. SENATE BILL NO. 372 An Act relating to community local options for control of alcoholic beverages; relating to the control of alcoholic beverages; relating to the definition of `alcoholic beverage'; and providing for an effective date. Co-chair Pearce directed that SB 372 be brought on for discussion. PATRICK SHARROCK, Director, Alcoholic Beverage Control Board, Dept. of Revenue, and KEVIN SULLIVAN, aide to Senator Taylor, came before committee. The Co-chair referenced CSSB 372 (Jud) as well as a draft CSSB 372 (Fin) (work draft 8-LS1848\K, Ford, 4/26/94). Senator Kelly MOVED for adoption of CSSB 372 (Fin) "K" version. No objection having been raised, version "K" of CSSB 372 (Fin) was ADOPTED. [Temporary tape malfunction. Minutes of this portion of the meeting reflect transcription of shorthand notes.] Mr. Sharrock explained that the primary element of the legislation would allow villages and communities local options for control of alcoholic beverages. He directed attention to a handout (copy on file) and noted the menu of options, provisions relating to changing or removing an option, and new provisions relating to delivery sites and catering permits. Mr. Sharrock next directed attention to a recent article highlighting a situation at St. Marys. He explained that the proposed legislation would make it easier for communities to change the options they elect to be under. It allows communities to change or remove local options. At the present time, 112 villages are under one local option provision or another. Some wish to change the current status. Mr. Sharrock further spoke to products from which alcohol can be extracted and the fact that some communities seek to prohibit the import of those products. The bill provides some law enforcement authority to intervene in instances where prohibited products are being utilized. Mr. Sharrock alluded to the fact that the chief of police in one community identified 25 drug-store products he requested not be shipped into his community. [The recording problem was corrected at this point. Remaining minutes reflect transcription of the tape recording of the meeting.] Mr. Sharrock noted that Senator Kelly previously introduced legislation requiring server training for those who serve or sell alcoholic beverages. Common carrier dispensary licenses were included in the list of entities to which training applies. Common carriers that are in Alaska for a limited time feel that the criteria and subject matter relating to server training, as set forth by the board in regulations, is burdensome, cumbersome, and includes matters that do not apply to them. That is the rationale for language within CSSB 372 (Jud), listing only statutes that apply to the serving of alcohol in Alaska by employees aboard common carriers. In response to a question from Co- chair Pearce, Mr. Sharrock advised that the amendment applies to cruise ships, the ferry system, airlines, and the Alaska Railroad. Sec. 48, at page 27, specifies the statutes common carriers must address in training employees who sell alcohol. Training requirements for these carriers is more limited than for other dispensers statewide. Need for the accommodation has been demonstrated. Kevin Sullivan next spoke to municipal tax exemptions. He said that provisions do not limit municipal taxing authority. However, they do not allow a municipality to single out alcohol and apply a "sin tax" to it alone. The thinking was that if municipalities are able to apply a specific tax to alcohol, that presents a strong argument against future imposition of alcohol taxes by the state. In uncertain economic times, the state must protect its sources of revenue. CSSB 372 (Jud) calls for a 20%, across-the- board increase on alcoholic beverages--malt liquor, wine, and distilled spirits. Tax moneys would flow directly to the general fund. Senator Sharp directed attention to Sec. 45, page 26, and asked what changes in the Senate Judiciary version accomplish in terms of municipal options. Mr. Sharrock explained that the board was not involved in the changes because they relate to policy questions. He then said that language at line 27 appears to delete municipal ability to impose a property tax on inventories. Line 29 states that a sales tax on alcoholic beverages may be imposed if a general sales tax is in place on other sales within the municipality. Mr. Sharrock further pointed to related language at Sec. 58, page 30. Kevin Sullivan reiterated need to protect state revenue sources for the future. He again noted that if each municipality imposes a different tax structure, that presents a strong argument against increased state taxes. The prohibition also provides some certainty to the industry. Co-chair Pearce noted an inconsistency in the Senate Judiciary approach in that it seeks to prohibit municipalities from singling out alcohol for taxation, yet it allows the state to do just that and increases the state tax by 20%. Mr. Sullivan responded that the state tax is presently in statute. He concurred that the issue reflects a policy call: Is the state going to give municipalities the ability to levy such a tax or retain tax on alcohol to the "exclusive domain of the state." Senate Judiciary determined it should be a state issue. Senator Sharp voiced his belief that the prohibition would substantially impact the Fairbanks area, particularly if it is retroactive to July 1, 1985. Mr. Sullivan noted that provisions within CSSB 372 (Jud) would not apply to municipal sales taxes in effect before the effective date of the instant legislation. It would not retroactively claim sales tax revenues generated in the past. Senator Kelly inquired concerning the ABC board position on the issue. Mr. Sharrock reiterated that the board has never involved itself in tax matters. Senator Kelly asked what amounts might be involved and questioned whether the legislature should do away with those revenues without knowing how much they are. Mr. Sullivan voiced his understanding that a new fiscal note was being generated. Co-chair Pearce concurred that the change would have an impact and asked if the Dept. of Revenue was preparing a new note. ROD MOURANT, Deputy Commissioner, Dept. of Revenue, advised that the note would be available later in the day. Discussion followed between Senator Rieger and Mr. Sharrock concerning a situation in Anchorage. Mr. Sharrock advised that the board resolved the issue three or four weeks ago through adoption of regulations for restaurant licenses with Karoake entertainment. The regulations allow that form of entertainment in those restaurants between 6:00 and 9:00 p.m. He also acknowledged ongoing review and need for revision of restaurant licensing. The board does not believe revisions can be accomplished by regulation and has discussed introduction of legislation. Kevin Sullivan told members that CSSB 372 (Jud) incorporates an additional change which prohibits the sale of beverages containing more than 76% alcohol--152 proof. Everclear is the only commonly sold beverage in excess of that limit. It is 95% alcohol (190 proof) and is sold only in Georgia and Alaska. Mr. Sharrock explained that, in the original version of the bill, the board intended to prohibit shipping of that product in response to written orders to package stores. The board limitation was 75%. Senator Halford offered an amendment in Senate Judiciary which changed the percentage to 76. Senator Kerttula asked why the committee sought to preclude the sale of Everclear. Mr. Sullivan said that one is more susceptible to death from consumption of great amounts of alcohol in concentrated form. Senator Sharp pointed to subsection (1) in Sec. 28, page 21, and asked if the prohibition on sale of an alcoholic beverage if it "is not in liquid form" reflects new language. Mr. Sharrock advised that the language is currently in law. It was inserted in 1980 to address import of powdered alcoholic drinks. KEN SWISHER, Executive Director, Alaska Municipal League, next came before committee and voiced concern regarding Secs. 45 and 58, which he said reduce municipal taxing authority. Tax on alcohol would be precluded in the absence of a general sales tax at the local level. In the face of declining municipal assistance and revenue sharing, municipalities need the flexibility to raise revenues at the local level and structure local taxes to fit the community. Mr. Swisher advised that the Municipality of Fairbanks would be impacted by the bill if its municipal sales tax was not enacted before 1985. The current 5% liquor tax generates approximately $850.0 per year for Fairbanks. That is one- third of the amount received from revenue sharing and a substantial amount for the community. Sec. 58 removes municipal ability to impose property taxes on liquor, and Sec. 45 deals with inventory and sales taxes. Legislation that creates a further decline in municipal revenues is unacceptable. Mr. Swisher suggested that alcoholic beverages are one of the most "price-elastic" purchases. He questioned suggestions that a modest increase in the price would dissuade people from purchasing it. Experience has not shown that. Mr. Swisher then suggested that concern for protecting the state's tax base by preventing local governments from imposing such taxes is not well founded. RESA JERREL, National Federation of Independent Business, next came before committee on behalf of the federation's 4,800 members. She voiced opposition to provisions within Sec. 59 (page 30) which would increase the alcohol tax. A poll of members evidenced 92% in favor of reduction of state spending prior to increases or imposition of new taxes. A poll of taxing preferences resulted in 43% in support of a state sales tax, support for a personal income tax, and 13% for increased taxing of alcohol and liquor products. Ms. Jerrel requested that Sec. 59 be removed from the bill. Co-chair Pearce called for additional testimony on the bill. None was forthcoming. She then queried members regarding amendments and disposition of the bill. Senator Kelly MOVED to delete Sec. 45 prohibiting both a municipal property tax on alcoholic beverage inventories and the levying of a tax on alcohol unless a general sales tax is in place. Co-chair Pearce asked if the motion includes Sec. 58, the prohibition against a property tax on alcoholic beverages. Senator Kelly advised that he wished to incorporate Sec. 58 within his motion. He explained that the state has always conceded that sales and property taxes provide a source of revenue for municipalities. It is not good public policy for the state to attempt to solve its fiscal problems by extending those problems to municipalities. Co-chair Pearce called for a show of hands on the motion. The motion to delete Secs. 45 and 58 CARRIED unanimously. Brief discussion followed between Senator Rieger and Co- chair Pearce concerning tobacco taxes contained within pending health care legislation. Senator Kelly requested that the Dept. of Revenue provide updated fiscal note information on CSSB 372 (Jud). He voiced need for information to support the Senate Finance position when the bill is before the full Senate for action. Senator Sharp directed attention to page 31 of the bill and raised concern over opt-out provisions, unified municipalities, and organized boroughs. He noted a number of unincorporated communities in the Fairbanks vicinity and suggested that new language might fragment borough policy. Mr. Sharrock explained that under current law "established village" is defined as: An unincorporated community that is in the unorganized borough and that has twenty-five or more permanent residents or (b) an unincorporated community that is in an organized borough has twenty-five or more permanent residents and (1) is on a road system and is located more than 50 miles outside the boundary limits of a unified municipality or (2) is not on a road system and is located more than 15 miles outside the boundary limits of a unified municipality. The problem with the foregoing definition, in relation to local option elections, is that local option statutes presently provide that after a local option election alcoholic beverages cannot be brought into: the perimeter of an established village or a certain distance from the perimeter. Statutes contain no definition for either "perimeter" or "distance." The instant bill proposes to establish a ten- mile perimeter. If the perimeter is not established by the village, the board could establish the perimeter. Amendments to Title 29 attempt to make language consistent, absent the perimeter aspect. The perimeter only comes into play with regard to local options. Mr. Sharrock referenced language in Secs. 50 and 51 at pages 28 and 29. In response to a question from Senator Sharp, Mr. Sharrock explained that, under current law, a village within a borough could hold a local option election and the perimeter would apply. The perimeter the board established under regulation is a five-mile radius. That will have to be amended or changed if the instant legislation is adopted. An adequate and defining geographic area had to be established in order to provide specific enforcement. Senator Sharp inquired concerning need for Sec. 60. Mr. Sharrock voiced his understanding that it attempts to "make the definition consistent throughout other statutes." In response to questions from Senator Kerttula, Mr. Sharrock said that the board has promoted the proposed legislation for a number of years. Although it was initially drafted in October, it was introduced approximately two weeks ago by Senate Judiciary. It is lengthy because it changes all current-law section numbers relating to local option provisions. Co-chair Pearce asked if members were in accordance with alcohol tax increases within the bill. No response was forthcoming. The Co-chair then queried members regarding disposition. Senator Rieger MOVED that CSSB 372 (Fin) pass from committee with individual recommendations. Senator Kerttula OBJECTED. Co-chair Pearce called for a show of hands. Lacking a majority of four affirmative votes required for passage, CSSB 372 (Fin) FAILED to move from committee on a vote of 3 to 2. (Co-chair Frank and Senators Rieger and Sharp voted in favor of passage, and Co-chair Pearce and Kerttula were opposed. Senator Kelly did not vote, and Senator Jacko was absent from the meeting.) ADJOURNMENT The meeting was adjourned at approximately 11:35 a.m.