MINUTES SENATE FINANCE COMMITTEE 4 April 1997 10:17 a.m. TAPES SFC-97, #76, Side 1, (000 - 592) 76, Side 2, (592 - 570) CALL TO ORDER Senator Bert Sharp, Co-chairman, convened the meeting at approximately 10:17 a.m. PRESENT In addition to Co-chairman Sharp, Senators Phillips, Torgerson, Parnell and Adams were present when the meeting was convened. Senators Pearce and Donley arrived respectively shortly thereafter. ALSO ATTENDING: Jack Chenoweth, Legal Services, Legislative Affairs Agency; Bob Bartholomew, Deputy Director, Division of Income and Excise Audit, Department of Revenue; Pat Carr, Division of Public Health, Department of Health and Social Services; Jeannie Monk, SEARHC; Don Dapcevich, State Advisory Board on Alcohol and Drug Abuse; Joyanne Bloom, Juneau Tobacco Prevention Network; aides to committee members and other legislators. SUMMARY INFORMATION Co-chair Sharp convened the meeting. He called SB 13. CS FOR SENATE BILL NO. 13(HES) "An Act relating to taxes on cigarettes and tobacco products, and to the filings of returns for and the use of the proceeds of those taxes; and providing for an effective date." Senator Adams moved CSSB 13(FIN) "Q" version as work version before the committee. Senator Torgerson objected. He noted that he had an amendment for the committee to consider. It was to the HES version. If the latitude would be allowed he would offer the amendment under the FIN version. Co-chair Sharp said it would be no problem and therefore Senator Torgerson removed his objection. CSSB 13(FIN) "Q" was adopted without objection for working purposes. Co-chair Sharp explained that this was a Revenue and Education bill as well as a Health bill. Section 1 detailed the legislative intent of the bill. Items (1) and (2), line 6, directs cigarette tax be deposited to the existing dedicated school fund and could only be used for rehabilitation, construction and repair of State school facilities as per AS 43.50.140. Item (3), page 1, lines 12 - 14 and page 2, lines 1 - 3 stated legislative intent subject to appropriation, as all future expenditures are, that the new tobacco tax revenue be used for the establishment and maintenance of an anti-tobacco campaign targeting children and also to establish and maintain a program of pass-thru grants to municipalities who desire to participate for programs to detect and prosecute those who sell or supply tobacco products to children. Sections 3 and 4 increase the tax on each pack of cigarettes by $0.71. Section 5, a change from the previous version, increases excise tax on non-cigarette type tobacco products from 25% of wholesale value to 75% of wholesale value, which tracks close to the same percentage as the $0.71. Section 6 amends AS 43.50.350 to bring the statute in line with legislative intent. The new CS revises AS 43.50.350, disposition of proceeds, and expanded it to cover the use of the proceeds for criminal prosecution involving the sale of tobacco products to persons under the age of 19. Sections 7, 8 and 9 set varying conditions and effective dates depending on possible Court decisions. An accompanying fiscal note analysis breaks the estimated revenue from cigarettes and other tobacco products, because of the constitutional constraints and proposed different uses in the legislation. These amounts represent a significant portion of the $66 million of new revenue that has been committed to as far as the long range fiscal plan for the year '98. He urged careful scrutiny of the CS draft now before the committee. Jack Chenoweth, Legal Services, Legislative Affairs Agency was invited to join the committee. He explained the legalities of the bill in response to a specific request by Senator Phillips. The bill proposed to increase the school tax levy from 2-1/2 mills to 38 mills, as reflected on page 2, line 5, with the understanding that the increase would be handled as it presently is in the dedicated school fund provisions. He referred to a provision in section 3, which would take the increase rate which supports the dedication back down to 2-1/2 mills and moves the 35-1/2 mill increase over to the non-dedicated portion, which is AS 43.50.190(a)(4). They were trying to give the Legislature the benefit of using the increase to support the school fund. The excise provision in section 5, was a non- dedicated provision and the use of the proceeds was set over in section 6. He explained the reason for the disclaimer added in section 7. Senator Torgerson asked if section 11 were challenged in Court would sections 3 and 4 kick in and Mr. Chenoweth indicated they would. Senator Torgerson then asked what would happen to the tax or the time line between the collection of money until the Court would decide the issue. Mr. Chenoweth indicated that he did not know. The only real question was whether the Legislature could pass a law that dedicates the money or not. The rate would remain the same and a Court would be able to sort this out and would not put a hold on the proposed increase. The bill basically says that if the Court rules one way, the money will be dedicated. If the Court rules the other way, another provision will kick in and the money will continue to come into the general fund and be available for appropriation. He did not feel the Court could make the money be held in escrow. Senator Torgerson sought approval to discuss his amendment with Mr. Chenoweth and the Co-chair allowed the request. Senator Torgerson noted that the amendment had not been offered yet, but it would place this question before the voters for voter approval. He felt that the Legislature was setting itself up for a Court challenge. It was not a question of "if", but rather "when". Mr. Chenoweth responded saying that there was a difference of opinion between Legislative Legal and the Attorney General. Senator Torgerson felt voter approval was a quicker vehicle and would prevent cat-and-mouse games. Senator Torgerson thanked the Co-chair for latitude in discussing his amendment with Mr. Chenoweth. Senator Pearce referred to section 6, disposition of proceeds, it was clearly indicated that the tax money would go into the general fund and it may be used by the Legislature to make appropriations. She wanted to know if that was any more of a dedication than an ASCF endowment, where the Legislature chose to set aside an endowment and the money flows through, but the Legislature still had to appropriate it. It is not a constitutional set-aside, but rather a Legislative accounting set-aside. She said that Senator Faikes had referred to it as "white picket fences". Mr. Chenoweth advised that section 6 was not the dedicated funds. Section 6 supported the use of the money from the tax placed on cigars, snuff, pipe tobacco and things of that nature. The dedicated fund is AS 43.51.040 which was not amended in the bill. It has been around since 1955. The proceeds derive from the payment of taxes, fees and penalties under the cigarette tax, AS 43.50.090(a). The license fees received by the department shall be paid into a state fund, entitled "school fund" and shall be used exclusively to rehabilitate, construct and repair the State school facilities and for cost of insurance on buildings comprised of school facilities during the rehabilitation, construction and repair and for the life of the buildings. That was a true dedication and one of the very few that were left. It was the maintenance of that dedication that would be put in issue by the proposed increase in the tax rate under section 2. Senator Pearce indicated then that it would be a separate section and not a dedication and Mr. Chenoweth concurred. Bob Bartholomew, Deputy Director, Division of Income and Excise Audit Division, Department of Revenue was invited to join the committee. He gave a brief summary of fiscal effects of the CS and potential amendments or areas that could be considered for amendments. He noted that the increase was $0.71 plus the current $0.29 combining to equal $1.00 per pack of cigarettes if adopted. The increased taxes that would go into the school fund would be approximately $30 million. Other items he pointed out were in the House version of the tobacco bill. Under current statute tax payers were allowed to maintain 1% of the taxes paid to cover administrative costs in processing and paying the tax. By increasing the tax without addressing that rate of administrative fee and there is a large increase in the rate, next year the taxpayers would be allowed to maintain $450,000. The department supported adjusting the percentage to four-tenths of 1%. That would give the taxpayers a slight increase in fees to cover their costs, but it would not be the windfall that would happen under the current version. Only two sections of the bill would have to be amended on page 2 in order to accomplish that. The other area would also be the non-tobacco tax products. Co-chair Sharp asked if the four-tenths would produce an estimated equivalent of $180 thousand. Mr. Bartholomew concurred. If left as it is it would be $450 thousand. Co-chair Sharp requested a new fiscal note reflecting the changes. Mr. Bartholomew said the numbers had been run against the new draft and it would be a total of approximately $33 million. There was a brief pause on record. Pat Carr, Division of Public Health, Department of Health and Social Services was invited to join the committee. She said there was a packet of information provided to members to give them guidance in terms of the Department's position and the health consequences for tobacco use. Due to the high death rate attributed to tobacco use in the State the department took a position in support of increasing taxation on tobacco. Twenty-three percent of the deaths in Alaska, for individuals 35 years or older were attributed to smoking. She pointed out the following important issues in the department's handout: page 5, the heavy use of tobacco (approximately 20% of today's youth are regular users of tobacco and 83% of adults reported they started smoking before the age of 20); page 11, direct medical costs involved; page 14, an increase in tax will cause consumption to fall; and page 15, with $1.00 increase there will be a 32% reduction in youth smoking. Senator Phillips referred to page 11, direct medical costs. Ms. Carr explained further. Jeannie Monk, SEARHC was invited to join the committee. She said she was also part of the Juneau Tobacco Prevention Network and the Alaska Tobacco Control Alliance. She urged support of the tobacco tax increase. She said there was widespread support of the tax increase. Without this, 18,000 youngsters today will become addicted and will die. She said the Juneau Tobacco Prevention Network and the Alaska Tobacco Control Alliance were working together to provide enforcement, education and pricing. A Teens Against Tobacco Use had also been coordinated and smoking cessation classes at JDHS had been formed and well attended. There were compliance checks to keep children from being able to smoke. It was necessary for everyone to work together to help Alaska's children not smoke. Ms. Monk reviewed briefly many student comments in support of the bill. Most teenagers themselves believe other teenagers would not smoke if the tax were high enough and the cigarettes not so readily available. She requested the Senators to pass this bill and urged their counterparts in the House to do the same. Senator Phillips asked about the telephone survey and how was the question raised regarding the tobacco tax. Ms. Monk responded that it was a telephone survey done during 1996. It was phrased asking individuals about a significant tobacco increase. Senator Phillips asked if it was worded basically to state raise the taxes for health purposes and Ms. Monk indicated that was correct. To raise the taxes for health purposes was the emphasis. Don Dapcevich, State Advisory Board on Alcohol and Drug Abuse was invited to join the committee. He also urged passage of the bill. It had been shown that raising the price of cigarettes that youth consumption would go down. Joyanne Bloom, Juneau Tobacco Prevention Network was invited to join the committee. She noted that the Network was recognized by the Alaska Public Health Association and received the 1996 community service award because of the education and compliance work that was being done to see that the laws that are already in place are being implemented. The Network has made great strides. She asked support for the committee's support for the bill. She further noted that the bill was supported statewide, specifically by young teenagers. Co-chair Sharp noted pending amendment #2. Senator Pearce moved amendment #2. Co-chair Sharp explained that under current law wholesalers and distributors were allowed to retain one percent of the tax to cover their administrative and bookkeeping expenses for filing. Because of the increase the actual time in doing the same work does not go up appreciatively and if it is not reduced it would result in a $300,000 more or less windfall because of the increase of tax. This amendment would hold them harmless plus would give about a $30,000 increase. He said this amendment was to the "Q" version of the work draft CS. Without objection amendment #2 was adopted. He reviewed the evening schedule, stating the committee would continue on with the tobacco tax and the capital overview. ADJOURNMENT Co-chair Sharp recessed the meeting at 11:04 a.m. until 6:00 p.m. this evening.