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.