Legislature(2003 - 2004)
02/25/2004 01:45 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 503
An Act relating to the tobacco product Master
Settlement Agreement; and providing for an effective
date.
CO-CHAIR HARRIS, SPONSOR, briefly introduced HB 503. The
bill addresses the Master Settlement Agreement (MSA) with
the tobacco industry and would close a current loophole with
the non-participating tobacco manufacturers and place money
into an escrow account held by the state.
TOM WRIGHT, STAFF TO REPRESENTATIVE JOHN HARRIS, explained
that the legislation was suggested by the National
Association of Attorneys General. The statutory change would
ensure that the non-participating manufacturers (NPMs) in
the MSA place in escrow approximately 1.5 cents per
cigarette sold in the state, rather than an allocable share.
Alaska's allocable share nationwide is .34%. Currently, the
NPMs are able to take out of escrow any amount that exceeds
its allocable share, which in some states may be a
significant amount. Mr. Wright commented that the bill
sections are confusing. He explained that Section 1 is the
"heart" of the bill, and Section 2 and Section 3 contain
conditional language in the event that either Section 1 or
Section 2 is found to be unconstitutional.
Co-Chair Harris asked for an explanation of the Master
Settlement Agreement and the loophole.
MIKE BARNHILL, ASSISTANT ATTORNEY GENERAL, COMMERCIAL/FAIR
BUSINESS SECTION, DEPARTMENT OF LAW, provided background on
the Master Settlement Agreement (MSA). In 1997 most of the
states sued the four principal tobacco manufacturers and the
litigation was settled in 1998 under the MSA. Under the
agreement, all manufacturers that have signed onto it pay a
certain amount of money on every cigarette sold and the
money is distributed on an annual basis to all the states
that participated in the MSA. It has generated about $100
million in revenue for the state of Alaska.
Mr. Barnhill explained that some manufacturers were not
going to participate in the MSA, which created an "unlevel
playing field". The participating members raise the price
of their cigarettes by the amount they estimate they'll need
to contribute to the MSA revenues, while the non-
participating members don't raise their price. This
undermines the MSA because the non-participating members can
capture market share by undercutting. The MSA proposed that
all participating states would enact legislation to level
the economic playing field and require all non-participating
manufacturers to deposit money into an escrow account. The
money is calculated on an annual basis, at about 2 cents per
cigarette this year. The amount is designed to reflect what
the non-participating members would have paid in the MSA.
All the manufacturers in the participating states either pay
into an escrow account or the MSA revenues that are
approximately the same amount of money per cigarette.
Mr. Barnhill explained the circumstances in which the non-
participating manufacturers (NPMs) can request that money be
released from escrow:
* If the state sues the NPM, recovers a judgment and that
manufacturer is judgment-proof, the money can be claimed
from the escrow account; or
* If more is paid into a state's escrow account than the
NPM would have paid as a participating manufacturer under
the MSA; or
* If the money has been sitting in the escrow account for
twenty-five years.
Mr. Barnhill noted the spreadsheet in the packets, "NPM
Escrow Release Calculations for hypothetical non
participating manufacturer Cheap Smokes, Inc." (copy on
file.) The spreadsheet indicates that under current law,
the market advantage has shifted to the non-participating
manufacturer who pays less than a penny per cigarette. This
is the loophole that HB 503 is trying to solve.
Representative Croft thought that the amount would keep
sliding. There would be more sales by NPMs and a big Alaska
market share that would grow. Mr. Barnhill acknowledged
that was correct. He stated that the good news for Alaska
is that the State ranks last in the country in terms of the
size of the NPM market. Alaskans smoke brand cigarettes.
Mr. Barnhill noted that specialty non-participating
manufacturers cater to price because a percentage of the
market buys the lowest cost cigarettes that are available.
In response to a question by Representative Croft, Mr.
Barnhill advised that taxing has no constitutional problems.
There have been proposals for a tax credit scheme; however,
the department tends to follow the National Association of
Attorneys General on these proposals, and strives for
uniformity with other states.
Representative Croft thought that the simplest solution
would involve raising the price to ten cents per cigarette,
giving everyone a credit for MSA participation, and leveling
the price. Mr. Barnhill acknowledged that there have been
similar proposals and stated that he did not know the
specific problems.
Representative Croft noted that he was attempting to
understand the details of the bill.
In response to a comment by Co-Chair Harris, Mr. Barnhill
stated that there is no direct financial impact to the state
as a result of the legislation. However, an indirect
financial impact resulted from implementation of the MSA
that raised cigarette prices and provided the NPM market
advantage. He added that it will have an indirect effect on
the state revenues when the market share of NPMs increases
on an aggregate basis.
In response to a question by Co-Chair Harris, Mr. Barnhill
affirmed that the NPMs and the MSA participants pay the same
tax to the state of Alaska.
Co-Chair Harris asked about taxing the non-participating
members more than the participants. Mr. Barnhill thought it
might cause equal protection problems. He offered to follow
up regarding the query.
Representative Croft noted his support for the bill.
Representative Croft referred to Mr. Barnhill's spreadsheet
and the hypothetical escrow of $20 thousand, asking how the
state could continue to escrow that amount when the MSA
would bring about $6800. Mr. Barnhill explained that the
amount is placed into escrow for 25 years unless a lawsuit
or judgment is filed, or the manufacturer is eligible for a
release. There are a variety of adjustments under the MSA
that can be implemented against a state. Alaska is obligated
to diligently enforce state law relating to NPMs and the
department has filed several lawsuits to force noncompliant
NPMs to deposit money into escrow.
Mr. Barnhill commented that there is not an economic
incentive for the State of Alaska to file suit against a
NPM. The total escrow account is less than $100 thousand
dollars spread between 30 manufacturers. The NPM market is
small so the corresponding escrow deposit requirement is
small. The state has only sued the big manufacturers as the
principal cause of alleged harm.
Representative Croft questioned the legality of holding $20
thousand in escrow when the NPM only owes the state $6800.
Mr. Barnhill advised that the state does not keep the money;
rather, the NPM opens an escrow account in their own name
and makes deposits. Commonly an NPM with nationwide sales
deposits money into segregated sub-accounts for each of the
states. Alaska is a potential beneficiary of that money.
In response to a question by Representative Croft, Mr.
Barnhill explained the three options of the contingency
language:
* Section 1 would require the NPM to pay the MSA amount
into escrow with no release, putting it on equal par with
the participating member. In Mr. Barnhill's opinion, the
legal drafters have been very cautious in the event the
states are sued and that provision is found to be
unconstitutional.
* Section two eliminates any ability of the NPMs to
request a release from escrow. The escrow amount is only
released after 25 years or to pay the state's lawsuit or
judgment.
* Section three reverts back to current law if Sections 1
and 2 are found to be unconstitutional. Mr. Barnhill
reiterated that it is cautious drafting.
Mr. Barnhill explained for Representative Croft how the NPM
sliding scale has the ultimate effect of undermining the
MSA.
Representative Hawker asked if this legislation ties into
the MSA issues of last session. Mr. Barnhill replied that
complementary legislation was designed to heighten
enforcement of Alaska's NPM statute. To prevent non-
compliance, a law was passed requiring all sellers of
cigarettes in the state to register with the Department of
Revenue.
Co-Chair Harris asked if the tobacco tax could be added to
this bill. Mr. Wright advised that the title would need to
be expanded.
Representative Foster MOVED to report HB 503 out of
Committee with individual recommendations and a zero fiscal
note. There being NO OBJECTION, it was so ordered.
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