SENATE BILL NO. 1001 "An Act relating to taxes on cigarettes and tobacco products, to tax stamps on cigarettes, to forfeiture of cigarettes and of property used in the manufacture, transportation, possession, or sale of unstamped cigarettes, to accounting for and use of part of the proceeds of the additional cigarette tax, and to licenses and licensees under the Cigarette Tax Act; relating to unfair cigarette sales; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this bill would increase the current cigarette excise tax by one dollar per pack and increase the tax on other tobacco products. It would also designate a portion of the tax revenues to support smoking education, tobacco use prevention and tobacco control programs. Senator Bunde noted that the bill is similar to a Senate bill heard during the Twenty-Third Legislative Session. The few minor changes include: the re-inclusion of the tobacco product floor stock tax that was eliminated from the Session bill due to concern that it might encourage product stock piling and thereby reduce revenue; and the re-inclusion of the taxes on other tobacco products. This language was excluded from the Session bill due to concern that it would encourage the use of "substitute" cigarettes in order to avoid the tax. The Session bill was altered in the House of Representatives in that they amended language to pro-rate the amount of the tax. To that point, he declared that the Legislature should do all it could do to "increase sticker shock" by increasing the tax by one dollar rather than gradually imposing the tax, as he agreed with studies that have shown that an increase in the price of cigarettes reduces smoking. JOEL GILBERTSON, Commissioner, Department of Health and Social Services, stated that the Administration proposed the tobacco tax increase and the other changes proposed in the bill "largely because of the public health impact that tobacco is causing on this State and the public health benefits" that would be generated from the tax increase. "Tobacco is the leading cause of death," disability, and chronic illness in the State and is recognized by the Department as the State's "number one public health threat," specifically to the State's children. The 1997 tobacco tax increase resulted in a 30-percent reduction in cigarette consumption. There is a "direct correlation between increasing price and decreasing consumption of tobacco products," specifically usage by young Alaskans and individuals with limited resources. The results of a 2003 Department youth risk behavior survey compared to its 1995 survey substantiate the fact that the 1997 tobacco tax increase had an impact on tobacco usage as youth consumption of tobacco products has declined by 50-percent in that time period. "A good portion of that decrease" is attributed to the tax increase. In addition, the Department's tobacco enforcement efforts have also been effective as the illegal sale of tobacco products to minors have reduced from 30.2 percent to ten percent. This is one of the lowest rates in the nation. Were the proposed tax increase enacted, the Department predicts a 15-percent decline in the number of youth smokers. This would equate to 1,800 young Alaskans "being saved from a premature death" attributed to smoking. The Department predicts that 3,500 Alaskans would quit smoking were the tax increase implemented. Of that number, 800 would be saved from a smoking related death. IN addition, 850 babies would be spared from exposure to maternal smoking during the next five years. The tax increase would result in a decrease in the number of Alaska Natives who smoke. Currently, 44-percent of Alaska Natives smoke. This is double the percent of non-Native smokers. Commissioner Gilbertson shared that a 1998 Department study indicated that tobacco products usage costs the State $270 million, or $400 per person. $133 million of the $270 million is direct medical expenses such as hospital care, nursing home care, and pharmacy costs. This expense directly affects health care premiums. It has been determined that 15-percent, or $20 million, of the State's Medicaid program's medical expenses are tobacco related. The Tobacco Master Settlement Agreement was initially instituted to fund the costs to states resulting from tobacco consumption. He encouraged the Committee to support this legislation. Co-Chair Green asked regarding "the proposed distribution" of the revenue that would be generated by this tax. Commissioner Gilbertson estimated that approximately four million dollars would be provided to the Department's Tobacco Use Education and Cessation Fund program, which is currently primarily funded by the Tobacco Master Settlement Agreement (MSA). JOHANNA BALES, Manager, Cigarette and Tobacco Products Excise Tax Program, Department of Revenue, explained that, currently, a portion of the revenue raised by the State's tobacco tax is provided to the School Fund and a portion is provided to the General Fund. This bill proposes that the entire revenue generated from the tax increase be deposited into the General Fund. Under this proposal, 8.9 percent, or approximately four million dollars, of the tobacco tax revenue that is deposited in the General Fund would be designated, annually, to support the Tobacco Use Education and Cessation Fund program. Currently, 20-percent of the MSA, which has historically averaged between four and five million dollars annually, is directed to support that program. Were this legislation adopted, the Program could receive approximately eight or nine million dollars in funding. Eight million dollars is the minimum amount specified for the program by the national Centers for Disease Control and Prevention (CDC). Commissioner Gilbertson stated that this is the minimum amount recommended for Alaska as specified in the CDC "Best Practices for States" guidelines. Co-Chair Green interjected that the monetary range specified by the CDC was between eight and $17 million. Therefore, she asked whether the CDC might apply pressure for further increases. Her preference would be that, rather than increasing the funding for the Tobacco Use Education and Cessation Fund program, the revenue be utilized to support the Department of Health and Social Services' tobacco associated Medicaid expenses. She asked whether the increased funding for the Tobacco Use Education and Cessation Fund program would increase or replace existing funding. Commissioner Gilbertson clarified that this would be "a true increase" in the funding of the State's tobacco control efforts. He characterized Co-Chair Green's remarks as being "very fair and correct" and expressed that initially the dialogue regarding the MSA money included compensating States for their Medicaid program expenses resulting from "tobacco consumption by beneficiaries." This bill would dedicate funds for the State's Tobacco Control program rather than to Medicaid expenses. "That said," while the State has implemented a good Tobacco Control program, its funding level is below the amount designated by the CDC. The increased level of funding that would be provided to the Tobacco Control program via the Tobacco Use Education and Cessation Fund program must be conducted in an "orderly ramp-up" fashion using Best Practice guidelines. He reviewed the current Program endeavors. Co-Chair Green asked whether the Tobacco Control program is "a Department run program" that is separate from the media campaign that is conducted by a variety of non-profit organizations. Commissioner Gilbertson clarified that some of the MSA money supports a variety of Department programs including the Tobacco Enforcement program, which conducts "stings" on the illegal sale of tobacco products to minors by retailers. In addition, MSA funds are utilized by the Department to support the Tobacco Control program that provides grants and contracts. These funds support a variety of endeavors including the media campaign referenced. Co-Chair Green asked whether funding for the anti-smoking media campaigns might be doubled as a result of this legislation. Commissioner Gilbertson responded that the total amount available to the Tobacco Control Program is estimated to be "slightly less than double" the current level. How the approximate four million dollar increase would be spent is, of yet, undetermined. Co-Chair Green asked whether the expectation in the future might be that, as the funds are disbursed in support of various programs, that more funds should be provided to fund the anti-smoking media campaign, as this media funding discussion is a re-occurring one. Commissioner Gilbertson replied that neither the Governor nor the Department intent to request any further increase in tobacco control funding in the next Legislative Session beyond what is being proposed in this bill. He clarified however, that were this bill enacted, the increased funds generated would require appropriation. Co-Chair Green asked whether details regarding the disbursement of the new tax revenue are specified in the bill in addition to being detailed in the Department of Health and Social Services fiscal note #3, dated June 22, 2004. Co-Chair Wilken noted that the Department's fiscal note #3 does not reflect any expenditure in FY 05. Senator Olson commented that the Senate bill, upon which this legislation was based, did not specify that the generated revenue would support Tobacco Control programs. As a physician, he would always favor some sort of tobacco control; and therefore, he supports the funding being designated to support Tobacco Control programs. Ms. Bales pointed out that the revenue disbursement language is located in Section 16 beginning on line 18, page four, of the bill. While this money would be specified for the Tobacco Use Education and Cessation Fund, it does not specify how those funds must be expended. Co-Chair Green asked for a definition of the Tobacco Use Education and Cessation Fund as "generally defined" within the Department. Commissioner Gilbertson stated that the Fund, which is established by AS 37.05.580, is the fund in which the MSA funds are deposited each April. Co-Chair Green asked whether the determination that the MSA funds would be decreasing is the reason this program has been designated as the recipient of the revenue generated by this legislation. Commissioner Gilbertson responded that the terms of the MSA dictate the level of payout to the States. There has been some indication that the level of funding "might be modestly declining" due to market share conditions of the MSA signatories. Ms. Bales stated that the expectation is that the Tobacco Use Education and Cessation Fund would receive $3.6 million MSA funding in the year 2006. During the initial years, the MSA payment was approximately five million dollars. While there has been a decrease in the level of MSA funding, the reason this funding is being proposed is to address the CDC minimum recommendation for the State. Co-Chair Green declared that the State would never to able to satisfy CDC, and furthermore, CDC recommendations "should never set the standards" for State programs. Ms. Bales commented that this legislation is a combination of the bill that passed the Senate and the amendments proposed by the House Ways & Means and House Labor & Commerce committees. The House of Representatives exerted tremendous effort in the consideration of the funding provision included in this bill. In addition to specifying how the revenues would be allocated, the bill would also allow individuals to physically transport into the State up to 400 cigarettes per month without incurring any tax. This number would align with federal allowances. In addition, the bill contains penalty language for the violation of cigarette shipping restrictions and the violation of the unstamped cigarette guidelines; specifies that the one dollar per pack tax increase would not be phased in; would increase the tax level on Other Tobacco products as well as requiring that the tax be paid on these products were individuals to ship these Other Tobacco products into the State for personal consumption. Retailers and Distributors in the State support this shipping provision. In addition, in-State licensees who have a good tax paying record would be allowed to reduce the level of the required bond; minimum pricing and a provision addressing unfair pricing and other components are also addressed in the legislation. The effective date of the bill would be September first, 2004. Senator Bunde moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. Co-Chair Green did not object, but commented for the record, that she would be "again opposing" this legislation on the Senate floor. Until such a time the State were to impose a broad based tax such as a sales tax, she could not support taxing specific commodities or products. Such taxation is "an inappropriate" manner through which to attempt to change individual's lifestyles or behaviors. There being no objection, SB 1001 was REPORTED from Committee with $828,100 fiscal note #1, dated June 15, 2004 from the Department of Revenue; $206,400 fiscal note #2, dated June 14, 2004 from the Department of Public Safety; and zero fiscal note #3, dated June 22, 2004 from the Department of Health and Social Services.