HB 208-CRUISE SHIP TAX  8:57:57 AM CO-CHAIR MUNOZ announced that the final order of business would be HOUSE BILL NO. 208, "An Act relating to taxes for certain activities on large passenger ships; and providing for an effective date." 8:58:03 AM REPRESENTATIVE HARRY CRAWFORD, Alaska State Legislature, speaking as the prime sponsor of HB 208, explained that he doesn't want to open the door for for-profit gambling in the state. He expressed concern that the cruise ship taxation initiative that started taxing the cruise ship industry on its gambling within state waters opens the door to for-profit gambling. The aforementioned, as illustrated in court decisions, has happened in the Lower 48. The desire to not open the door to for-profit gambling in Alaska is why Alaska banned Monte Carlo nights in the state in the 1990s. He then referred to a June 30, 1997, Anchorage Daily News article in the committee packet entitled "Tribal gambling in Alaska? Not yet, but it's one step closer". From the following article, he read [original punctuation provided]: As in other areas, Congress sets the rules for gambling in Indian country. Under the Indian Gaming Regulatory Act of 1988, Native Americans can operate casino-type gambling only in states where such activity is legal. In 1994, the Southeast Alaska village of Klawock proposed a casino on a fragment of village land held in trust by the federal government. In response, the Legislature passed a law revoking the authority for nonprofit groups to hold Monte Carlo nights with roulette, cards and other casino games. That closed the door to Klawock. The Venetie ruling makes it possible for any tribe that can establish Indian country to qualify for a casino operation, but only if the Legislature votes to make such gambling legal in Alaska. The Legislature did not eliminate lotteries when it banned the other games, however. The state and Klawock are still negotiating over a tribal lottery, said assistant attorney general Vince Usera. REPRESENTATIVE CRAWFORD opined that since the aforementioned article, the cruise ship initiative was passed. The initiative taxes the cruise ship industry on its gambling profits, which could be viewed as an implicit acceptance of Class 3 gambling inside the state. Therefore, he introduced HB 208. 9:02:36 AM REPRESENTATIVE HARRIS asked if HB 208 would prohibit Native villages from having casinos on tribal properties. REPRESENTATIVE CRAWFORD clarified that HB 208 isn't an absolute prohibition; rather it's just not opening the door [to gambling in Alaska]. He explained that the U.S. only allows tribal gaming in states where the same type of gaming is available to other entities. Alaska hasn't done the aforementioned. However, Alaska has passed the cruise ship initiative that taxed the Class 3 gambling onboard the cruise ships. The aforementioned, he reiterated, could open the door to casino- type gambling in Alaska. He noted that Alaska is one of only two states that don't allow for-profit gambling. 9:04:04 AM REPRESENTATIVE HARRIS surmised then that HB 208 would eliminate the ability of Alaska Native tribes/corporations to participate in a business opportunity such as gaming. REPRESENTATIVE CRAWFORD replied yes. 9:04:31 AM REPRESENTATIVE MILLETT asked if the sponsor is trying to establish a mechanism to stop Indian gaming. REPRESENTATIVE CRAWFORD related that the casino businesses use Indian gaming operations as a door to gambling. The aforementioned happened in Louisiana. 9:05:50 AM KEN ALPERS, Staff, Representative Harry Crawford, Alaska State Legislature, speaking on behalf of the sponsor, Representative Crawford, explained that the legislature banned Monte Carlo nights and associated activities in 1995 primarily to disallow Indian gaming. The provision in the cruise ship initiative that taxes gaming opens a loophole the legislature consciously closed 15 years ago. This legislation merely tries to ensure that loophole remains closed. 9:06:28 AM REPRESENTATIVE MILLETT commented that the cruise ship initiative included many things to which many people weren't aware. She then asked if the sponsor could walk her through the current process of a tribe opening a casino in Alaska. REPRESENTATIVE CRAWFORD answered that there is no such process because heretofore it hasn't been allowed. 9:07:09 AM REPRESENTATIVE MILLETT inquired as to the federal process for a tribe to work with the state to open a casino. MR. ALPERS explained that under the Indian Gaming Act of 1988, states are allowed to enter into agreements and compacts with tribes to regulate Class 3 gaming. The federal law requires that the state has to allow the activity to take place. The [law says] "If the state permits such gaming for any purpose by any person, organization, or entity." The first step, he further explained, is for the state to enter into a compact. The state hasn't done so because the state doesn't permit any such gaming for any purpose, organization, or entity. 9:07:56 AM REPRESENTATIVE MILLETT requested an explanation of the exact loophole that HB 208 addresses. MR. ALPERS explained that that the courts could construe that by taxing this gaming activity, the state is indirectly permitting it. REPRESENTATIVE MILLETT surmised then that the legislation is in response to fear of court action. 9:09:38 AM REPRESENTATIVE CRAWFORD directed the committee's attention to a document entitled "Why We Need HB 208; A Brief Legal History," from which he paraphrased from the following paragraph: In response to the Cabazon case, Congress passed the Indian Gaming Regulatory Act of 1998 (IGRA). This established the three "classes" of gaming that we use today. It also explicitly recognized the role of tribal gaming for local economic development and self sufficiency. The Act created a National Indian Gaming Commission, which directly regulated Class 2 gaming (bingo), and required state-tribal compacts to regulate Class 3 gaming (slots, casinos, etc). Since this act, tribal gambling revenue increased from $100 million in 1998 to $17.7 billion in 2006. REPRESENTATIVE CRAWFORD informed the committee that prior to IGRA few states allowed large casinos, but now casinos in the Lower 48 have proliferated. Alaska has expressly denied expansion into gaming, which he said he wants to continue to do. 9:11:04 AM REPRESENTATIVE MILLETT asked which states with Class 3 gaming have formed compacts and which haven't, but have been forced to allow gaming due to court action. She further asked that the delineation between those states that have willingly entered into compacts and which have been forced into a compact be specified. REPRESENTATIVE CRAWFORD said he couldn't provide the actual number of states or specific states. However, he said he could provide some examples of states that have been forced to open up to for-profit gambling. 9:12:03 AM REPRESENTATIVE CRAWFORD, in response to Co-Chair Herron, said that he didn't know how the vessels regulate the tax collected for the onboard gaming. However, he surmised that it is self- reported. MR. ALPERS explained that the initiative statute specifies adjusted gross earnings: revenue less payouts and expenses and so forth. He said that to the extent there is a regulatory process, he said he wasn't aware of the details. 9:13:07 AM CO-CHAIR HERRON related his understanding that for other bingo/pull tabs a municipality has the ability to negotiate the local tax on gaming. However, the local operator has no ability to negotiate with the state. Therefore, he surmised that the 33 percent tax was arbitrary and voted on by the people rather than negotiated between the operators and the legislature or the governor. REPRESENTATIVE CRAWFORD confirmed that the 33 percent tax was in the cruise ship initiative. 9:14:07 AM CO-CHAIR HERRON said that the sponsor, in reference to the loophole the legislation is trying to close, has used examples of land-based loopholes in other states, but this is a water- based loophole. He asked if this water-based loophole has been used in other states. REPRESENTATIVE CRAWFORD informed the committee that in Louisiana river boats were used for gambling. Those river boats with gambling couldn't be parked, but once those river boats were anchored in state waters gambling onshore began. 9:15:19 AM CO-CHAIR HERRON asked if the water-based example in Alaska exists elsewhere. He pointed out that the cruise ships in Alaska move in and out of international waters. REPRESENTATIVE CRAWFORD acknowledged that the situation in Alaska may be a different animal than [the Louisiana situation]. However, he reminded the committee that [taxing the gambling onboard cruise ships] will result in the state relying on some judge to determine whether the state allows gambling or not. He reiterated his belief that the initiative offers a loophole through which gambling in Alaska could take a foothold. 9:16:31 AM CO-CHAIR HERRON said that he needs more information, and inquired as to what the loophole is. MR. ALPERS related that the foundation lawsuit arose when the Mashantucket Pequot Tribe of Connecticut with a small reservation sued the State of Connecticut, which didn't have any interest in being in the casino business. Because the State of Connecticut allowed church Monte Carlo nights, the tribe was able to convert its small bingo hall into what's now one of the largest casinos in the world. Although it's impossible to say what a judge would do, the loophole is that the state allowed [Monte Carlo night gambling] so it had to be allowed for the tribal entity. Therefore, the sponsor believes that by acknowledging and collecting taxes on gaming, the state is allowing gaming. REPRESENTATIVE CRAWFORD then related a case in which the Coushatta Indians in Louisiana had no traditional lands. However, they bought several acres in an urban area and referred to those lands as Indian lands. The Coushatta Indians went to court and now a casino is on the lands they designated as Indian lands, although there was no traditional use on those lands. Therefore, Representative Crawford opined that if the loophole in Alaska isn't closed, it will be successfully used to bring casino gambling in Alaska. He referred to it as a back door attempt to allow gambling. Whether the state allows for-profit gambling is something that should require a vote of the people. 9:19:57 AM REPRESENTATIVE MILLETT asked if the sponsor is suggesting that a tribe could sue Alaska and force the state into a compact. REPRESENTATIVE CRAWFORD responded yes. In further response, he opined that the courts could require the governor or the legislature to sign a contract. The aforementioned is the reason why when Klawock wanted to construct a casino the legislature banned Monte Carlo nights in the state in order to eliminate the basis of a lawsuit. 9:21:03 AM REPRESENTATIVE MILLETT said that she has a copy of the Connecticut State Compact that allows gaming and can't find where it says a court action caused gaming to be allowed in Connecticut. REPRESENTATIVE CRAWFORD interjected that it's the Indian Gaming Regulatory Act of 1988 that actually caused [gaming to be allowed in Connecticut]. REPRESENTATIVE MILLETT pointed out that IGRA is voluntary and only requires that a state compact be signed. She then asked if all the state compacts are in reaction to a lawsuit or do states enter into the compacts voluntarily. She related her understanding that states enter into the compacts voluntarily. She further asked if the courts can force a state into a compact. REPRESENTATIVE CRAWFORD replied yes, a court can force the state into a compact allowing gambling. REPRESENTATIVE MILLETT requested examples in which the courts have required the governor and the legislature to do something. REPRESENTATIVE CRAWFORD offered to provide specific examples later. MR. ALPERS related his understanding that the Connecticut Compact was the result of a lawsuit. The State of Connecticut didn't want to enter into such a compact, but was forced to by the courts. The aforementioned doesn't necessarily need to specify such in the compact as it only makes the rules for gaming. The legal history leading to the compact is separate from the compact itself. REPRESENTATIVE CRAWFORD interjected that in the case with the Coushatta Indians, the state [of Louisiana] didn't want to [allow gaming], but it was forced to do so by the court. 9:23:22 AM CO-CHAIR HERRON referred to the sponsor's document entitled "Why We Need HB 208; A Brief Legal History," which says "that a state-tribal contract must allow a particular sort of gambling if the state 'permits such gaming for any purpose by any person,  organization, or entity.'" Since Alaska prohibits Monte Carlo nights [and IGRA] includes the aforementioned language, Co-Chair Herron inquired as to what he is missing. REPRESENTATIVE CRAWFORD specified that the cruise ships allow slot machines, roulette wheels, and other gambling games, which is the loophole he wants to close. This legislation isn't addressing the onshore Monte Carlo nights as those were addressed in the 1990s. 9:24:56 AM CO-CHAIR HERRON pointed out that Alaska doesn't permit the cruise ship gambling, the state merely taxes it. REPRESENTATIVE CRAWFORD reiterated that the problem is that by taxing and acknowledging the gambling, it's implicitly permitting it. 9:25:24 AM REPRESENTATIVE HARRIS asked if the initiative was written in a manner to allow gaming in the state. REPRESENTATIVE CRAWFORD replied no. REPRESENTATIVE HARRIS inquired then as to why the initiative includes taxing gaming. REPRESENTATIVE CRAWFORD said that he didn't want to assume the motive of the initiative sponsors, but opined that they felt that the cruise ship industry was taking advantage of the state and not contributing to the extent they should be. He further opined that the initiative sponsors felt that there were a number of areas within the cruise industry that the state should tax. 9:26:57 AM REPRESENTATIVE HARRIS asked if the law was in place that prohibited for-profit gambling when the cruise ship initiative passed. REPRESENTATIVE CRAWFORD answered that the law banning Monte Carlo nights was in place when the cruise ship initiative was passed. In further response to Representative Harris, Representative Crawford said he didn't believe the cruise ship initiative specifically says that it would tax for-profit gambling on cruise ships in Alaska waters, but rather characterized it as an inadvertent loophole. 9:28:20 AM REPRESENTATIVE HARRIS surmised then that Representative Crawford was conceding that the cruise ship initiative included at least one unintended consequence. REPRESENTATIVE CRAWFORD replied yes, that's a possibility. 9:28:59 AM REPRESENTATIVE MILLETT requested that Representative Crawford provide to her the specifics of the loophole as she is still having difficulty understanding what the loophole is. REPRESENTATIVE CRAWFORD agreed to do so. He then reiterated his belief that it's not in Alaska's best interest to have for- profit gambling in the state. 9:30:23 AM CO-CHAIR MUNOZ requested additional information regarding the Connecticut example be provided to the committee. 9:30:32 AM REPRESENTATIVE HARRIS related his understanding that in Alaska there are many opportunities for people to participate legally in not-for-profit gambling so long as there's no profit to the sponsor of the games. REPRESENTATIVE CRAWFORD agreed that such exists, and said that he isn't trying to outlaw that as those are situations in which a consenting adult participates in gambling. REPRESENTATIVE HARRIS surmised then that Alaska has said it won't allow organized for-profit gambling, but hasn't prohibited gambling in situations in which folks get together for a poker game that they don't advertise and for which the sponsor of the game doesn't take a cut. REPRESENTATIVE CRAWFORD responded that he isn't advocating anything in law to prohibit non-organized gambling for which the sponsor doesn't take a cut. MR. ALPERS clarified the differences between Class 2 and Class 3 gaming, as follows. All of the regulated nonprofit gaming in Alaska falls under Class 2 gaming, such as bingo, pull tabs, etcetera. No Class 3 gaming, such as video games, table games, or slot machines, is allowed in the state except on cruise ships. He said that he wasn't sure of the specific status of poker, and thus wouldn't address it. He pointed out that there are no black jack tables or slot machines in the allowed nonprofit gaming in the state. REPRESENTATIVE CRAWFORD interjected that roulette wheels and video poker machines are outlawed in Alaska. 9:34:51 AM CO-CHAIR MUNOZ asked if the implementation of the tax has impacted the location of the gambling activity and the amount of gambling activity that occurs in state waters. REPRESENTATIVE CRAWFORD deferred to the cruise ship industry. MR. ALPERS informed the committee that the cruise ship casinos aren't open while in port, but are able to open once the vessel breaks from the port. He reminded the committee that the $6.8 million last year, including the $50 head tax, is deposited into the subaccount to the general fund (GF). He specified that the funds fund cruise-related impact projects. 9:36:12 AM CO-CHAIR MUNOZ thanked the sponsor for bringing this issue before the committee as it's an important issue. 9:36:41 AM JOHANNA BALES, Deputy Director, Tax Division, Department of Revenue, informed the committee that the Department of Revenue (DOR) doesn't believe that taxing this activity makes this type of gambling legal in the state. She related DOR has conferred with DOL as well. Ms. Bales confirmed that Class 3 gambling is illegal in Alaska. The only type of gambling allowed in the state is gambling that's for charitable purposes. However, federal law prohibits Alaska from making it illegal for cruise ships [to allow gaming]. She pointed out that there is a definition of the type of vessel that can conduct gambling in Alaska waters. Basically, the only vessels that are allowed to conduct gaming in Alaska's waters are those with a voyage that includes a stop in Canada and or another state other than Alaska and stops at two different ports in Alaska during its voyage. Still, such a vessel is not allowed to conduct within three nautical miles of any port within Alaska. The aforementioned is specified in the federal law. Ms. Bales clarified, "The only reason that these cruise ships are allowed to conduct gaming activities is because the federal law prohibits the State of Alaska from making that illegal in Alaska waters." However, gambling in Alaska and in Alaska state waters is illegal, save the aforementioned prohibition under federal law. MS. BALES then pointed out that there are various illegal activities conducted in the state and nation. For example, it's illegal to be a drug dealer in the U.S., but the income made from that activity is taxable under federal income tax law. The activity isn't made legal by virtue of it being taxed. 9:39:42 AM REPRESENTATIVE HARRIS inquired as how far out do Alaska's waters reach for taxation purposes. MS. BALES answered Alaska waters are those waters three miles from shore. In further response to Representative Harris, Ms. Bales confirmed that the legislation refers to three nautical miles from the port, which could extend any direction. 9:40:19 AM MS. BALES, in response to Representative Gardner, clarified that under the federal law the state is allowed to prohibit gaming three miles from a port. Therefore, [the vessel] could still be within the three miles in Alaska waters but three miles from a port. She further clarified that so long as the vessel is three miles away from a port along the coast, the vessel can conduct gambling activities. 9:41:49 AM JOE GELDHOF, Legal Counsel, Responsible Cruising in Alaska, began by noting that he was one of the primary authors of the cruise ship initiative. He explained that the portion of the cruise ship initiative related to taxing [gambling] can be traced back to the 1980s. At that time, the Office of the Attorney General in loose cooperation with the U.S. Department of Justice began reviewing gambling operations in Alaska territorial waters. Although there was never any formal enforcement, when the Federal Bureau of Investigation (FBI) became interested in the emerging cruise ship market that included gambling it was apparent that there were more questions than answers. He opined that the cruise industry understood the heightened interest in the gambling activities within territorial waters, and used the appropriate influence to achieve the law referenced by Ms. Bales. The aforementioned law basically prohibited Alaska from stopping [gambling activities]. The aforementioned was an unusual prohibition that raised concerns with lawyers regarding whether the federal government could prohibit the state from acting. He noted that the basic doctrine is within the Tenth Amendment. During the aforementioned discussion, former legislator Hugh Malone pointed out that the cruise industry had created a loophole that says the state can't prohibit [gambling on the cruise ships]. Mr. Malone suggested that rather than continuing with litigation, the state should tax the activity. Mr. Geldhof recalled the discussion at the time was that [gambling on cruise ships] would be taxed and the activity wouldn't be sanctioned. MR. GELDHOF then turned to the 33.3 percent taxation on cruise ship gaming was taken from existing statute for charitable gaming. He noted that it wasn't anticipated that the 33.3 percent "takes the oxygen out of any profit." According to the initiative, the taxation of cruise ship gambling has returned about $6.8 million a year. Although the cruise industry may not like the law, it does like the opportunity for its passengers to gamble. Mr. Geldhof characterized the law as a peculiar response to a unique set of circumstances. Furthermore, the law highlights that geography still matters and takes the state's fair share according to the charitable gaming statute. Mr. Geldhof explained that the taxes collected on gambling goes into the large passenger account, but those funds are unrestricted and can be spent without regard to the federal law that specifies the funds have to be spent on safety and efficiency of the passengers and the vessel. Mr. Geldhof opined that the concern should arise when one wants the cruise ship deal and requests a compact. 9:48:45 AM REPRESENTATIVE HARRIS thanked Mr. Geldhof, who he characterized as a voice of reason, for being present today. He asked Mr. Geldhof if it would be fair to say that he opposes HB 208 as it's a dramatic departure from the intent of the sponsors of the initiative. MR. GELDHOF stated that in the larger concept of the cruise ship initiative, the gambling tax was a small piece of cleanup legislation to address something that had been around since the 1980s. The initiative seemed to bring some resolution to the gambling issue, and he opined that the drafters of the initiative "got it more right than wrong." 9:50:34 AM REPRESENTATIVE MILLETT inquired as to why the gambling tax was included in the cruise vessel passenger tax initiative. She further inquired as to what the authors of the initiative were trying to gain by including the gambling tax in the initiative. MR. GELDHOF restated the history of the issue with gambling in state waters in which the cruise industry ultimately trumped the state's law that gambling in Alaska is not legal with a federal statute that prevented Alaska from saying that gambling in state waters is illegal. In response to the aforementioned and rather than going through litigation, it was determined to be necessary to tax what the state still believes to be illegal activity. The levy rate was set at 33.3 percent, the charitable gaming provision. The thought, he opined, was that if gaming is going on in Alaska [waters] and the state can't prevent it, then the state should receive the same percentage as it would from charitable gaming. 9:52:52 AM REPRESENTATIVE MILLETT asked if Mr. Geldhof believes this taxation of cruise ship gambling is grounds to open up to Class 3 gaming in Alaska. MR. GELDHOF said that upon reviewing the federal and the state law, there's no easy deal to get because at best one would have to operate a large passenger vessel in foreign carriage that has a port outside. Mr. Geldhof opined that in Alaska there's no opportunity to do what is done in Louisiana or Indiana with near-shore gambling. Furthermore, Mr. Geldhof pointed out that the gambling revenue for the cruise industry is incidental and a full-blown seasonal business can't be built on such revenue. 9:55:18 AM REPRESENTATIVE GARDNER recalled Mr. Geldhof saying that if a lawsuit is brought on the grounds that the sponsor fears, the state could address it by removing the gambling tax. She asked if it would be too late at that point. MR. GELDHOF answered that he didn't believe so. At the point, someone comes forward to leverage the state and the governor desires a compact, that's when a working group would likely come together and one of the options would likely be to remove the tax. 9:57:45 AM MR. GELDHOF, in response to Representative Crawford, acknowledged that there is a scenario in which someone wants the gambling deal and a compact is signed. He further acknowledged that in the course of the compact, the party could agree to the terms. However, the likelihood of the aforementioned seems to be very remote. He opined that his experience is that whatever the scenario, it will require deliberation and will move slowly. 10:00:11 AM CO-CHAIR MUNOZ announced that HB 208 would be held over. 10:00:38 AM CO-CHAIR HERRON surmised that basically Alaska's law, due to the initiative, is a fairly high hurdle, particularly for someone who is in business to make a profit. Therefore, he questioned whether the tax is appropriate to keep on the books. MR. GELDHOF opined that the real issue for the legislature is obtaining funds from taxing gambling while not allowing gambling besides in a very peculiar fashion. "The real challenge here," he opined, "is spending the $6.8 [million] or whatever the yield is for the benefit of our state in a thoughtful way." [HB 208 was held over.]