HOUSE BILL NO. 1 "An Act relating to taxes on cigarettes and tobacco products; and providing for an effective date." REPRESENTATIVE CON BUNDE, SPONSOR testified in support of HB 1. He maintained that the tobacco tax increase will serve as an economic barrier in the prevention of young people from smoking. He emphasized that nicotine is a highly addictive drug. Testimony in previous committees indicated that tobacco is more addictive than alcohol and cocaine. He maintained that the only way young people can be protected from the ravages of nicotine is to encourage them to not begin smoking. Representative Bunde described HB 1 as user fee legislation. He observed the state cost associated with tobacco related health care. He estimated that tobacco related health care costs state residents $360 dollars per person per year. (Tape Change, HFC 97-38, Side 1) Representative Bunde emphasized that HB 1 responds to the demands of the majority of residents. Every poll that he reviewed showed that 60 to 75 percent of Alaskan residents support the tax. Representative Bunde discussed the impacts of cigarette smoking. He asked members to imagine a head on crash of two fully loaded 747 airplanes. He maintained that the national deaths contributed to tobacco use is equal to a crash of this magnitude every day. Representative Bunde recounted that his mother started smoking when she was 16 years old. At that time, smoking was promoted by doctors. It was considered patriotic to smoke. His mother died at 55 from a tobacco related condition. Representative Bunde recalled testimony by a parent in a previous committee. The parent suggested that a four pronged approach is needed. He agreed with the parent's remarks and summarized them for the Committee: Parents must do their job as role models; schools must continue to work with children; laws must be enforced; and HB 1 should be 7 passed to increase the tobacco tax. He observed that the nicotine industry needs to recruit new addicts because the old ones have a habit of dying. He emphasized that enforcement costs money. He acknowledged that Eastern Canada had a huge crime problem when they increased their tobacco tax. He suggested that the proximity to New York City may have influenced the Canadian problem. He noted that there was not a huge crime problem in Western Canada. He observed that there is concern regarding Indian country. He emphasized that smuggling will not occur between the United States and Canada because cigarettes cost more in Canada. He stated that it is hard for him to imagine people going to Igiugig or Fort Yukon to buy cigarettes. He said it was unfair to assume that rural residents would become black marketeers. Representative Bunde referred to smokeless tobacco. He maintained that smokeless tobacco is one of the most abused drugs in rural communities, with kids as young as 5 and 6 years of age consuming. He did not think that smokeless tobacco should be exempt from any attempt to create an economic barrier. He acknowledged that the health impact from cigar use is only one-third that of cigarettes. He stressed that an exception for cigars would allow the industry to create a cigar that for all intent and purpose would be the same as a cigarette. Representative Bunde expressed concern for small specialty shops. He noted that mail order businesses could have an unfair advantage over local businesses. He stated that this concern should be addressed in legislation. He maintained that no mail order business should have an advantage over a local business. Representative Bunde discussed the social and economic consequence of tobacco use. He maintained that the health care expenditure for tobacco related illnesses costs all Alaskans a great deal of money. He referred to arguments that a tax on tobacco would lead to a tax on sugar or other unhealthy food. He stressed that tobacco is the only product, when used exactly as prescribed, is guaranteed to cause health problems. Representative Bunde countered arguments that the tobacco tax will not work by pointing to lobbying efforts by the tobacco industry. He maintained that the industry is fighting for its right to make a profit. He maintained that profit should not come at the expense of the citizens of the State of Alaska. In response to a question by Representative Mulder, Representative Bunde stated that he has introduced another 8 bill that would restrict youth access. The legislation was originally introduced to comply with federal law. He suggested that the penalties for people who illegally sell tobacco should be raised. He noted that an Anchorage study demonstrated that attempts by underage children to buy tobacco products were successful 60 percent of the time. Representative Mulder spoke in support of greater enforcement. He observed that there is a built in escalator. Representative Bunde clarified that the tax will increase $.24 cents every three years, in an attempt to address inflation. Representative Bunde discussed the enforcement problem. He recounted concerns by a mother whose 15 year old son bought chewing tobacco at a Quick Stop. After contacting the police, she was informed that they store could not be prosecuted because police did not witness the purchase. She offered to send her younger son and video his purchase. Police told her that her son would be liable for a charge of possession and she would be liable for contributing to the delinquency of a minor. He maintained that enforcement alone would not work. Representative Mulder spoke in support of controlled access. He clarified that there are no other taxes with built in escalators. In response to a question by Representative Davies, Representative Bunde discussed revenues. He observed that revenues from the sale of cigarettes would be dedicated to the School Construction and Maintenance Fund. Taxes from other tobacco products will enter the General Fund. He explained that a severability clause is contained if the dedicated portion is found to be unconstitutional. If the severability clause is activated the tax revenues will be deposited into the General Fund. Representative Therriault expressed concern with the escalator provisions. He expressed a preference for legislative control over the level of taxation. Co-Chair Hanley noted that under current law, 2.5 mills are dedicated to the School Construction and Maintenance Fund and 12 mills are deposited into the General Fund. The legislation will increase the dedicated portion to 52.5 mills. If the dedication is found to be unconstitutional the legisltion will increase the general fund portion to 62 mills. Representative Davies summarized that, in current statute, there is a 25 percent tax on the wholesale price of tobacco 9 products. Representative Bunde clarified that the legislation provides an Anchorage CPI escalator on the total tax. He added that the escalator is an attempt to acknowledge the reality of inflation. He observed that the Legislature has worked on the issue for the past two years. He agreed that the Legislature should be involved. Co-Chair Therriault noted that there is a national debate regarding the inflation assumptions contained in the CPI. He maintained that major spending and taxation programs should not be on an autopilot mechanism. Representative Moses observed that vessels departing from Washington State have access to tax free cigarettes. Representative Bunde pointed out that they are not available for resale. Representative Martin recounted concerns by a citizen that the high cost of tobacco will increase the use of marijuana. Representative Bunde observed that statistics show that the number one gateway drug used by all addicts is tobacco. Representative Bunde stressed that drugs should not be legalized because of enforcement problems. Representative Martin maintained that smoking is one of the few things that poor people can enjoy. He suggested that permanent fund dividends should be withheld from minors that smoke illegally. Representative Bunde clarified that the intent is to prevent children from smoking. He stressed that poor people also die from cancer. He observed that tobacco related health problems account for $21 to $25 million dollars of the Medicaid budget. He emphasized that the tax is voluntary. "No one has to pay it, all they have to do is not smoke." ROD STAMLER, FORENSIC INVESTIGATIVE ASSOCIATES (FIA) discussed his credentials. Mr. Stamler worked for the Royal Canadian Mounted Police and headed the drug enforcement program. He is a consultant to the United Nations. Forensic Investigative Associates investigates smuggling and organized crime. He maintained that if government restricts or increases the price of any product to the point where the public want a cheaper price there is a consensual crime. He maintained that if the public is willing to pay the price for illicit drugs, there will be a supplier and money made. Mr. Stamler observed that his organization has carried out studies demonstrating that if the public wants a product at a certain price that organized crime and enterprising people will get involved in delivering those products. Mr. Stamler outlined findings from studies his organization has conducted regarding illicit sales. He maintained that a 10 serious situation occurs when approximately 30 percent of the market is contraband. He alleged that studies by anti- smoking groups do not measure some of the contraband market. He noted that legal sales were reduced in Michigan by 30 percent. His study showed that 22 percent of that market was from contraband sales. He maintained that in this kind of situation a parallel illegal market comes into place. He stated that the issue is the profit on a contraband carton of cigarettes. Mr. Stamler discussed potential profit in illegal sales. He stressed that containers of generic cigarettes can be purchased in Seattle at $300 dollars a case. There are 50 cartons in a case. The total cost would be $7 to $8 dollars a carton. There is a profit margin of $17 dollars a carton. He observed that the product is light and easy to handle. He alleged that there are sophisticated international organizations that are involved in the distributions of illegal cigarettes. He reiterated that vessels can deliver cigarettes. He maintained that street gangs will be involved. Mr. Stamler stated that cigarettes were distributed in schools by dealers in Canada. He maintained that the same type of distribution system, as is in place for marijuana, will become involved. Mr. Stamler observed that those that have special status have the potential for involvement. He noted that 80 percent of contraband cigarettes in Michigan come through Indian reservations in the Northern United States. Mr. Stamler maintained that store owners will be forced to participate in the contraband market or lose profits. He added that money from the sale of illegal cigarettes will have to be laundered. He asserted that corruption will occur in Alaska if the tax is approved. Representative Davies ascertained that Mr. Stamler is funded by the National Coalition Against Crime and Tobacco Contraband. He observed that the Coalition is composed of people and organizations that benefit from the distribution of tobacco. The Coalition also funded the studies referred to by Mr. Stamler and his travel to Alaska. Co-Chair Hanley asked what level of taxation could occur without a significant increase in smuggling. Mr. Stamler stated that the "flash point" would occur at approximately $.36 to $.38 a package. He suggested that another $.05 or $.06 cents could be added on to the flash point due to Alaska's location. He estimated that the flash point would be approximately $.40 cents. 11 In response to a question by Representative Mulder, Mr. Stamler noted that Canada raised the tobacco tax by 122 percent. A tax of approximately $18 dollars was added to a carton of cigarettes in Canada. He noted that Canadian cigarettes are made from Virginia tobacco. Representative Martin asked if there has been an increase in sales at military bases. (Tape Change, HFC 97-39, Side 1) Representative Martin suggested that military personnel may purchase a greater percentage of their cigarettes on base to save money. He emphasized that this could affect tax revenues. Representative Martin pointed out that Mr. Stamler's organization works on other issues. Mr. Stamler stressed that his organization performs forensic work in a wide range of areas. Discussion ensued regarding the cost of purchasing cigarettes in Washington for shipment to Alaska. Cartons of generic cigarettes could be purchased for as little as $3 dollars. There are 10 packages in a carton. Representative Davies noted that there is already a $2 dollar per pack differential on generic cigarettes. He asked if the existing $2 dollar differential a pack has created underground sales. Mr. Stamler observed that if the public is satisfied with the current price of cigarettes that the average person will not turn to a contraband market. He emphasized that it is "the straw that breaks the camels back." He noted that generic cigarettes do not satisfy every smoker. Representative Kelly summarized that the additional tax would be $500 dollars per case. There are approximately 860 cases per container. A container could result in an extra profit of approximately $40 thousand dollars. ELMER LINDSTROM, SPECIAL ASSISTANT, DEPARTMENT OF HEALTH AND SOCIAL SERVICES shared an advertisement from the 1940's to demonstrate change in public view of tobacco use. The advertisement stressed the use of tobacco by doctors. PATRICIA CARR, DIVISION OF PUBLIC HEALTH, DEPARTMENT OF HEALTH AND SOCIAL SERVICES testified in support of HB 1. She noted that: * Tobacco usage is the number one cause of preventable death and disease in the US, 12 accounting for more than 419,000 deaths each year; and * 23% of deaths of Alaskans 35 years of age or older in 1991 were attributable to smoking. Ms. Carr observed that there were 418,690 thousand deaths contributed to cigarette smoking in the United States. There were 1,416 thousand deaths contributed to cigarette smoking in Alaska. In both cases there were more deaths contributed to cigarettes smoking than from fires, illegal drugs, homicides, Aids, suicides, motor vehicle accidents, and alcohol combined. She also stated that: * 83% of adult smokers report that they started smoking before the age of 20; * 21% of Alaskan high school students reported they regularly smoked in the last month; * 25% of Alaskan middle school students reported smoking at least one cigarette in the last month; * 64% of Alaska tobacco merchants complied with tobacco restriction laws in 1996; * The federal government mandates an 80% compliance rate by the year 2000 under the Synar Amendment; * Tobacco vendors refused to sell to 14-15 year olds 71% of the time, while 16-17 year olds were refused 58% of the time; * Today Alaska Natives have some of the highest rates of tobacco use in the world, 47% for men and 39% for women; * Alaska Natives account for 23 % of smoking related deaths while they account for 17 % of the State's population; * Alaska Natives have the highest cancer mortality rate of any Indian Health Service Area; * The lung cancer death rate among AK Native women is three times the national average; * Tobacco use among Alaska Native youth is higher that non-native youth; * 41% of Alaska Native boys and 32% of Alaska Native girls were using smokeless tobacco weekly; 13 * Among the boys, 45% started using tobacco before the age of 8; * Total direct medical costs for smoking related illnesses for Alaskans aged 35 years or older in 1993 was $96.5 million; * $23 million of the direct medical care costs for smoking related illness was paid by Medicaid in Alaska; * Meanwhile, the state collected only $15.6 million in cigarette tax revenues in 1993 (excludes taxes on smokeless tobacco); * The state of Alaska has taxed tobacco since territorial days, when a 5 cents per pack tax was levied on cigarettes to help fund school construction; * The current tax level of 29 cents per pack has been in place since 1989; * In 1989 Alaska ranked 17th among the 50 states and District of Columbia on the amount of tobacco tax levied; * Currently Alaska is ranked 28th among the states on tobacco taxes levied; * For every 10% increase in tobacco prices, youth tobacco consumption will fall by at least 10%; * For every 10% increase in tobacco prices, general consumption will fall by 4%; * At current adult smoking rates, approximately 18,000 of Alaskans currently under the age of 18 will die prematurely of a tobacco related illness; * A $1.00 per pack tax increase would reduce youth smoking in Alaska by an estimated 32%; and * The tobacco tax would prevent 5,700 premature deaths among Alaskans currently under the age of 18. Ms. Carr maintained that the groundwork is in place and that there is broad public support. She noted that 75% of Alaskans surveyed support the $1.00 per pack tax. This 14 included: 75% of conservatives, 75% of moderates, 73% of liberals and 55% of smokers. Ms. Carr observed that the tax is also supported by: C. Everett Koop, MD., former Surgeon General, 280 individuals and over 50 organizations that make up the Alaska Tobacco Control Alliance including: the Alaska Native Health Board, the American Cancer Society, and the American Heart Association. Ms. Carr referred to the Alaska Medicine Journal, Volume 38, Number 1 (copy on file). She noted that studies show a substantial drop in youth and adult consumption in Canada. Representative Martin pointed out that millions of dollars are spent by the federal government to subsidize the tobacco industry. Ms. Carr emphasized that a multi-faceted effort is needed to address tobacco use. Representative Martin expressed opposition to additional taxes. In response to a question by Representative Martin, Ms. Carr observed that eduction alone has not been a substantial deterrent to use of tobacco by children. She emphasized that tobacco is an addictive substance. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE discussed the Department's fiscal note. He observed that the fiscal note is based on an additional $1 dollar a pack tax. The fiscal note estimates that the combined revenue to the State would be approximately $43 million dollars in the first full year of the tax. This assumes an 18 percent drop in consumption. He referred to a report entitled, "Estimated Revenue Affects of a Proposed $1 Dollar per Pack Increase in the Cigarette Tax Rate in Alaska" prepared by Barents Group LLC of KPNG Peat Marwick LLP, for the Alaska Cabaret, Hotel, Restaurant and Retailers Association, dated 2/13/97 (copy on file). He observed that the report has errors. The Department of Revenue contacted the firm that produced the report. The firm acknowledged that their results, which were based on figures from industry sources, were dramatically overstated. The updated report assumes that consumption of cigarettes in the State of Alaska will drop by 49 percent in the next 5 years. The Department of Revenue has based its assumption on findings by the Surgeon General. The report assumes that there will be a loss in state and local revenues due to a 49 percent reduction in consumption. Mr. Bartholomew discussed potential sales on military installations. He noted that the report, "Impact of Alaska Cigarette Tax" (copy on file), distributed by the National 15 Coalition Against Crime and Tobacco Contraband asserts that 45 percent of all sales in Alaska are on military bases. The Department of Revenue contacted military officials to verify this assumption. He stressed that the information provided by the military indicates that sales on military installations represent 7.5 percent of the total cigarette sales in Alaska. The number of Alaskans with privileges to make purchases at military installations represent 9.7 percent of the State's total population. Military officials have indicated their willingness to work with the State regarding the prevention of illegal sales. He observed that military officials have stated that they have rules and regulations in place for the appropriate sale of commodities on base. Discussion ensued regarding the ratio of sales on bases in relationship to the percentage of military in the State. Mr. Bartholomew stressed that the Department is not aware of illegal sales on military installations. Representative Davies asked if there is a limit on the purchase of cigarettes on military installations. Mr. Bartholomew clarified that there is no cap on purchases on military installations in Alaska. A cap was placed on tobacco sales on military installations in Hawaii when that state raised it's tobacco tax. Co-Chair Therriault observed that as the tax increases the person selling the product would continue to deduct the same percentage of the tax for administrative purposes. Mr. Bartholomew recommended that the percentage of the tax deducted to cover the cost of filing with the Department of Revenue be lowered. Wholesalers who filed with the Department in FY 97 retained $150 thousand dollars to cover their costs. If the provision is not changed the same individuals would receive approximately $550 thousand dollars. In response to a question by Representative Davies, Mr. Bartholomew noted that the Supreme Court ruled that a state sales tax cannot be placed on a company that does not have a presence in the State. He observed that one interpretation to the cigarette tax is that the person receiving the product in the State would be responsible for the tax. He acknowledged that it would be difficult to enforce this interpretation. There have been several court cases that have precluded implementation of a sales tax on mail order purchases. # ADJOURNMENT The meeting adjourned at 3:53 p.m. 16