HOUSE FINANCE COMMITTEE February 26, 1997 1:58 P.M. TAPE HFC 97-42, Side 1, #000 - end. TAPE HFC 97-42, Side 2, #000 - end. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:58 p.m. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Representative Norman Rokeberg; Representative Con Bunde; Robert Bartholomew, Assistant Director, Income and Excise Audit Division, Department of Revenue. SUMMARY HB 1 "An Act relating to taxes on cigarettes and tobacco products; and providing for an effective date." CSHB 1 (FIN) was reported out of Committee with a "do not pass" recommendation and with a fiscal impact note by the Department of Revenue. HB 51 "An Act relating to the Department of Environmental Conservation." HB 51 was HELD in Committee for further consideration. HOUSE BILL NO. 51 "An Act relating to the Department of Environmental Conservation." Representative Davies provided members with a package of 1 amendments for HB 51 (copy on file). Representative Davies MOVED to adopt Amendment 13. Representative Mulder OBJECTED. Amendment 13 would delete the existing language on page 4, line 24 through page 5, line 2 and insert new language. Representative Davies explained that Amendment 13 would set in place a new set of conditions. Amendment 13 defines the terms; water quality criteria, standards, natural conditions, and background condition. He stated that the definitions were taken from a letter by Michelle Brown, Commissioner, Department of Environmental Conservation. He maintained that definitions of these terms are inconsistent in the bill. "Water quality criteria" are defined as scientific information regarding the maximum concentrations of specific chemicals or other pollutants in water which are consistent with the protection of aquatic life or human health. "Natural condition" would mean the condition of a water body before human impact. He noted that the State adopts criteria used by the Environmental Protection Agency. He maintained that the State does not have the scientific apparatus to perform the research necessary to establish criteria independently. He explained that the definitions in Amendment 13 provide the basis for other amendments. Representative Davies noted that Amendment 13 was not reviewed by the Legal Services Division, Legislative Affairs Agency. Co-Chair Hanley asked the rationale of including "legally enforceable state-established requirements" in the definition of "standards". Representative Davies noted that the language was used by the Department of Environmental Conservation. Representative Davies pointed out that a "standard" is something that is legally enforceable. Co- Chair Hanley noted that "standards" are state-established requirements. He questioned if "legally enforceable" is necessary under law. Representative Rokeberg objected to Amendment 13. He observed that he had not had sufficient time to review the amendments. Discussion ensued regarding further review of the amendments. Representative Grussendorf suggested that the legislation be reviewed in subcommittee. Representative Rokeberg urged Committee action. Representative Mulder requested review by the Legal Services Agency. Representative Rokeberg noted that Amendment 13 is conceptual. He suggested the amendment may have drafting problems. Co-Chair Therriault observed that members would like time to further review the proposed amendments. HB 51 was HELD in Committee for further consideration. 2 HOUSE BILL NO. 1 "An Act relating to taxes on cigarettes and tobacco products; and providing for an effective date." Co-Chair Therriault provided members with a letter from the Department of Revenue dated 2/26/97 (copy on file). He observed that nicotine gum or patches would not be subject to the tobacco tax. Co-Chair Therriault MOVED to adopt Amendment 1 (copy on file). He explained that the intention of the amendment is to prevent someone from stocking cigarettes prior to the tax increase and then selling them, after implementation, with the addition of the tax. Representative Grussendorf noted concerns that wholesalers' present floor stock will be taxed. He observed that wholesalers will have to pay tax to the State on their current floor stock. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE explained that the effective date is October 1, 1997. He observed that cigarettes have a fairly short shelf-life. The tax is paid 30 days after the liability becomes due. Taxes are paid in February for purchases in January. He pointed out that cigarettes will be sold at the higher price after the effective date. He maintained that the amendment would prevent wholesalers from inappropriately profiting from the sale of cigarettes at a higher price if the tax was not paid. He acknowledged that people with a large stock pile could undersell their competitors. In response to a question by Representative Martin, Mr. Bartholomew explained that the tax is liable upon distribution. It is possible to pay the tax before distribution. He observed that the collection process does not change. Representative Moses clarified that the tax is handled by the wholesalers. Representative Davies observed that, by statute, the tax is due at the end of the month following the month that it was incurred. He asked if a transitional provision would solve the cash follow problem. Mr. Bartholomew suggested that private financing may be instituted for a deferred payment. Co-Chair Therriault noted that the legislation empowers the 3 Department of Revenue to implement the statute. He suggested that the Department could handle the transition through regulations. In response to a question by Representative Kelly, Mr. Bartholomew noted that the wholesalers contacted by the Department indicated that they take delivery on cigarettes once or twice a week. Wholesalers must pay for delivers they receive in as little as seven days. Representative Kelly maintained that the retailers would implement an increase greater than $1 dollar. Mr. Bartholomew noted that there are fixed costs at the wholesale level. He argued that retailers should not have to raise the price beyond $1 dollar. Representative Kelly stressed that the profit margin would decreased. Discussion ensued regarding the potential profit margin. Mr. Bartholomew emphasized that buying levels will reflect demand. Representative Kelly reiterated his belief that the incremental increase to the consumer will be higher than $1 dollar. Representative Moses stated that merchants would not be interested in trading dollars. He agreed that merchants will add a profit margin to the dollar. He observed that cigarettes have a low profit margin. He asked if the tax will be refunded if a merchant goes out of business. Mr. Bartholomew questioned if the merchant would sell out his inventory. Representative Moses asked if there is a method to separate inventories. He observed that some inventory would have been assessed the old tax and some the new. Mr. Bartholomew replied that some states utilize a state stamp. Alaska does not have a state stamp at this time. Co-Chair Hanley noted that returns must be filed by the last day of the month following the month in which the product is received and the tax must be remitted at that time. Mr. Bartholomew replied that the there are wholesalers that file their return but only pay half of their tax. He emphasized that the Department does not shut them down the first day that the tax is overdue. He observed that there are penalties and interest. The Department has not offered a deferred payment plan. (Tape Change, HFC 97-42, Side 2) Mr. Bartholomew stated that some distributors pay the tax the day the product is received and others wait until the product is distributed. Co-Chair Hanley pointed out that the tax is applied to the sale. He summarized that they 4 cannot sell cigarettes cheaper because they would have to pay the tax. He referred to AS 43.50.080 (a) and (b). He maintained that the tax is assessed at the time of the sale. Mr. Bartholomew stated that the problem occurs when wholesalers are related to retailers. He observed that an amendment may be needed on the retail level to affect stockpiling. Cases could be distributed on September 29, 1997 to retailers that would not have to pay or charge the tax. Mr. Bartholomew stated that he would confer with operations personnel that collect the tax. Co-Chair Therriault WITHDREW Amendment 1. Co-Chair Therriault MOVED to adopt Amendment 2 (copy on file). Representative Mulder OBJECTED. Co-Chair Therriault observed that the percentage deducted by wholesalers for administrating the tax is not changed by the legislation. Wholesalers who filed with the Department in FY 97 retained $150 thousand dollars. If the provision is not changed the same individuals would receive approximately $550 thousand dollars. Representative Mulder asked if the cost of administrating the tax is affected. Mr. Bartholomew observed that the mechanics of filing a return and processing the paperwork will not change. Representative Mulder stressed that it is difficult to ascertain the affect to wholesalers. Co-Chair Hanley noted that the amendment assumes that the $1 dollar increase will not change. He observed that if the tax amount changed then the ratio would need to be adjusted. In response to a question by Co-Chair Hanley, Mr. Bartholomew observed that the tobacco tax was last changed in 1989. The 1 percent deduction did not change at that time. He noted that inflation has gone up. Representative Davies expressed concern that there may be some additional cost to the wholesaler. Co-Chair Therriault observed that the mechanics would remain the same. Co-Chair Hanley asserted that there will be additional insurance and bonding costs. Representative Davies MOVED to AMEND Amendment 2, delete "three-tens" and insert "four-tenths." There being NO OBJECTION, it was so ordered. Representative Mulder stressed that it is presumptuous to assume that the Committee knows what business practices and unintended side effects will occur. Co-Chair Therriault spoke in support of the amendment. He did not think that the cost of administrating the tax would increase five-fold. 5 Representative Moses noted that a Seattle wholesaler would not have to pay the tax until the tobacco products are shipped to Alaska. A roll call vote was taken on the MOTION to adopt Amendment 2 as amended. IN FAVOR: Moses, Davies, Grussendorf, Foster, Therriault, Hanley OPPOSED: Mulder, Davis, Kelly, Kohring, Martin The MOTION PASSED (6-5). Co-Chair Therriault MOVED to adopt Amendment 3 (copy on file). He explained that Amendment 3 would remove the automatic escalator and reduce the tax increase to $.71 percent. He expressed concern with inclusion of escalators. He maintained that the issue should be reviewed by the Legislature on a periodic basis. He observed that the Legislature can review the tax at anytime. He referred to concerns that an increase would trigger the flash point on contraband sales. Representative Mulder OBJECTED for purposes of discussion. In response to a question by Representative Mulder, Mr. Bartholomew discussed the mill rate. A mill is a tenth of a cent per cigarette. He explained that 38 mills equates to 3.8 cents per cigarette. There are 20 cigarettes in a pack. Co-Chair Therriault explained that section 2(a) and (b) would only apply if the severability clause comes into effect. Representative Davies explained that the 2.5 mills would be subtracted from the 38 mills to get to $.71 cents on a pack. Representative Bunde acknowledged Co-Chair Therriault's philosophical concern regarding escalators. He spoke in support of retaining the $1 dollar a pack tax. He emphasized that lowering the tax will lower the economic barrier for prevention. He stressed that adults that choose to smoke collectively cost the State a great deal of money in health care expenses. He asserted that by lowering the tax, the tax on the rest of the citizens that have to pay for the health care costs will be greater. He spoke against the amendment. He emphasized that those that oppose the tax will not be made more comfortable by lowering the tax. He maintained that the potential effectiveness will be decreased by lowering the amount. Representative Mulder asked why a $1 dollar increase was chosen. Representative Bunde agreed that if all the medical expenses were to be captured the tax would have to be 6 higher. He stressed that "the longest journey begins at a single step." He acknowledged that compromise is necessary to achieve the goal. He emphasized that the public is comfortable with a $1 dollar increase. In response to a question by Representative Davis, Representative Bunde stated that he did not have other taxes in mind. Representative Grussendorf spoke in support of eliminating the escalator. In response to a comments by Representative Mulder, Mr. Bartholomew agreed that a $1 dollar increase would mean that Alaska would have the highest tobacco tax in the United States. The next highest state would be Washington with a tax of 82.5 cents. Maine has legislation pending that would raise their tobacco tax to $1 dollar. Representative Mulder summarized that the current Alaskan tobacco tax rate would be tripled. Representative Davies stated that there would be a 43 percent increase in total price. Mr. Bartholomew observed that for every 10 percent increase in price there would be a 4.2 percent decrease in consumption. An increase of $1 dollar would result in a decrease in consumption of approximately 18 percent. A $.72 cent increase would result in a decrease in consumption of approximately 12 percent. Representative Davies noted that instead of a decrease of 18 kids in a 100, there would be 12 out of 100 fewer kids smoking. Representative Davies MOVED to AMEND Amendment 3 to raise the tax back to $1 dollar a pack (page 1, line 4 insert 52.5 mills and page 1, line 20 62 mills.) He clarified that the tax will remain and the escalator would be removed. Representative Mulder OBJECTED. A roll call vote was taken on the MOTION. IN FAVOR: Davies, Grussendorf, Kelly OPPOSED: Mulder, Davis, Foster, Kohring, Martin, Moses, Hanley, Therriault The MOTION FAILED (3-8). A roll call vote was taken on the main MOTION to adopt Amendment 3. Representative Therriault explained that the escalator would be removed and the tax lowered to $.71 cents. Representative Kohring spoke against any additional taxes. IN FAVOR: Foster, Moses, Mulder, Therriault, Hanley OPPOSED: Davies, Davis, Grussendorf, Kelly, Kohring, Martin 7 The MOTION FAILED (5-6). Representative Davies WITHDREW Amendment 4. Co-Chair Therriault MOVED to adopt Amendment 5 (copy on file). He explained that the amendment would retain the $1 dollar tax and remove the escalators. Representative Mulder OBJECTED. A roll call vote was taken on the MOTION. IN FAVOR: Davies, Davis, Grussendorf, Hanley, Therriault OPPOSED: Foster, Kelly, Kohring, Martin, Moses, Mulder The MOTION FAILED (5-6). Co-Chair Therriault MOVED to adopt Amendment 6 (copy on file). He explained that Amendment 6 would reduce the tax to $.71 cents. The escalator would remain. Representative Davis OBJECTED. A roll call vote was taken on the MOTION. IN FAVOR: Foster, Grussendorf, Davies, Therriault, Hanley OPPOSED: Davis, Kelly, Kohring, Martin, Moses, Mulder The MOTION FAILED (5-6). Co-Chair Hanley MOVED to report CSHB 1 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Kohring OBJECTED. He spoke in opposition to the legislation. He asserted that it is not clear that a majority of his constituents support the bill. He maintained that the bill would tax an illegal activity. He was not convinced that an increase in the tax would result in a decrease in the use of tobacco products by teens. He suggested that there are alternatives in lieu of taxes. He suggested that advertising could be restricted, driver's licenses of kids that are caught using tobacco products could be revoked or they could loose their permanent fund dividends. He maintained that the tax is dictating social behavior. Representative Kohring WITHDREW his OBJECTION. There being NO OBJECTION to MOVE CSHB 1 (FIN), it was so ordered. CSHB 1 (FIN) was reported out of Committee with a "do not pass" recommendation and with a fiscal impact note by the Department of Revenue. ADJOURNMENT The meeting adjourned at 3:37 p.m. 8