Legislature(2017 - 2018)BELTZ 105 (TSBldg)
04/26/2017 09:00 AM Senate LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HB 115-INCOME TAX; PFD PAYMENT/CREDIT;
9:03:28 AM
CHAIR COSTELLO announced the consideration of HB 115, and
advised her office was accepting written testimony on the income
tax bill.
She welcomed Mr. Walczak from the Tax Foundation.
9:05:10 AM
JARED WALCZAK, Policy Analyst, Tax Foundation (TF), Washington,
D.C., said HB 115 seeks to resolve the important issues of the
budget shortfall, but it's a challenge because the state relies
on a single industry for most of its revenue.
9:06:18 AM
SENATOR STEVENS asked Mr. Walczak to introduce himself and who
he works for, so the committee understands his potential bias.
MR. WALCZAK stated that he represents the Tax Foundation, a
nonpartisan, nonprofit tax policy organization based in
Washington, D.C. They work with the principles that taxes should
be simple, transparent, and pro-growth. Taxes should also be
applied in as neutral a manner as possible. As a tax policy
organization, TF tries to steer clear of questions about whether
a state needs additional revenue and what the optimal level of
tax revenue may be. He said his interest is tax structure and
the implications of imposing an income tax versus a sales tax
versus the current situation of no tax. He looks at behavioral
responses and what is optimal in a tax code. Being a nonprofit,
TF receives contributions from both family and charitable
foundations, corporations, and individuals.
9:09:09 AM
SENATOR HUGHES asked if he prepared his comments after he had
looked at the overall budget, the per capita spending, how
Alaska compares to other states, the state's savings, and the
Senate's goals to reduce the budget deficit.
MR. WALCZAK said he'd go into that in more detail later in the
presentation but Alaska does have the highest expenditures per
capita of any state in the nation. Some of that can be explained
by Alaska's unique characteristics. Other states can take
advantage of economies of scale that are more difficult in a
large, dispersed geographic region like Alaska. Providing
education and basic services in Alaska can be expected to be
more expensive on a per capita basis.
He said he does believe that Alaska has been on a glide path
where expenditures were not controlled as strictly as they would
have been in other states. Because revenue was so readily
available, the pros and cons of different spending programs
probably were not scrutinized as much as they might have been.
The individual income tax was repealed because it was
essentially deemed unnecessary once oil started to flow through
the pipeline. At the peak in FY2014, state and local per capita
spending was $19,357 compared to about $8,700 nationwide. This
is something to take seriously within the context and perhaps
before any consideration of broad-based tax changes, he said.
CHAIR COSTELLO asked him to proceed with the slide presentation.
9:13:00 AM
MR. WALCZAK said everyone realizes that the budget shortfall is
related to the degree of reliance on a single industry. Mining
and minerals represent about 18 percent of the gross domestic
product (GDP) and, at peak, oil and gas taxes were responsible
for as much as 72 percent of all state revenue. He said Alaska
also has a severance tax that is based on the operator's net
income, which is unique and potentially volatile. He highlighted
that the oil related revenue in 2017 is estimated to be about $1
billion, whereas it was $7.4 billion in 2014. He said Texas,
North Dakota, and Louisiana have also experienced shortfalls,
but not the scope of what we're seeing in Alaska. He said one
answer to the problem of relying on a single industry for the
overall revenue picture is to adopt a new broad-based individual
income tax. The difficult question is whether that is the right
answer. He said he believes that most people would say that the
current tax structure is too volatile, but many other questions
need answers too. These generally relate to price forecasts,
estimated revenue needs, the tax structure and duration, the
role of the state's traditional revenue sources, and expenditure
reform.
9:16:45 AM
MR. WALCZAK said he wanted to talk about what constitutes
optimal tax design to help inform the general understanding of
how a tax code is developed. One principle is to develop a tax
code that distorts economic choices to the least extent
possible. The goal is that the code is not picking winners and
losers. It's as neutral as possible so people base their market
decisions on their own assessments of relative value and worth
rather than on tax arbitrage or tax avoidance. He said there's
also a broad principle that the optimal tax on intermediate
goods is always zero.
9:18:09 AM
SENATOR GARDNER asked if he agrees that tax incentives distort
economic choices.
MR. WALCZAK said absolutely, and the amount of distortion varies
based on the incentive and how it functions. An incentive that
is available to many firms in the market operates more like
simply having a lower overall rate, whereas one that is very
narrowly construed to benefit one industry or economic activity
is going to establish a set of winners and losers. That would be
economically distortive and sub-optimal.
He said there is widespread agreement in the public finance
world that incentives are sub-optimal, but it's hard for states
to opt out when they see themselves in a competition. He opined
that the best economic development policy a state can adopt is
to have a broader base and a lower rate. He cited the extreme
example of North Carolina that extensively carved out incentives
for agricultural and textile manufacturing industries. The
state's economy changed over time, but it was still hard for
other businesses to come in and compete. It demonstrates that
it's increasingly difficult to pick winners and losers,
particularly as the economy changes over time, he said.
SENATOR COSTELLO asked if he had any experience with people
deciding to leave a state based on tax policy. She related that
the committee heard extensive testimony to that effect last
night. She asked if these are the things that a military family
considers when they decide where to retire.
MR. WALCZAK said that is relevant, but in Alaska it may be
difficult to get a handle on the significance. People do make
decisions on location based to some degree on taxes, but
generally it's based on a range of factors regarding the broader
environment. This can be the tax climate, the actual climate,
proximity to amenities, an educated workforce, or ease of access
in transportation. He said he suspects that a lot of people
would find it challenging to move to Alaska, meaning there are
probably some people who are on the margin on whether they want
to be in Alaska or another state.
MR. WALCZAK said we know people make this determination at the
margin. There is a net outmigration from high tax states and
inmigration to states with low taxes, especially those with no
individual income tax. In fact, 7 of the 9 states that forego
wage income taxes are growing faster than the national average,
and the other 2 are growing faster than their regional peers.
While this isn't the only thing people care about, it is
something that is within the power of the legislature to
address, so it's pertinent. Many people in Alaska experience
high costs of living. That can put them on the cusp of the
decision and increasing living costs through a new tax could
drive out some individuals. He clarified that he isn't
suggesting there will be a massive outmigration, but people do
make these decisions, especially when they have flexibility.
Retirees, for example, are more sensitive to tax changes than
people in the workforce. "We often see retirees or wealthier
individuals leaving." The idea isn't to protect wealthy
individuals, but communities don't necessarily want to see a
large outflow of higher income individuals.
CHAIR COSTELLO advised that Mr. Walczak was still discussing
optimal tax design and avoiding distorting economic choices.
MR. WALCZAK discussed exempting intermediate goods in the
optimal tax design. He said the goal is to tax things just once.
This isn't just a problem with a sales tax but also with capital
taxation. Capital is more mobile than labor, which makes the
element of the individual income tax that hits small business
particularly pertinent. It may change where a business locates
and whether there is new hiring. Businesses also need to respond
to the fact that an individual income tax reduces the value of
an employee's salary. Over time wages will rise as an offset,
but it means that employment overall will be lower. He said an
economist at the University of Alaska Anchorage did some
economic modeling and suggested a loss of 3,500 to 5,000 jobs,
should the tax to be implemented. He opined that while there may
be some dislocation of jobs initially, the real impact will be
in later years when growth is slower than it would be otherwise.
9:31:36 AM
SENATOR HUGHES asked if he had looked at the idea that Alaska
would be more negatively impacted by an individual income tax
because it has more small businesses per capita than any other
state.
MR. WALCZAK said he isn't sure if Alaska has more small
businesses per capita or if it's that a larger percentage of
working Alaskans are employed by a small business. He related
that nearly 90 percent of all businesses in the U.S. are
identified as small businesses. These are primarily passthrough
entities meaning that for tax purposes income passes through to
the individual federal form. If Alaska were to have an
individual income tax, they would pay that too. He said this is
a significant issue for Alaska's economy, perhaps more than in
other states because so many individuals are employed by small
businesses, many of whom are fulltime residents.
9:34:47 AM
MR. WALCZAK suggested thinking of an income tax as a tax on the
total value of consumption plus the rate of change in savings,
which is essentially a tax on future consumption. At some level
it's a double tax if you have an income tax and a sales tax, he
said, because you're taxing current consumption in the sales tax
and future consumption of both the income and the sales tax. He
said we often don't think about what income is equivalent to
economically. Sales tax falls to a return to savings or on
capital income which is exempt from a consumption tax, but it is
taxed in an income tax. He said taxable return to savings does
distort work effort because it lowers the payoff to work. People
who work today and plan on consuming in the future will be able
to consume less in the future for a given hour of work. A tax on
the return to savings, like a sales tax, would increase that
future cost of consumption. It's hours of labor producing fewer
goods at a later date. He said we think of different taxes in
different ways, but economists worry about income taxes with
high rates because of the distortive effects.
9:37:57 AM
SENATOR GARDNER asked him to speak to the definition of tax
neutrality.
MR. WALCZAK explained that tax neutrality is essentially the
notion that the tax code should apply equally to all similarly
situated persons or activities. It should try to stay out of
economic decisions as much as possible while raising the
revenues desired. Trying to pick winners and losers is sub-
optimal.
SENATOR GARDNER said it's puzzling that you're saying that
efforts and programs to change behavior are sub-optimal as a tax
policy because virtually every state employs those tools.
MR. WALCZAK said he believes that people in the economic
community would broadly agree that programs to change behavior
are sub-optimal but extremely common. He drew a distinction
between an overarching goal to grow the economy of the state
versus a more modest goal to shift investment into a blighted
area. He suggested thinking of the latter as a more traditional
governmental expenditure or grant than as a tax policy tool even
though they do run through the tax code.
9:43:39 AM
MR. WALCZAK returned to the slide that looks at both sales tax
and income tax. He noted the variation in the 107 jurisdictions
in Alaska that impose sales tax and commented on the advantage
of a broader base and lower income tax rate versus a very narrow
eroded base. He said tax can be applied to capital accumulation,
labor force participation, consumption, or property, but the
advantage in taxing consumption and property is that it has less
impact on economic growth.
9:45:11 AM
CHAIR COSTELLO asked if consideration of an income tax should
also include a look at the onslaught of other taxes and expenses
individuals and families face. Last night the committee heard
about a family of four who spent $36,000 on health care costs
and now their property taxes are going up. She asked him to talk
about the impact that passing an income tax will have on the
overall economy.
MR. WALCZAK agreed that taxes should be considered in the
aggregate because they can be a significant burden, particularly
for those on a lower or fixed income. He continued to say that
legislators are probably in a better position than he is to look
in detail at the interaction of local tax increases and an
income tax proposal.
9:49:48 AM
MR. WALCZAK returned to the presentation. He summarized the
advantages of sales taxes saying they are more economically
efficient, have low compliance costs, and can capture revenue
from tourists. If the legislature were to decide on a state
sales tax, it would provide an opportunity to standardize the
local sales tax bases and collection. The disadvantages of a
sales tax include regressivity, business input would be a
problem if they are taxed, taxes on use often aren't remitted,
and remote transactions could be a problem.
The challenges associated with an income tax are that it reduces
labor force participation and makes it more expensive to do
business in the state. An advantage for the state is that an
income tax would capture revenue from nonresident workers. An
income tax also falls on small businesses, which is a pro or con
depending on the perspective. He said the disparity between
corporations that are taxed and small businesses that are not
taxed would persist if an income tax were adopted, because a
corporate income tax is essentially a double tax. He didn't
necessarily agree that adopting an income tax creates greater
equity.
9:53:01 AM
MR. WALCZAK turned to the issue of volatility. He said a Pew
study found that state revenue swings over the last decade
average plus or minus 5 percent. Wyoming ranked second
nationwide with revenue swings of plus or minus 12.1 percent.
Alaska experienced revenue swings of plus or minus 34 percent
over that period. With that sort of volatility, it is very
difficult to do accurate projections, make long-term
investments, or build programs that require stable funding. He
noted that the state does have several options to respond to and
smooth these significant revenue swings. Investment revenue from
the Alaska Permanent Fund and the Constitutional Budget Reserve
Fund may be used as well as interest on the permanent fund. It's
also very good news that Alaska has substantial reserves to draw
from. Earlier this year the market value of the funds totaled
$55.7 billion. He opined that as long as the state has a natural
resource based economy, there will always be significant
volatility and it makes sense to regularly rely on these funds.
Put the money away in good years and use it in the bad years to
address a shortfall, but not as a source of supplemental revenue
for new programs.
9:57:45 AM
SENATOR STEVENS recalled that when Alaskans voted to create the
permanent fund it was as a rainy-day fund and now there isn't
one. He asked Mr. Walczak to talk about the difference between a
rainy-day fund and a fund that smooths the state's economy.
MR. WALCZAK said rainy-day funds vary in structure, but they're
basically designed so that states don't need to recreate their
tax code when they experience the inevitable economic declines
in the business cycle. He said Alaska is different primarily
because it has reserves that are an order of magnitude larger
than any other state. Because the state relies heavily on one
industry for revenue, it makes sense to modify the way the
reserves currently work to have a more traditional rainy-day
fund. The structure is in place, but the way it's been used is
not as consistent as what we normally see for a rainy-day fund,
he said.
MR. WALCZAK turned to the question of competitiveness and what
taxes should be if there were an individual income tax. He said
the Tax Foundation published the State Business Tax Climate
Index that looks at whether the tax structure is simple,
neutral, and transparent. Other components on the index look at
corporate taxes, property taxes, and unemployment insurance
taxes. Alaska does very well right now because it forgoes both
an individual income tax and a state sales tax. It currently is
th
in a four-way tie for first but would fall to 27 if an income
tax were adopted. There are several reasons for that. HB 115
reflects an above average top marginal rate of 7 percent, it has
an above average number of brackets, and the personal exemption
is not indexed to inflation. If the bill becomes law, Alaska
th
would go from having no personal income tax to having the 12
highest top marginal rate in the country.
He advised that Alaska would have a broader than average
individual income tax base simply because nothing has been
carved out through deductions and exemptions. However, that also
means that the effective tax rate would be higher than in other
states that have a similar top marginal rate.
10:07:40 AM
CHAIR COSTELLO asked what people should expect in the transition
from a no income tax to an income tax, should HB 115 pass.
MR. WALCZAK said these transitions are always difficult. There
is a large body of regulatory and administrative code that must
be built essentially from scratch, revenue projections might be
less than precise the first couple of years, and certain
necessary components might be initially forgotten. He clarified
that individuals won't see a large difference because they're
already accustomed to paying income tax; it's the state
administrative buildout that would be somewhat burdensome.
CHAIR COSTELLO clarified that her question related to the impact
on the economy transitioning from no income tax to an income tax
environment.
MR. WALCZAK answered that you should anticipate some adverse
impacts. "People are going to realize that they just have less
disposable income, or small businesses are suddenly going to
have a cost that they had not budgeted." This will show up in
the employment market. There aren't any studies at the state
level, but federal studies generally indicate that the reduction
in economic activity resulting from imposing or increasing an
income tax would be larger by a significant margin than the
revenue gained.
10:15:35 AM
CHAIR COSTELLO asked if it's the right time to initiate an
income tax when Alaska is experiencing a recession.
MR. WALCZAK said it's relatively common for states and
individuals to experience an economic crunch at about the same
time. Taxes are often raised when people are already struggling
to make ends meet. That's why revenue reserves are so important.
He pointed out that Alaska the opportunity to take things slowly
because HB 115 doesn't actually impose the tax until 2019.
10:17:14 AM
SENATOR HUGHES asked, despite the 2019 effective date, if
implementing an individual income tax could prolong and deepen
the recession.
MR. WALCZAK said it has the potential to create adverse economic
impacts. He said he couldn't speculate on whether it has
recessionary impacts, but reducing disposable income of
individuals or reducing the demand for labor would have an
adverse effect on a recession. If HB 115 were to pass,
businesses would presumably make investment decisions this year
and next year in anticipation of the change in the tax code in
2019.
10:18:58 AM
SENATOR GARDNER mentioned the generalized uncertainty due to the
failure of the state to tackle the fiscal crisis, and asked how
he suggests addressing the recession and building confidence
that there is a durable plan when there aren't new revenues now
or the promise of new revenues from taxes in 2020.
MR. WALCZAK answered that if legislators decide that a new
general tax is the way to tackle the fiscal crisis, there are
several things to consider in the process. There are questions
about the appropriate revenue aims for the tax and whether this
is a fix for the current recession or a more fundamental shakeup
of the entire tax code. It appears that HB 115 leans toward
reshaping the tax code, but that is something that needs to be
explicitly debated and understood. Expenditure reform is also an
important part, particularly since the state has significantly
higher expenditures per capita than any other state in the
nation. He said he also thinks that revenue smoothing must be a
big part of the picture. New revenues may be necessary, but
there doesn't seem to be agreement on the amount that's needed.
There's also the question of what will avert this situation in
the future. He said he thinks there is some danger to only
tackling the revenue side without tackling the other issues. He
urged a cautious approach. He said HB 115 is certainly a
credible starting point but there are a lot of questions that it
doesn't entirely answer. He pointed out that HB 115 doesn't have
things like a Section 179 deduction or a standard deduction,
although the latter may be intentional. Also, the conformity to
the Internal Revenue code doesn't appear to be complete. He
suggested taking a step back to assess whether all the aims are
in context.
10:26:26 AM
SENATOR GARDNER commented that placing a sunset on a new revenue
program prolongs the uncertainty.
MR. WALCZAK said there's truth to that, but he didn't know if
there would be a downside for the taxpayer.
CHAIR COSTELLO asked Mr. Walczak to continue the presentation.
10:28:53 AM
MR. WALCZAK said he thinks there is risk associated with
adopting a new tax regime on the notion that the current
expenditure level is sustainable and desirable. If the goal is
to be comprehensive, it's important to look at spending, revenue
smoothing, revenue needs, and whether the new tax is necessary.
He opined that a sunset or trigger mechanism is consistent with
the aims of many members who don't support a permanent tax. He
said there is something to the Senate proposal to limit the
dividend to $1,000 for three years and to implement $750 million
in spending cuts over three years, because it looks at both
elements. He reiterated that looking at the smoothing option is
very important. He urged doing things simultaneously so getting
the new revenue doesn't short circuit other efforts.
CHAIR COSTELLO advised that the Senate proposal has a spending
cap, whereas the House proposal does not. She asked if raising
revenue through taxes without a spending cap is a concern.
MR. WALCZAK said the Tax Foundation doesn't have a position on
spending caps, but some sort of expenditure control is an
important part of a package that looks at revenues.
10:32:46 AM
SENATOR HUGHES asked him to comment on the potential impact if
the state income tax deduction is no longer available.
10:33:27 AM
MR WALCZAK said it's relevant because that is essentially the
partial offset associated with state and local governments
raising revenues through the major tax sources. He noted that
this deduction is one of the rare, highly regressive elements in
the federal income tax code. He said there is a good argument
that Alaskans would benefit from having a lower rate and
eliminating the deduction because most of the value is flowing
to states like New York, California, Pennsylvania, and New
Jersey. Nevertheless, it means that state income tax wouldn't be
offset by the federal income tax deduction. More of it would be
borne by Alaskan payers. It is also significant because federal
adjusted gross income might change. If the base is broadened for
the federal income tax and used to lower rates, those base
broadeners are going to flow through to any Alaska income tax.
The rate reductions will not flow through because HB 115 sets
those separately. He further pointed out that if HB 115 were
adopted, it would be a stealth increase in the tax because a
larger definition of income would be taxed at the same rate. All
states with an income tax will need to think about that and
perhaps lower rates to avoid a potentially significant income
tax increase.
10:38:32 AM
CHAIR COSTELLO thanked Mr. Walczak and held HB 115 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| TF Testimony - AK Sen Labor and Commerce (04-26-17).pdf |
SL&C 4/26/2017 9:00:00 AM |