Legislature(2017 - 2018)BELTZ 105 (TSBldg)
04/27/2017 01:30 PM Senate LABOR & COMMERCE
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| Audio | Topic |
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| 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 | ||
| + | TELECONFERENCED |
HB 115-INCOME TAX; PFD PAYMENT/CREDIT
CHAIR COSTELLO announced the consideration of HB 115. She asked
Mr. Millsap to start his presentation by telling the committee
about the Mercatus Center.
1:34:00 PM
ADAM MILLSAP, PhD, Mercatus Center, George Mason University,
Arlington, Virginia, stated that the Mercatus Center is a
university-based research center whose mission is to bridge the
gap between academic ideas and policy by sharing research with
policymakers. He said he couldn't give details about funding
because the research center is entirely separate, but the donor
policy is on the website. It includes contact names and numbers
if anyone is interested in more information.
1:35:14 PM
MR. MILLSAP read the following testimony into the record:
Chairman Costello, Vice Chairman Hughes, and
distinguished members of the Senate Labor and Commerce
Committee:
Thank you for accepting my testimony on creating an
alternative source of revenue in Alaska and on the
features of economically sound tax policy. My name is
Adam Millsap, and I am a research fellow at the
Mercatus Center at George Mason University, where I
study state and local public policy. As Alaska's
legislature considers alternative revenue sources, my
message today is that tax policy that is economically
efficient and promotes economic growth has two
important features: 1) low rates and 2) a broad tax
1
base with few exemptions or deductions.
TAX REFORM IN ALASKA
The most common sources of revenue for state
governments are the income tax and the sales tax.
Alaska has neither of these, instead relying on taxes,
rents, and royalties tied to the extraction of oil and
gas for much of its revenue. The price and production
of these commodities fluctuates for a variety of
supply and demand reasons, and Alaska's reliance on
them as a source of revenue results in some of that
volatility being transferred to the state's revenue
stream.
In recent years Alaska has experienced significant
budget deficits, which has generated a search for more
stable alternative sources of revenue. An income tax,
a sales tax, or a combination of the two is capable of
providing that revenue. However, the efficacy and
efficiency of any tax depends on the way it is
structured. For a tax to generate revenue efficiently,
it should consist of low rates and a broad base.
In combination, these features reduce the number of
tax-related distortions to the economy and maximize
the amount of resources left in the hands of
taxpayers, while still raising adequate revenue for
government functions. They also reduce compliance
costs, which are the costs associated with obeying the
law. Reducing the number of deductions and exemptions
saves time and effort required to ensure compliance.
A simple tax code also means less effort needs to be
expended monitoring year-to-year changes in brackets
and allowable deductions and exemptions. Finally, a
broad tax base is generally less variable over time,
which makes it easier for policymakers to forecast
2
revenue during the budgeting process.
STRUCTURE INCOME TAX TO AVOID DISTORTIONS
As mentioned previously, two common state taxes are
the income tax and the sales tax. Income taxes distort
people's choices of how much to work by reducing the
benefits of work. Low marginal income tax rates reduce
this distortion. Limiting deductions and exemptions
also allows rates to be lower by broadening the tax
base.
Numerous income tax brackets increase the complexity
of the tax code and deter additional work near each
bracket threshold, since any additional income is
subject to a higher tax rate than previous income. The
more brackets there are, the more often workers
confront changes in the incentive to work. Reducing
the number of brackets encourages more work across the
income distribution. Some progressivity in the tax
code may be desirable, but it should be achieved with
as few brackets as possible.
States have implemented income taxes at different
times, and there is evidence that states experience
slower per capita income growth following the adoption
3
of an income tax.This is consistent with other
studies that find that states with higher income tax
4
rates experience slower per capita income growth.
There is also evidence that people migrate in order to
5
reduce their tax liability.Thus the creation of an
income tax may harm Alaska's economy by reducing the
incentive to work and by inducing people to emigrate
from the state.
However, the potential costs to economic growth from
the implementation of an income tax must be weighed
against the costs of chronic budget deficits and
spending cuts. For example, some studies find that
government spending on education, public health, and
infrastructure can counteract the disincentive effects
of greater taxation and actually improve economic
6
growth.And since people and businesses are forward
looking, large and frequent budget deficits will cause
them to expect future tax increases and will create
uncertainty about the state's economic and fiscal
future.
The net effect on Alaska's economy will ultimately
depend on the structure of the income tax, the state's
spending decisions, and whether an income tax can
assure residents, investors, and firms that the
state's finances are sound.
Many states have reformed their income tax codes
recently, and these reforms provide some guidance for
7
Alaska.Reforms in Utah and North Carolina broadened
their income tax bases by eliminating various credits,
exemptions, and deductions and replaced their systems
of tax brackets with one flat rate. These changes
eliminated distortions in the tax code and improved
the efficiency of each state's income tax. Alaska can
eliminate the need for future reform by implementing
an income tax with similar features from the start.
STRUCTURE SALES TAX TO LIMIT DISTORTIONS AND
REGRESSIVENESS
In addition to the income tax, a sales tax is a common
way for government to raise revenue. A sales tax is a
tax on consumption, so it discourages consumption and
encourages saving. More saving means more investment
and ultimately more economic growth. Conversely, the
income tax's main flaw is that it discourages work and
saving. This is why many economists prefer a
comprehensive consumption tax over an income tax as a
means of generating revenue.
However, a sales tax also has drawbacks, the primary
one being that in its most common and basic form it is
regressive. Since lower-income people spend a larger
portion of their income than higher-income people, a
sales tax imposes a relatively larger burden on those
with lower incomes. This undesirable feature can be
mitigated by applying the sales tax to a broad base
that includes both goods and services. Taxing services
is also important since unlike in the past, most
consumer spending today is on services rather than
goods.
Applying a sales tax to all final goods and services
allows the rate to be lower to achieve a given revenue
8
target, which reduces the burden on all consumers.A
broad base can also reduce the tax's regressiveness,
since higher-income people spend a larger share of
9
their income on services than lower-income people. If
only goods are taxed, a sizeable amount of consumer
spending, especially by higher-income people, will be
unfairly exempt from taxation.
Product-specific sales taxes, commonly referred to as
"sin taxes," are especially egregious since they are
routinely applied to goods disproportionately consumed
by lower-income people. The limited scope of sin taxes
creates large welfare losses as consumers expend time
10
and effort seeking out tax-free alternatives.They
also invite lobbying from various interests, both for
and against the taxes, which wastes resources in a
11
process called rent-seeking.Product-specific or
industry-specific sales taxes should be avoided for
these reasons.
MAKE THE TAX CODE MORE EQUITABLE
Equity is another important feature of tax policy that
could be improved in Alaska. Horizontal equity is
achieved when taxpayers who earn the same income face
the same tax burden. In Alaska, revenue is primarily
raised through the oil and gas industry. In fiscal
year 2016, oil and gas revenue accounted for 72
percent of the state's general fund unrestricted
12
revenue.
Since all taxes are ultimately paid by people, taxes
on the oil and gas industry are paid by some
combination of its workers, owners, and customers.
This means that workers and investors in this industry
bear more of the tax burden in the form of lower wages
and dividends than similar people in other industries,
which violates the principle of horizontal equity.
Moreover, the benefit principle of taxation states
that those receiving the benefits of government goods
and services should contribute to their provision.
While Alaska does levy some user fees, product-
specific sales taxes, and a corporate income tax,
these taxes generate significantly less revenue than
the taxes on the oil and gas industry. To the extent
that Alaska's state government is providing goods and
services that benefit each resident, each resident
should contribute to their cost. A broad-based income
or sales tax would be more equitable, and it would
better satisfy the benefit principle of taxation than
the current system, since it would more evenly
distribute the cost of government.
CONCLUSION
Efficient and effective tax policy should consist of
low rates that are applied to broad bases. Together,
low rates and a broad base reduce distortions,
decrease compliance costs and ensure that the tax
burden is shared equitably by all taxpayers.
Finally, it is important to note that the creation of
an income tax, sales tax, or both should not be viewed
as a panacea. Such taxes can provide a relatively
stable source of additional revenue, but it is also
important for state governments and their citizenry to
live within their means. Government spending in Alaska
as a percentage of total state personal income was 31
percent in 2015, nearly two and a half times the
13
national average of 13 percent.Maintaining such a
high level of spending relative to income would likely
require more than a modest tax increase, and higher
tax rates increase the likelihood that an income or
sales tax will have a negative net effect on Alaska's
economy. For this reason, efforts to balance Alaska's
budget should consider both revenue increases and
spending cuts.
Thank you for inviting me to speak with you today
about tax policy in Alaska. I look forward to
answering any questions you may have concerning my
testimony.
_______________
1 Adam Millsap and Olivia Gonzalez, "State and Local Tax Policy," Economic
Perspectives, Mercatus Center at George Mason University, January 2016.
2
Richard F. Dye and Therese J. McGuire, "Growth and Variability of State Individual Income
and General Sales Taxes," National Tax Journal (1991): 55-66.
3
Thomas R. Dye and Richard C. Feiock, "State Income Tax Adoption and Economic Growth,"
Social Science Quarterly (1995):
648-54.
4
Barry W. Poulson and Jules Gordon Kaplan, "State Income Taxes and Economic Growth," Cato
Journal 28, no. 1 (2008): 53.
Randall G. Holcombe and Donald J. Lacombe, "The Effect of State Income Taxation on Per
Capita Income Growth," Public Finance Review 32, no. 3 (2004): 292-312.
5
Ira S. Saltz, "State Income Tax Policy and Geographic Labour Force Mobility in the United
States," Applied Economics Letters
5, no. 10 (1998): 599-601. Martin Feldstein and Marian Vaillant Wrobel, "Can State Taxes
Redistribute Income?," Journal of Public Economics 68, no. 3 (1998): 369-96. Richard J.
Cebula and Gigi M. Alexander, "Determinants of Net Interstate Migration, 2000-2004,"
Journal of Regional Analysis and Policy 36, no. 2 (2006): 116-23.
6
L. Jay Helms, "The Effect of State and Local Taxes on Economic Growth: A Time Series-
Cross Section Approach," Review of Economics and Statistics 67, no. 4 (1985): 574-82.
Alaeddin Mofidi and Joe A. Stone, "Do State and Local Taxes Affect
Economic Growth?," Review of Economics and Statistics (1990): 686-91.
7
George R. Crowley, "Case Studies in the Political Economy of Tax Reform" (Mercatus
Research, Mercatus Center at George Mason University, Arlington, VA, 2016
8
Thomas Stratmann, "More Sales Tax Exemptions, Higher Sales Tax Rates," Mercatus Center at
George Mason University, September 17, 2014.
9
John J. Siegfried and Paul A. Smith, "The Distributional Effects of a Sales Tax on
Services," National Tax Journal 44, no. 1 (1991): 41-53.
10
Adam J. Hoffer, William F. Shughart, and Michael D. Thomas, "Sin Taxes and Sindustry:
Revenue, Paternalism, and Political Interest," Independent Review 19, no. 1 (2014): 47-64.
11
Richard Williams and Katelyn Christ, "Taxing Sin" (Mercatus on Policy, Mercatus
Center at George Mason University, Arlington, VA, July 2009).
12
Alaska Department of Revenue, Tax Division, "Revenue Sources Book: Fall 2016," accessed
April 26, 2017.
13 Eileen Norcross and Olivia Gonzalez, "Ranking the States by Fiscal Condition: 2017
Edition" (Mercatus Research, Mercatus Center at George Mason University, Arlington, VA,
forthcoming).
1:44:34 PM
SENATOR STEVENS asked him to elaborate on the statement that sin
taxes apply disproportionately to lower-income people.
MR. MILLSAP explained that sin taxes are generally applied as a
way of deterring behavior, not as a means of generating revenue.
They apply to things like tobacco products, alcohol, and junk
food and a higher proportion of lower-income people tend to
consume of these products.
SENATOR STEVENS disagreed with the premise but declined to ask
additional questions.
SENATOR GARDNER commented that while it's true that some
segments of society may drink a lot more beer, higher-income
people probably pay more for the alcohol they drink.
She referenced the statement that taxes on the oil and gas
industry are paid by some combination of the workers, owners,
and customers. In Alaska, taxes on the oil industry comes from a
variety of sources, including severance or production tax. That
can be thought of as the sales price for the resource that
Alaskans own in common. She asked if that changes the
calculation of horizontal equity.
MR. MILLSAP replied there might be a slight difference, but it's
not so large that the people involved in the industry are
bearing a higher portion of the tax burden.
1:49:14 PM
SENATOR MEYER asked if it's logical to think that initiating an
income tax will cause people to move where the cost of living is
lower, even though they may have to pay income tax or sales tax
or both in that new location.
MR. MILLSAP said it's perfectly reasonable to think that some
people may be living in Alaska because it is a lower tax
environment, and any decision the legislature makes to increase
revenue is going to change that calculus. It may provide an
additional reason to migrate to another state.
SENATOR MEYER referenced the statements that states experience
slower per capita growth after implementing an income tax, and
that people migrate to reduce their tax liability.
MR. MILLSAP confirmed that was part of his testimony.
1:52:36 PM
SENATOR HUGHES asked if the introduction of an income tax
coupled with the high cost of living in Alaska would likely
result in higher outmigration compared to other states.
MR. MILLSAP opined that the introduction of an income tax would
change some people's decision making, but whether the numbers
are higher or lower than any other state that introduces such a
tax would depend, in part, on the tax rate. The magnitude of the
outmigration is an empirical question that can only be evaluated
ex-post, he said, but putting the money to productive services
such as improving education, public health, or worthwhile
infrastructure that helps the economy could be an offset.
SENATOR HUGHES referenced his testimony that 2015 government
spending in Alaska was 31 percent of total state personal
income, and the suggestion that the state should consider both
revenue increases and spending cuts. She asked if other states
had faced a similar situation and questioned whether any
reductions would be made if an income tax was introduced first.
MR. MILLSAP said he would advise doing them simultaneously
because the additional revenue could readily be spent without
addressing spending. That is what happened when Connecticut
implemented an individual income tax in the early 1990s.
Spending cuts were not made at the same time that the tax was
implemented, and that state is currently dealing with both
budget and pension issues.
SENATOR HUGHES asked if it wouldn't be better to make cuts
first.
MR. MILLSAP said he assumes the budget process would have cuts
and new revenue done somewhat in tandem. He cautioned against
raising revenue first and delaying spending cuts.
1:59:13 PM
SENATOR GARDNER asked him to compare the scenarios of taking
definitive action to raise revenue through new taxes versus not
doing so, given Alaska's specific situation. That includes: an
operating budget that has been cut by 26 percent in recent
years; a credit rating that is dropping and at risk of dropping
further; a well-demonstrated reluctance of industry,
individuals, and small businesses to make investments due to a
lack of confidence in the fiscal future; a struggling
university; no community college system in a society where more
and more people need to have more than a high school education;
and school districts that are laying off hundreds of teachers
and increasing class sizes.
MR. MILLSAP said it's an excellent point because both revenue
and spending needs to be considered. Cutting core government
services that people have come to expect is not the best way to
make Alaska a good place to live and do business. If there is
very little room for significant cuts, the revenue side needs to
be shored up. He said this is ultimately a question for Alaska
taxpayers, but he does believe that running huge budget deficits
is a concern. People who are considering moving to or doing
business in Alaska are going to take this into consideration.
2:02:39 PM
CHAIR COSTELLO asked how the introduction of an income tax would
affect the unemployment rate and the cost of living in Alaska.
MR. MILLSAP said an income tax will certainly reduce people's
disposable income. However, it's a valid concern that the most
recent employment figures indicate that jobs are either leaving
the state or not being created as fast as they're destroyed. He
advised that most states that implement an income tax do so
during an economic boom. Alaska would be somewhat unique if it
were to implement a tax when the economy is struggling. If the
decision is to implement an income tax, he suggested
policymakers remain flexible and willing to go back and make
changes if necessary.
CHAIR COSTELLO asked if it's good or bad timing to implement an
income tax while the economy is in a recession.
MR. MILLSAP replied the timing is not optimal because it would
pull money out of the economy. Nevertheless, Alaska must deal
with the budget deficit and its hand might be forced. He
reiterated his advice to policymakers to remain flexible.
CHAIR COSTELLO asked how HB 115 would affect seniors and
military families.
MR. MILLSAP asked if she is asking if retirement income should
not be taxed.
CHAIR COSTELLO said that's correct. The bill has a standard
deduction for each individual, but it has no other deductions.
MR. MILLSAP said that's the most efficient thing to do from an
economic standpoint. A broader base keeps the rates as low as
possible and is the least distortive. He advised to keep the
current design with few deductions and exemptions and apply the
tax rate to all income earned in the state.
CHAIR COSTELLO asked if S corporations and small businesses will
be impacted by the current tax proposal.
MR. MILLSAP said they should be affected like everyone else. A
small business owner who files under the personal income tax
should pay the rate.
CHAIR COSTELLO asked if other states that are struggling with
budget deficits have savings like Alaska has.
MR. MILLSAP said some states have rainy-day funds and he isn't
opposed to using them to help with budget deficits, but Alaska's
budget deficits are more a structural problem based on the oil
market. It's reasonable to pull money from savings when it's
needed, but in Alaska's case that's not a substitution for
structural reform.
2:10:00 PM
SENATOR STEVENS asked for an explanation of the statement that
an income tax may harm the economy by reducing the incentive to
work. He said it seems that an income tax would increase the
incentive to work.
MR. MILLSAP answered with an explanation of the substitution
effect. In the context of an income tax, it's an economic
understanding that an individual will replace working a little
more with taking some leisure - not working. There is also an
income effect. In the context of an income tax, that's the
economic understanding that the tax makes an individual feel
poorer and it induces them to work more. The question is which
effect dominates. When economists look at the entire economy
they see that the substitution effect tends to dominate the
income effect. The reason at the macro level is that not only
can people choose to work a little bit less, but they can also
choose not to work at all. For example, a second earner in a
home may choose to work if there isn't an income tax, but when
the income tax is implemented they may choose not to work.
2:12:37 PM
SENATOR HUGHES asked if initiating an income tax right now might
deepen and prolong the recession.
MR. MILLSAP said economists don't generally think that
initiating an income tax will help to get out of a recession,
but it might not hurt given Alaska's existing deficit and the
potential magnitude of spending cuts that might have to occur
without an additional revenue stream.
SENATOR HUGHES asked if he had reviewed HB 115 and his thoughts
on the tax brackets that are proposed.
MR. MILLSAP said he reviewed the bill and believes it's
inefficient to have five brackets in such a short range.
2:15:48 PM
SENATOR HUGHES asked if a sales tax would be less regressive if
groceries were excluded.
MR. MILLSAP said yes.
SENATOR HUGHES highlighted the unique situation in many Alaska
village where groceries are very expensive.
2:17:26 PM
SENATOR GARDNER asked if instituting an income tax and
initiating large budget cuts impact employment rates equally.
MR. MILLSAP said it's hard to tell which would be worse, but it
comes down to what is cut. Massive spending cuts that eliminate
core services and delay infrastructure maintenance probably have
a similar impact to implementing an income tax on employment.
SENATOR GARDNER asked, other than cutting taxes, what the state
could do to stimulate the economy in the current recession and
do away with uncertainty.
MR. MILLSAP said recessions often need to run their course, but
it might help if the state could lend certainty to outside
investors whether that's bondholders or people thinking about
moving to Alaska or businesses thinking about opening in Alaska.
He warned that trying too hard to pull out of a recession can
make things worse down the road.
2:21:32 PM
SENATOR GARDNER asked if he's aware that the state has cut its
operating budget by 26 percent and has been operating with
essentially no capital budget for the last several years. That
has impacted a lot of employees, particularly in the trades.
She asked if there have been any studies about how people weigh
the non-financial factors when they determine where to live. An
income tax will hurt, but Alaskans place a lot of value on clean
air and water, hunting and fishing, and wide-open spaces.
MR. MILLSAP agreed that some people will stay in Alaska
regardless of an income tax. It has things they can't get
anywhere else. The people who would leave are those who are on
the margin. They moved to Alaska for a reason when there was no
income tax and instituting one changes their decision making
enough that it makes sense to go somewhere else. He acknowledged
that Alaska could be unique, and a tax would have a smaller
effect on the decision to leave. Nevertheless, some people will
leave.
2:24:15 PM
CHAIR COSTELLO asked him to comment on the impact of President
Trump's recent tax proposal that removes the deduction for state
taxes.
MR. MILLSAP said the deduction is only available to people who
itemize, and he didn't know how many Alaskans that might
include. He also wondered about the chance of that proposal
getting through the process.
2:26:03 PM
CHAIR COSTELLO thanked Mr. Millsap.
2:26:32 PM
At ease
2:30:23 PM
CHAIR COSTELLO reconvened the meeting and welcomed Mr.
Blattmachr.
2:30:47 PM
MATT BLATTMACHR, Vice President and Trust Officer, Peak Trust
Company, Anchorage, said he is "more or less" representing the
trust and estate planning industry in Alaska. He informed the
committee that in 1997 the legislature passed the Alaska Trust
Act. This made Alaska the first state in the nation to allow
self-settled trusts and perpetual trusts. Since then, the
legislature has passed additional laws that has kept Alaska at
the forefront of the industry. The industry has been so
successful that many other states have tried to compete for this
business. The state has benefited greatly over the years and it
generates meaningful tax revenue. The insurance tax currently
brings over $7 million into the general fund each year.
He related that the goal of the presentation is to highlight the
benefits of the trust industry to the state and to offer
evidence that to maintain the industry, some provisions in HB
115 need to be reexamined.
MR. BLATTMACHR explained that trusts are generally used by
average Alaskans for family and estate planning. He advised that
the considerable discussion about the taxation of trusts during
the bill hearings is just a minor piece in the overall scope of
trusts. He explained that trusts are usually taxed in one of
three ways: to the grantor, to the beneficiary, or to the trust
itself. The grantor (trust creator) is taxed if they retain
sufficient interest. Many trusts are taxed this way because of
the benefits associated with grantor trust status. The
beneficiary is taxed to the extent that he or she receives
distributions of income from the trust. The trust itself is
taxed if income is retained by the trust and it is not a grantor
trust.
2:35:48 PM
MR. BLATTMACHR said there are many different types of trusts,
but they can be broadly divided into revocable and irrevocable
trusts. Revocable trusts are essentially a will substitute that
has no tax advantages whatsoever. The income is taxed to the
individual that creates the trust. Irrevocable trusts create
separate and distinct entities. Taxation depends on whether the
trust has grantor status, whether there have been distributions,
and under HB 115 whether it would qualify as a resident or
nonresident trust for state income taxes.
2:36:41 PM
He reiterated that a trust can be considered a grantor if the
person who created the trust retains certain interests. This
includes: the grantor is a beneficiary, their spouse is a
beneficiary, they have the power to control beneficial
enjoyment, the trust has reversionary interests that can come
back to the grantor, or if the income from the trust can be used
for the benefit of the grantor. If the grantor retains
sufficient control, he or she is taxed on the trust income.
Irrevocable trusts can be grantor or non-grantor. Both are
broken out for resident and nonresident for state tax purposes.
He related that prior discussions on HB 115 centered on
irrevocable trusts, particularly non-grantor resident and
nonresident trusts where the income is accumulated. For grantor
trusts, income is taxed to the grantor. Non-grantor trusts are
those where the trust is its own taxpaying entity. Income will
be taxed to the beneficiary, to the extent that income is
distributed. It will be taxed to the trust when the income is
retained. If the income is split between the beneficiary and the
trust, each pays the appropriate share of the tax. He reported
that all competitive states in this industry try to tax resident
trusts if there is a state income tax. Nonresident trusts are
not taxed because doing so would eliminate any nonresident
business.
MR. BLATTMACHR reviewed several scenarios, all of which assume
no Alaska income. The first scenario is an Alaska resident who
creates a grantor trust. Whether income is accumulated or
distributed, it flows through to the grantor's Form 1040. If
there is a state income tax, the state would always collect the
proper tax on that trust. The second scenario is a grantor trust
created by a nonresident. Regardless of whether the income is
accumulated or distributed, it is taxed to the nonresident. He
advised that in this scenario Alaska should not attempt to
collect tax on the income from the trust. Doing so is
potentially unconstitutional, especially if there isn't any
Alaska-source income, and it would likely kill Alaska's trust
industry.
Scenario three is non-grantor trust created by nonresidents. If
income is accumulated, the trust would pay its own federal tax.
If the income is distributed to an Alaskan beneficiary, it would
be included in the beneficiary's taxable income and the state
would collect the state income tax. If the income is distributed
to a nonresident beneficiary, they would not pay Alaska income
tax. He reiterated that this assumes that there is no Alaska-
source income. Scenario four is a non-grantor trust by an Alaska
resident. Under HB 115 resident beneficiaries would be subject
to the state income tax if there was a distribution, but
nonresidents would not.
2:41:50 PM
MR. BLATTMACHR stated that that if HB 115 were to pass, Alaskans
who establish non-grantor trusts with resident and nonresident
beneficiaries would be encouraged to do their trust planning in
another state. He said it's a policy call as to whether Alaska
is open for trust business for just nonresidents.
He turned to the federal tax rates on trusts stating that
federal taxes discourage income retention and encourage
distributions from the trust. Trusts have the same tax brackets
as individuals, but they're compressed. For example, individuals
reach the maximum 43.4 percent tax bracket, including the
Medicare surtax, at $415,050 for single filers and $466,950 for
married joint filers. A trust reaches the maximum 43.4 percent
tax bracket at $12,400 of income. If HB 115 were to pass, the
state would collect its tax on income distributed to an Alaska
resident. Therefore, trustees will only retain income in trusts
if there is a compelling reason to do so. Such examples are a
beneficiary who should not receive distributions because he or
she has substance abuse problems, and a special needs trusts
where not all the income is consumed and needs to be retained.
MR. BLATTMACHR advised that HB 115 prevents DING trusts. This is
a planning strategy that is used by high income individuals who
live in states that have very high state income taxes. The
purpose is to avoid taxes on accumulated income. He reiterated
the warning that if HB 115 were to pass, residents would use
another state to create a non-grantor trust.
2:47:43 PM
MR. BLATTMACHR said regardless of the decision on what to do
about taxation on resident non-grantor trusts, the trust
industry feels some amendments should be made if Alaska is to
remain competitive. He listed the following: [HB 115 adds a new
chapter 22 to AS 43.]
· Trusts should receive the $10,300 exemption that
individuals receive.
· If Alaska foregoes an income tax regime, Sec. 43.22.020(c)
should make an affirmative statement that nonresident trust
and estates are not subject to Alaska income tax.
· Sec. 43.22.040(a) references 26 U.S. Code § 651 and it
should also reference 26 U.S. Code § 661.
· Sec. 43.22.150(1) provides a definition of domicile. It
says an individual might be considered a resident if their
dental and medical services are provided in the state. He
opined that this might discourage former residents from
returning to Alaska to get these services from their
established dentist or doctor. He acknowledged this isn't
trust related.
· Sec. 43.22.150(19) defines a resident trust. This should
include a definition as to when a transfer to a trust is
deemed to have been made.
· Sec. 43.22.150(19) should make an affirmative statement
that if a nonresident transfers property to an Alaska
trust, it is deemed a nonresident trust.
MR. BLATTMACHR highlighted that the definition of a resident
trust in HB 115 may discourage Alaskans from planning in Alaska.
For example, if a resident created a trust for children residing
in Montana and Texas, the accumulated income from the trust
would be subject to Alaska income tax.
2:51:55 PM
CHAIR COSTELLO asked how many trusts are registered in Alaska.
MR. BLATTMACHR said his institution has created about 2,600
different trusts, and that is just a small representation of the
number of trusts that have been created in Alaska. Not every
individual needs the services of a professional trustee and
practitioners estimate that they create as many as one in four
trusts or as few as one in eight.
CHAIR COSTELLO asked how HB 115, as written, would affect his
business.
MR. BLATTMACHR said the bill is okay as written, but it's not
great. The problem relates to the public perception. Alaska
started the "new age" trust industry 20 years ago and it's
regarded as the gold standard. If HB 115 were to pass as
currently written, Alaska would no longer hold that distinction.
He opined that significant business would be lost due to the
public perception. It doesn't help the industry move forward.
CHAIR COSTELLO found no further questions, thanked Mr.
Blattmachr, and held HB 115 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 115 - Trust Taxation Presentation.pdf |
SL&C 4/27/2017 1:30:00 PM |
HB 115 |
| Millsap-Tax-Reform-Alaska-Testimony-v1.pdf |
SL&C 4/27/2017 1:30:00 PM |