03/06/2012 09:00 AM Senate STATE AFFAIRS

                 SB  29-TAX EXPENDITURE REPORT                                                                              
                                                                                                                                
9:38:02 AM                                                                                                                    
CHAIR WIELECHOWSKI announced  the consideration of SB  29, a bill                                                               
which seeks to focus greater  public and legislative attention on                                                               
"independent state  expenditures," which the bill  defines as tax                                                               
credits,  deferrals, waivers,  exclusions, and  deductions. These                                                               
forms of  indirect spending  constitute a  high percent  of state                                                               
spending,  yet they  receive relatively  little attention  in the                                                               
annual  state  budgeting  process  and are  rarely  evaluated  to                                                               
determine whether they are meeting  the goals for which they were                                                               
initially  enacted.  The public  also  knows  little about  these                                                               
expenditures,  despite the  fact that  the state  actually writes                                                               
checks to reimburse companies for some types of tax credits.                                                                    
                                                                                                                                
SENATOR PASKVAN  moved to  adopt the  CS for  SB 29,  labeled 27-                                                               
LS0305\I, as the working document before the committee.                                                                         
                                                                                                                                
CHAIR WIELECHOWSKI objected for discussion purposes.                                                                            
                                                                                                                                
SAM GOTTSTEIN, staff to Senator  Bill Wielechowski, sponsor of SB
,  introduced the  bill.  He said  that SB  29  deals with  tax                                                               
expenditures which  are defined on  page 4,  lines 13 and  17. He                                                               
termed tax expenditures "tax credits."  The intent of the bill is                                                               
to have  information provided  to the  legislature and  public in                                                               
order to have  a better understanding of where  the state's money                                                               
goes  and  whether  money  given for  tax  credits  achieves  its                                                               
legislative  purpose.  According  to   the  Center  for  American                                                               
Progress, tax  expenditures make up  about 25 percent  of federal                                                               
government spending.  In Alaska,  according to the  Department of                                                               
Revenue (DOR),  there were  $863 million in  tax credits  in 2011                                                               
for the oil  and gas industry. Alaska spends more  on tax credits                                                               
annually than  the budget  of DOR, DNR,  DEC, LAW,  Court System,                                                               
and the Legislature combined. That  amount is about 15 percent of                                                               
Alaska's annual expenditures.                                                                                                   
                                                                                                                                
He  reported that  only  9 states  do not  publish  this type  of                                                               
disclosure information  and Alaska is  one of them.  The majority                                                               
of Alaska's tax  credits have no disclosure. Oil  and gas credits                                                               
do not disclose  the value of each credit, where  it was applied,                                                               
how  many jobs  it creates,  or how  much goes  to wages.  On the                                                               
other hand, the Alaska Film  Office has tax credit information on                                                               
line.                                                                                                                           
                                                                                                                                
He  concluded  that the  intent  of  the  legislation is  to  get                                                               
information about all tax credits out  to the public. He said the                                                               
sponsor's intent  is to  find the  right balance  between getting                                                               
information and creating too much of  a burden on DOR to find out                                                               
the information.                                                                                                                
                                                                                                                                
MR. GOTTSTEIN addressed the changes in the bill by section:                                                                     
                                                                                                                                
     Section 1  makes the short  title of SB 29  the "Alaska                                                                    
     Tax Break Transparency Act."                                                                                               
                                                                                                                                
     Section 2 requires legislative  intent language for any                                                                    
     future tax expenditures in order  to make it easier for                                                                    
     DOR  to  figure  out  if a  particular  tax  credit  is                                                                    
     achieving its legislative intent.                                                                                          
                                                                                                                                
     Sections 3-5 are  changed to more clearly  refer to the                                                                    
     Fall Revenue Sourcebook.                                                                                                   
                                                                                                                                
     Section 6 is  the "meat and potatoes" of  the bill. The                                                                    
     first  subsection deals  with what  would be  published                                                                    
     annually for  each tax credit. It  would have statutory                                                                    
     authority  and  deal  with the  annual  sum,  how  many                                                                    
     taxpayers there were, what the  estimate of tax credits                                                                    
     for the  following year would  be, and the  estimate of                                                                    
     the public  cost. In subsection  (c) in Section  6, the                                                                    
     goal is to have a  one-time analysis of each tax credit                                                                    
     over  $1  million  to  determine  whether  the  statute                                                                    
     authorizing  the  tax   expenditure  has  achieved  its                                                                    
     purpose.  Page   4,  lines  3-9,  describes   how  that                                                                    
     happens. If it  is a new tax  expenditure, the analysis                                                                    
     will be  done either seven years  after implementation,                                                                    
     or one year  before the sunset of  the tax expenditure.                                                                    
     If it is an existing  tax expenditure, there is a five-                                                                    
     year window  after the effective  date to  complete the                                                                    
     analysis. Also  in Section  6 is  a requirement  for an                                                                    
     electronic copy of the report.                                                                                             
                                                                                                                                
     Section 7 is  the effective date of July  1, 2015. This                                                                    
     date was chosen  because DOR is working  on creating an                                                                    
     automated  system,  which was  paid  for  from a  $34.7                                                                    
     million appropriation from the legislature last year.                                                                      
                                                                                                                                
9:45:09 AM                                                                                                                    
MATTHEW GARDNER,  Executive Director,  Institute on  Taxation and                                                               
Economic Policy  (ITEP), Washington,  D.C., testified  in support                                                               
of SB 29. He related that  ITEP is a non-profit organization that                                                               
focuses on federal  and state tax policy issues  with an emphasis                                                               
on  the goals  of sustainability,  transparency, and  fairness in                                                               
tax laws. He  said that SB 29 would take  an important first step                                                               
toward  achieving those  goals by  requiring regular  scrutiny of                                                               
Alaska  tax   expenditures  that  currently  reduce   Alaska  tax                                                               
revenue.                                                                                                                        
                                                                                                                                
He explained  that the basic  insight behind tax  expenditures is                                                               
that a law that cuts taxes  for a specific individual or business                                                               
is no  different, for budget  purposes, from a law  that directly                                                               
spends money  on that  business or person.  The problem  is that,                                                               
while the  legislative budget process imposes  regular and strict                                                               
scrutiny of spending that is  done directly by government, in the                                                               
absence of  a tax  expenditure report, little  or no  scrutiny is                                                               
given to spending  that is done through a tax  cut. He emphasized                                                               
that   tax  breaks   are  government   spending  and   should  be                                                               
scrutinized the same way as appropriations.                                                                                     
                                                                                                                                
He noted  that 45  states now require  a tax  expenditure report.                                                               
Five states have enacted new legislation  similar to SB 29. SB 29                                                               
goes the  extra mile to  evaluate tax breaks because  it requires                                                               
information  on the  equity  and efficiency  effects  of the  tax                                                               
expenditure. Requiring an evaluation  of the effectiveness of tax                                                               
breaks requires  a lot of  work. Some states, such  as Washington                                                               
and  Oregon, are  doing  very well  with  the reporting  process,                                                               
because they dedicate  resources up front. Other  states, such as                                                               
New Jersey,  have taken  the first step  of legally  requiring an                                                               
evaluation  of the  effectiveness  of tax  breaks,  but have  not                                                               
followed   through   by   funding   them.  SB   29   would   make                                                               
implementation easier  than some  states because it  requires the                                                               
evaluations  to be  staggered, which  reduces costs  and provides                                                               
adequate time to complete each evaluation.                                                                                      
                                                                                                                                
MR. GARDNER  suggested that SB 29  could go further in  one area.                                                               
It could decouple  from federal tax breaks. Oregon  is an example                                                               
of  a state  that provides  that tax  expenditure reports  not be                                                               
limited  to tax  breaks created  by state  law. It  also includes                                                               
federally  created tax  breaks.  SB 29  should  require that  new                                                               
legislation  creating or  expanding a  tax break  must include  a                                                               
statement identifying the rationale behind the tax break.                                                                       
                                                                                                                                
9:50:56 AM                                                                                                                    
MATT   WALLACE,  Executive   Director,  Alaska   Public  Interest                                                               
Research Group (APIRG), testified in  support of SB 29 because it                                                               
would achieve transparency,  accountability, and effectiveness in                                                               
Alaska's budget  and policy  making. He  related two  reasons why                                                               
this legislation  is important. First, it  promotes better policy                                                               
making and provides  information about whether it is  worth it to                                                               
provide  or increase  tax credits.  Secondly, it  makes sure  the                                                               
information about tax credits is available and transparent.                                                                     
                                                                                                                                
JOHANNA  BALES, Deputy  Directory,  Tax  Division, Department  of                                                               
Revenue (DOR),  answered questions related  to SB 29.  She agreed                                                               
with the  intent of the  legislation to provide  transparency and                                                               
information about  tax expenditures, but noted  the large expense                                                               
to do  so. She  referred to Mr.  Gardner's comment  about getting                                                               
information  from the  Film Credit  Program on-line,  but pointed                                                               
out that it  would not provide the type of  information this bill                                                               
is looking  for. She  said she  was aware that  LB&A was  doing a                                                               
performance audit  of the  Film Credit  Program and  had assigned                                                               
seven  auditors  to  the  project,  which  is  expected  to  take                                                               
approximately  six  months  and   use  a  significant  amount  of                                                               
resources  to  obtain the  information.  She  concluded that  the                                                               
legislation would be a highly expensive endeavor for the state.                                                                 
                                                                                                                                
CHAIR WIELECHOWSKI  noted that  DOR was  requesting 16  new full-                                                               
time  positions,   including  8  full-time  tax   technicians  to                                                               
manually compile  the aggregate  tax expenditures,  as well  as 4                                                               
full-time auditors. He  recalled several years ago  when he filed                                                               
a bill for  an on-line checkbook, which was done  for no cost. He                                                               
pointed out  that 45 other  states are doing  performance audits.                                                               
He  opined that  the legislation  was a  good investment,  but he                                                               
hoped it could be done for less than has been proposed.                                                                         
                                                                                                                                
SENATOR PASKVAN asked  if Ms. Bales agreed  with the coordination                                                               
with the  tax management system  that the legislature put  in the                                                               
budget a year ago.                                                                                                              
                                                                                                                                
MS.  BALES said  yes. Once  that system  is up  and running,  the                                                               
ability to compile  the information would simply be  a report. At                                                               
that point in time, tax technicians  would no longer be needed to                                                               
compile data. With  the implementation date of July  1, 2015, the                                                               
implementation  would  not  be   fully  realized  until  after  a                                                               
contractor has been identified, or  around 2017. In order to meet                                                               
the requirements of SB 29,  manual compilation of data would have                                                               
to be done.                                                                                                                     
                                                                                                                                
SENATOR  PASKVAN referred  to oil  production tax  credits of  $1                                                               
billion per  year, and asked what  would be a reasonable  cost in                                                               
order  to get  a  better  understanding of  where  that money  is                                                               
going.                                                                                                                          
                                                                                                                                
MS. BALES did  not have an opinion, but said  it was something to                                                               
think about when undertaking a  performance audit. She reiterated                                                               
that it would be expensive.                                                                                                     
                                                                                                                                
SENATOR PASKVAN  asked if  the DOR  fiscal note  was less  than 1                                                               
percent of the oil tax credits.                                                                                                 
                                                                                                                                
MS. BALES said yes.                                                                                                             
                                                                                                                                
9:59:36 AM                                                                                                                    
SENATOR  GIESSEL  asked if  Ms.  Bales  believed the  bill  would                                                               
clarify  where  the Film  Tax  Credits  would  go. She  said  she                                                               
thought that  the film industry did  not pay taxes and  their tax                                                               
credits were bartered to other companies.                                                                                       
                                                                                                                                
MS. BALES requested more information.                                                                                           
                                                                                                                                
SENATOR GIESSEL explained that the  state gives the film industry                                                               
a  credit and  those credits  are  sold to  other companies.  She                                                               
asked how a performance audit would show that.                                                                                  
                                                                                                                                
MS.  BALES explained  that the  report would  show the  number of                                                               
taxpayers that are claiming the  film credit. A performance audit                                                               
would  show the  benefit  to Alaska  from a  credit  to the  film                                                               
industry. She  noted that there  are 16  Alaska-specific credits,                                                               
12 of  which meet the $1  million threshold, so there  would need                                                               
to be 12 performance audits.                                                                                                    
                                                                                                                                
SENATOR GIESSEL  restated her concern.  She described  a scenario                                                               
where the  film industry credit  was sold to another  company and                                                               
asked how that credit would show up in a performance audit.                                                                     
                                                                                                                                
MS. BALES thought it would be shown  in two ways in the audit. It                                                               
would show up as a credit  given to the company that purchased it                                                               
and how it affected the film industry.                                                                                          
                                                                                                                                
SENATOR GIESSEL referred  to charts on page 106 of  the Fall 2011                                                               
Revenue Source Book  and asked if they summarize  the credits for                                                               
that tax year.                                                                                                                  
                                                                                                                                
MS. BALES said that was correct.                                                                                                
                                                                                                                                
10:04:08 AM                                                                                                                   
CHAIR WIELECHOWSKI noted  the original fiscal note for  SB 29 was                                                               
for $1.7  million and asked  for 16  new full time  positions. In                                                               
the past few  days, substantial changes were made to  the bill in                                                               
an attempt to keep expenses down,  and the effective date was set                                                               
at July 1, 2015,  to give the Tax Division time  to get their new                                                               
automated  tax  system  operational.   That  is  the  system  the                                                               
legislature appropriated $34.7 million  for last year. The intent                                                               
of that  was to avoid  most manual compilation  and to rely  on a                                                               
much less expensive and much more efficient automated system.                                                                   
                                                                                                                                
He explained  that the  revenue period  for tax  expenditures was                                                               
changed  from annually  to 7  years following  enactment for  new                                                               
expenditures,  and within  5  years from  2015  for existing  tax                                                               
expenditures. The  definition of tax expenditures  was refined in                                                               
order  to exempt  those  that  add up  to  less  than $1  million                                                               
annually   and   any   federal  tax   expenditures   Alaska   has                                                               
incorporated  into its  tax code.  He concluded  that the  fiscal                                                               
note is now  more modest and reasonable. He  requested Ms. Bales'                                                               
estimation of costs for version I of the bill.                                                                                  
                                                                                                                                
MS. BALES predicted there would be  a reduction in the amount for                                                               
compilation; however, the performance  audits costs may have been                                                               
underestimated. Even though federal  deductions are not included,                                                               
she predicted performance audits  would be more expensive because                                                               
of the  need to include  lease expenditures and capital  costs in                                                               
the oil  tax credit program.  She pointed  out that there  are 22                                                               
tax   programs  with   their  own   exemptions,  deferrals,   and                                                               
deductions   that  go   beyond  federal   corporate  income   tax                                                               
deductions   that   the   department   "piggybacks   on."   Doing                                                               
performance  audits on  those tax  programs,  within a  five-year                                                               
timeframe, would  be expense.  Also, she  noted there  was little                                                               
guidance regarding standards for  performance audits in the bill.                                                               
She  used  the film  production  tax  credit  as an  example  and                                                               
questioned what  standards would be  used to audit it.  Even with                                                               
the changes to the bill, significant resources would be needed.                                                                 
                                                                                                                                
CHAIR WIELECHOWSKI  said he  would continue to  work with  DOR on                                                               
the fiscal note.                                                                                                                
                                                                                                                                
10:08:46 AM                                                                                                                   
SENATOR  PASKVAN  discussed costs  that  apply  to an  audit.  He                                                               
understood  that DOR  already  has an  internal  duty to  conduct                                                               
audits and  he hoped that  DOR was  not including those  costs in                                                               
the fiscal note.                                                                                                                
                                                                                                                                
MS. BALES explained that DOR  does financial tax audits. The bill                                                               
would also  require performance  audits, which  DOR does  not do.                                                               
Performance  audits require  a more  subjective  process and  DOR                                                               
would need more direction as to how to proceed.                                                                                 
                                                                                                                                
SENATOR  PASKVAN  inquired about  the  automated  system that  is                                                               
going out  to bid. He  opined that  the internal audit  aspect of                                                               
the tax credit systems would be more easily understood.                                                                         
                                                                                                                                
MS. BALES said that was the expectation.                                                                                        
                                                                                                                                
SENATOR PASKVAN asked if determining  whether a credit is meeting                                                               
the intent was a legitimate function of government.                                                                             
                                                                                                                                
MS. BALES said  yes, but the legislation is outside  the scope of                                                               
DOR's mission, which is to  collect taxes. Currently, performance                                                               
audits  are  done  by  LB&A  and  have  specific  guidelines  and                                                               
standards.                                                                                                                      
                                                                                                                                
SENATOR  PASKVAN  requested  clarification  on  whether  the  Tax                                                               
Division  has the  authority to  conduct  performance audits,  or                                                               
whether another department should take on this work.                                                                            
                                                                                                                                
MS. BALES said she has  spoken with Chair Wielechowski about that                                                               
issue. She said she was  not saying performance audits should not                                                               
be  done by  DOR.  She  voiced concern  that  the guidelines  for                                                               
performance  audits are  not included  in  the bill.  Performance                                                               
audits are done by LB&A and contain performance standards.                                                                      
                                                                                                                                
SENATOR PASKVAN asked  if Ms. Bales would be  willing to transfer                                                               
data to LB&A.                                                                                                                   
                                                                                                                                
MS. BALES said that is already done.                                                                                            
                                                                                                                                
SENATOR MEYER suggested this legislation  could be considered for                                                               
LB&A.                                                                                                                           
                                                                                                                                
CHAIR WIELECHOWSKI agreed  to work further on this  issue. He set                                                               
SB 29 aside.