Legislature(2017 - 2018)HOUSE FINANCE 519
05/01/2017 01:30 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentations: the Economy and Fiscal Policy Overview | |
| SB6 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | SB 6 | TELECONFERENCED | |
| + | HB 172 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
May 1, 2017
1:34 p.m.
1:34:39 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Rob
Carpenter, Analyst, Legislative Finance Division; Alexei
Painter, Analyst, Legislative Finance Division; Senator
Shelley Hughes, Sponsor; Buddy Whitt, Staff, Senator
Shelley Hughes; Representative Bryce Edgmon; Representative
Dan Saddler.
PRESENT VIA TELECONFERENCE
Carl Davis, Institute on Taxation and Economic Policy
(ITEP), Washington D.C.; Rob Carter, Agronomist, Plant
Materials Center, Division of Agriculture, Department of
Natural Resources.
SUMMARY
CSSB 6(JUD)
INDUSTRIAL HEMP PRODUCTION
CSSB 6(JUD) was HEARD and HELD in committee for
further consideration.
PRESENTATIONS: THE ECONOMY AND FISCAL POLICY OVERVIEW
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION
CARL DAVIS, INSTITUTE OF TAXATION AND ECONOMIC POLICY
Co-Chair Seaton reviewed the meeting agenda.
^PRESENTATIONS: THE ECONOMY AND FISCAL POLICY OVERVIEW
1:35:49 PM
Co-Chair Seaton acknowledged Representatives Bryce Edgmon
and Dan Saddler in the audience. He relayed that SB 26, HB
115, and HB 111 had always been envisioned by the House as
a comprehensive fiscal plan, which was the reason SB 26 and
HB 115 had initially been combined. He stated that cuts had
as much or more of an impact on the economy than taxes. He
furthered that presentations from Institute of Social and
Economic Research (ISER) and Northern Economics had
demonstrated that fact. The goal was to have an Alaska that
people wanted to live in, with stable services, strong
education, and functioning facilities. He explained there
were different ways to balance a budget, both plans under
consideration would get the state away from an immediate
crisis, but they had different visions of policy changes.
He read from a statement:
The House Majority coalition believes that to help
protect the economy and not further deepen the
recession we are currently in, we need to provide
certainty by eliminating volatility in state budgets,
protect key services that are essential to Alaskans
and their business, and have a modest capital budget
that addresses our deferred maintenance and keeps the
construction industry engaged. We want to understand
the model assumptions and the levers that are policy
choices and the assumptions that we cannot control
that we need to be aware of.
1:38:02 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
addressed a presentation titled "HCS SB 26/HB 115/HB 111
Fiscal Plan" dated May 1, 2017 (copy on file). He detailed
that the co-chairs had asked the Legislative Finance
Division (LFD) to talk to the committee about the House
version of a fiscal plan. The plan included HCS SB 26
[related to the Permanent Fund], HB 115 related to income
tax/education tax, and HB 111 that dealt with oil tax
credit reform and other oil tax issues. In the House
version all of the items had been rolled into SB 26. He
intended to address the entire package as SB 26 for
simplicity. He stated the bill touched every Alaskan, not
just because it impacted the Permanent Fund Dividend (PFD),
but because it impacted the way government would be funded
and the levels of service that government could provide. He
intended to address why a fiscal plan was needed and
whether the House version of SB 26 offered a solution to
the fiscal problem.
Mr. Teal turned to slide 2 titled "Budget Reductions Since
FY13." A bar chart on the slide demonstrated the fiscal
problem facing the state. The black horizontal line
represented revenue, which had declined substantially from
its $7 billion peak [in FY 13] to less than $2 billion at
present. During the same period the state's expenditures
had fallen from $7.8 billion to $4.4 billion. He specified
that the traditional revenue source - oil - used to be
sufficient to cover the state's expenditures, but since FY
13 it had not been. The state faced a $2.5 billion deficit
in FY 18. He furthered that in the past the state had been
able to absorb deficits of that size, but it was the sixth
consecutive year of deficits.
1:40:33 PM
Mr. Teal turned to slide 3 and addressed a chart titled
"End-of-Year Budget Reserve Balances, FY07-FY18." The chart
showed that the state's reserves (Statutory Budget Reserve
(SBR) and Constitutional Budget Reserve (CBR)) had gone
from a peak of slightly over $16 billion [in FY 13] to
about $2.5 billion at present. There was one year's worth
of reserves left after FY 18. The outlook was for
continuing deficits. For LFD, anything the legislature may
do in the face of continuing deficits with no reserves, was
speculation. He explained that the model broke under those
conditions. The presentation looked at scenarios that had a
budget that could be funded. He pointed out that the CBR
served not only as a shock absorber for budget deficits,
but as a cash flow management tool. The Office of
Management and Budget (OMB) said that even during years of
a surplus, there was typically a significant amount of
money flowing out at the beginning of a year before money
flowed in; OMB believed the state needed a cash balance of
about $2.5 billion in the CBR in order to meet cash
management needs. He elaborated the scenario meant
borrowing in the short-term from the CBR and paying back
the amount during the year.
Representative Grenn asked Mr. Teal to repeat the $2.5
billion deficit information.
Mr. Teal explained that even in the best of times, the
legislature had to use CBR draws that were repaid during
the year the money had been drawn. He detailed that the
state's revenue did not appear on July 1 [the beginning of
the fiscal year], but there were significant cash outlays
early in the year. The legislature had always used the CBR
as a source for cash management, which did not include the
shock absorber impact.
1:43:33 PM
Representative Wilson thought the committee had been told
there was $4 billion in the CBR at an earlier hearing.
Mr. Teal answered by pointing to a note including
assumptions used on slide 3. He detailed the information on
the slide assumed traditional withdrawals from the CBR in
FY 17 and FY 18. In FY 17 there had been over $4 billion in
the CBR. The slide indicated $2.2 billion at the end of FY
18 assuming the entire deficit was drawn from the CBR.
Representative Wilson asked for verification that currently
there was $4 billion in the CBR. Mr. Teal answered it was
about $4.5 billion.
Vice-Chair Gara asked about the ramifications of going to a
$2 billion CBR instead of a $4.2 billion CBR.
Mr. Teal replied that $2 billion may be sufficient for cash
management needs, but the legislature may be put in the
position of issuing revenue anticipation notes. It was not
something the state had done in the past, but every year
the budget contained an appropriation for that purpose, so
it was possible the state would issue revenue anticipation
notes for the same kind of thing. The notes had to be paid
during the year - it was short-term borrowing in
anticipation of revenue.
Vice-Chair Gara would personally be more comfortable with a
savings account over $4 billion. He asked if it would be
wiser to maintain over $4 billion in the CBR.
Mr. Teal replied that in his opinion $5 billion was better
than $4 billion; however, that was only his opinion. He
reminded the committee that when there was $4 billion or $5
billion cash in the CBR, the state still owed the CBR its
full balance. It had been up to about $13 billion;
therefore, if the balance was down to $2 billion, the state
owed $11 billion to the CBR as specified by the
constitution. The chart indicated the cash balance, not the
accounting balance of $13 billion.
1:47:53 PM
Representative Ortiz asked when the draw would
traditionally take place to bring the fund down to $2.2
billion.
Mr. Teal answered there was no particular date - it was a
year-end balance. He detailed that typically there were
large outflows, especially for K-12, early in the year. The
money was provided to school districts, which depleted the
balance. Any time there was a deficit, it cost the state
"x" million dollars per day in losses. The losses
accumulated and the projected balance at year end was $2.2
billion. He guessed the draw would be June 30.
Representative Guttenberg referred to the topic of where
the lowest point the CBR cash balance should be. He was
concerned about Mr. Teal's statement that it could be kept
at $2 billion or less. He asked about the cost of revenue
anticipation notes. He asked for detail.
Mr. Teal replied it was a better question for the
Department of Revenue (DOR). He added it would be a higher
interest rate than the state would lose from the CBR, which
was slightly under 3 percent. There would also be cost to
issuing the notes. He summarized that it would be more
expensive to issue notes than it was to borrow from the
CBR.
Co-Chair Seaton spoke to the constitutional provision
related to borrowing from the CBR (he pointed to slide 3).
He noted the CBR had been $13 billion and at present the
balance was $2.2 billion. He asked if there was a
designated timeframe for the repayment of funds.
Mr. Teal answered there was no associated timeframe. Any
time the state had a liability to the CBR, at the end of
the year the General Fund and other accounts were swept
into the CBR for repayment. Until the CBR was repaid, any
unspent general funds would be swept into the CBR. There
was typically a provision referred to as a reverse sweep
that put the money back into the accounts it had come from.
1:51:49 PM
Mr. Teal turned to slide 4 titled "What Does a Solution
Look Like?" The slide contained numerous questions related
to the meaning of healthy reserves. He explained he could
not specify what healthy reserves looked like and could not
tell the legislature what to do. He questioned whether
healthy reserves meant the $2.5 billion minimum the
legislature wanted for cash flow purposes. Alternatively,
he questioned whether it meant growing and stabilizing
reserves and working to get back to a $16 billion balance.
There were a number of ways to look at the issue and the
answer would be different for everyone. Some may merely
want a sustainable and balanced budget and may not
particularly care how the solution looked. He had heard
that sentiment from members of the public. However, to
others the path forward was just as important as the
destination. He continued that those questions brought up
questions about how big dividends would be, the amount of
government that was desired, how much residents would have
to pay out of their pocket for the government, and how
actions would impact the economy. He stated that all of the
questions had major policy implications and he could not
tell the committee the answers to any of the questions.
Mr. Teal continued to address slide 4 and stated that the
points overlapped some. He had seen point 1 [1. Healthy
Reserve Balances?] as a direct response to the problem of
vanishing reserves and points 2 [2. A Sustainable Budget?]
and 3 [3. A Healthier Economy?] as a better way to
emphasize the paths rather than the destination alone. He
asked how fast the balanced budget should be obtained if
that was the goal. He questioned whether the budget should
be balanced immediately or whether a glide path was
acceptable or even preferable to some. He reasoned that the
budget could be balanced at any level as long as the state
had the revenue to support that level of expenditures.
Merely saying the goal was a balanced budget did not
provide answers towards reaching the goal. He addressed
point 3 and believed everyone was aiming at a healthier
economy; however, he questioned whether an income tax would
hurt or help the goal. The traditional view was that an
income tax took money out of the economy and therefore
slowed it down or hurt it. However, it could also be argued
that a state tax went right back into the economy. The way
the tax in Alaska would probably work was it would add $1
for every $0.80 removed from the economy. He noted that
$0.20 of the income tax would come from nonresidents.
Choosing the path involved numerous policy decisions and
some of those were addressed by SB 26.
1:55:47 PM
Mr. Teal advanced to slide 5 titled "What Does HCS SB 26
Do?" The most significant policy change under HCS SB 26 was
a payout from the [Permanent Fund] Earnings Reserve Account
(ERA) to the General Fund. The payout that 5.25 percent for
a couple of years and dropped to 5 percent further out,
greatly reduced volatility in the state's revenue stream.
He elaborated that the reduction in volatility made sense
when recognizing that the payout was as large as or larger
than the state's traditional oil revenue source. He
furthered that the payout would reduce the deficit by about
$1.7 billion to $2 billion per year.
Mr. Teal addressed the second provision in HCS SB 26 that
would mean a payout from the ERA for dividends. Under the
bill the payout was 33 percent, which gave annual dividends
of about $1,250 in the beginning. He furthered that under
the baseline assumptions the dividends were expected to
increase towards $1,400 per year. He noted that some may
wonder how the dividend amount impacted the problem of
vanishing reserves. He detailed that the relationship was
fairly straight forward. As dividends increase it cost more
money. Since there was a 5.25 percent total payout, more
money to dividends meant less money to the General Fund.
Less money to the General Fund meant deficits would
increase and reserves would decline.
Mr. Teal addressed the payout (revenue) limit provision
included in the bill (slide 5). He explained that the
revenue limit kicked in only at revenues above any
scenarios facing the state. He elaborated that it did not
mean the limit was ineffective; it was designed to work
only when revenue was unexpectedly high. He had not
included modeling those scenarios, because too much revenue
would not be seen as a problem. The bill would also divert
some royalties from the Permanent Fund to the General Fund.
He specified that the constitution mandated 25 percent of
royalties to go to the Permanent Fund. Statutes mandated an
additional 25 percent from new fields. The additional 25
percent was diverted to the General Fund under SB 26.
Lastly, the bill contained conditional links to a broad-
based tax and to oil tax/credit reform.
Mr. Teal turned to slide 6 titled "Baseline HCS SB 26." The
slide showed screenshots, which fell under the baseline
assumptions; the assumptions were an OMB growth forecast -
of about $1 billion between FY 17 and FY 26. He furthered
that the budget forecast was flat for FY 19 and grew about
2.5 percent per year after FY 20. The OMB forecast included
retirement assistance at the most recent acutarial
valuation dated June 2016. The spring revenue forecast had
been used for price and a "P10" production forecast had
been used. He knew the committee had some issues with DOR's
production forecast and LFD believed that using the P10
forecast addressed the issue of the 12 percent decline. He
elaborated it provided a revenue number that was very
similar to the number released by DOR late the previous
week. He stated that unfortunately the information included
a number at a particular price, which was insufficient to
update the LFD model. He hoped to build the forecast into
the model later in the week once DOR had provided the
numbers.
2:01:09 PM
Mr. Teal continued that the model used 6.95 percent
Permanent Fund investment returns. He cautioned that the
model showed projections only; the future was uncertain and
LFD expected legislators to understand that their policy
decisions have to address the uncertainty inherent in any
model and in the future in general. The base scenario used
fairly stable earnings and oil prices despite the fact that
both items would most likely be volatile. He emphasized
that the precision was not high and LFD believed the model
was within a couple hundred million dollars for FY 18 and
hopefully within $1 billion by 2026. He noted that the
legislature would not witness the limit being exercised and
he cautioned that the plans should always be stress tested
to see what would occur under less favorable assumptions.
Mr. Teal addressed takeaways from the chart on slide 6.
First, the Permanent Fund reached $70 billion, which was
about 105 percent of the FY 17 real value. The Permanent
Fund was protected, dividends began at about $1,250 and
increased to about $1,400 under the baseline assumptions.
The CBR was not empty as had been implied on slide 3 that
showed reserves of about $2.5 billion remaining in FY 18.
He expounded that one more year of a $2.5 billion deficit
would have emptied the CBR. The bill did not have that
effect - the decline was more gradual. He noted that the
gradual decline was not a complete solution and would
require coming back in a few years to look at reductions or
revenue enhancements. The second screenshot on slide 6
showed increasing the capital budget from $180 million to
$250 million. The committee substitute (HCS SB 26) also
added the House version of the income tax (HB 115) and the
House version of the oil tax bill (HB 111). Under those
assumptions the CBR began to grow, deficits were eliminated
and surpluses were projected in the early 2020s.
2:04:33 PM
Representative Guttenberg urged the co-chairs to reach out
IT Committee and Legislative Council and volunteer the
House Finance Committee to access technology that would
allow the members to read everything on the charts. He
thought it would be beneficial.
Vice-Chair Gara referred to slide 6 and asked about the
capital budget assumption. Mr. Teal replied $480 million.
Vice-Chair Gara did not imagine getting back to capital
budgets of the past. He detailed that the construction
industry had communicated that the constrained capital
budget had been part of the reason for the constrained job
market. He believed some capital budgets had been in the
$600 million to $800 million range over the ten years prior
to 2014. He surmised that on the one hand the budgets
seemed much larger than the state could currently afford.
He gathered that a $300 million capital budget or closer to
those of past years would make the state's savings
disappear much more quickly if the plan only used Permanent
Fund earnings.
Mr. Teal answered that three slides had not been included
because they did not relate directly to SB 26, but a few
slides had been included on capital budget, deferred
maintenance, and other. He deferred to a colleague for
detail.
ROB CARPENTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
confirmed that any increase to the capital budget would
drain reserves quicker. He provided a chart titled "UGF
Capital Budget vs ANS Average $/bbl" (copy not on file)
that showed the unrestricted general fund (UGF) capital
budget from FY 00 to FY 18. The chart included the size of
the capital budget and the price of oil. He relayed that
between FY 00 and FY 17 capital budget average was $600
million. From FY 00 to FY 05 the average had been about
$160 million. He elaborated that during the "boom years"
the average had been about $1 billion. He did not know what
the "sweet spot" was in terms of the capital budget size.
The $180 million in the LFD model was based on an educated
assumption the state would need roughly $50 million per
year for deferred maintenance (based on OMB's projection
for $70 million to $90 million for deferred maintenance in
its 10-year plan, including schools) for state facilities
and another $30 million for deferred maintenance for
schools, $80 million in federal matching funds (which had
averaged about $60 million annually) for highways and
aviation, $10 million for grants, and $10 million for other
state capital. He noted that there was plenty of demand for
capital funding and the funding amount was up to the
legislature.
2:10:23 PM
Representative Ortiz spoke to the decline in the capital
budget and projections it would remain relatively flat in
the future. He asked if there was a way to estimate what
the long-term costs of deferred maintenance would be if the
capital budget was not addressed in a more robust way.
Mr. Carpenter referenced a chart titled "Deferred
Maintenance by Agency (millions)" (copy not on file) that
showed the actual deferred maintenance backlog since FY 12.
The backlog had started at $2.3 billion and had declined to
about $1.6 billion as of January 2017. The decline was a
result of an initiative implemented by the governor and the
legislature - beginning in FY 11, $100 million per year had
gone towards addressing deferred maintenance. The payments
had a significant impact on the backlog. He elaborated that
as maintenance continued to be deferred the costs would
increase. He detailed that buildings fell into more
disrepair as time went on and there was an inflation factor
on the general building materials and cost of labor.
Co-Chair Seaton noted it would be possible to put in some
of the variables when the committee viewed the LFD model.
Representative Wilson spoke to Mr. Teal's mention of
utilizing SB 26 alone without other pieces. She wondered if
the LFD modeling included Senate components such as cuts of
$750 million in the next three years. She stated she was
fairly certain "they" were not looking at a $1 billion
increase between "then and 2026." She also mentioned
legislation the Senate put in place like a Medicaid bill,
crime bill, and an education package that was forthcoming.
Mr. Teal answered that LFD was using the same baseline
scenario for the House and Senate, including the same
earnings assumptions, forecast, and expenditure. The Senate
had requested a reduction in expenditures as part of its
plan. Whereas a House committee chair had elected to
increase the capital budget from $180 million to $250
million as part of the House plan. He explained that the
LFD model would allow a comparison of a Senate scenario to
the House scenario. The model could also demonstrate what a
reduction to the budget would look like in the House and
Senate versions.
2:13:51 PM
Representative Wilson spoke to the importance of including
all components of a piece of legislation when viewing the
LFD model.
Co-Chair Seaton clarified that slides with the title SB 26
House [HCS SB 26] indicated it was the bill version that
passed the House. Likewise, if the slide title showed
Senate, it was the Senate's base version.
Mr. Teal noted that the chart was titled "Baseline HCS SB
26."
Representative Wilson underscored that the slides' titles
did not reflect what had been stated during the meeting.
She explained that there had been discussion about what it
would look like if the Senate bill alone was passed. She
asked for clarification. She wondered if that statement
meant they were talking about the House version of SB 26
without other added components. She wanted the public to be
clear on what bill version and components the committee was
talking about.
Co-Chair Seaton clarified that the top of the slides
indicated what bill version the scenario was addressing
(e.g. HCS SB 26).
Mr. Teal clarified that there were many assumptions driving
the LFD model - some could not be controlled such as oil
prices and Permanent Fund earnings. There were other things
that could be controlled, including the size of the capital
and operating budgets. Policy choices pertained to the
controllable variables and the model's stress test
pertained to uncontrollable variables. He furthered that
the committee may want to see what the model looked like if
there were lower Permanent Fund earnings or a lower price
or production forecast. He explained that the scenarios in
the model were driven by the assumption - there was no
guarantee any of the model's projections would occur. He
referred to a scenario that showed declining reserves. He
provided examples where the change from one scenario to
another was the addition of about $200 million per year in
income tax and about $100 million in capital budget. When
the expenditures were added, there were also taxes added to
pay for the expenditures. He reiterated that there was no
guarantee the model's projections would come to fruition.
The actual scenario could be worse or better.
2:19:14 PM
Representative Guttenberg noted that the committee had seen
a slide pertaining to SB 26 compared with the baseline
House version of the bill. Another slide included SB 26
with the other two House bills added in. He believed some
of the concerns were about whether comparisons were apples-
to-oranges or other.
Co-Chair Seaton clarified that the Senate version was not
being discussed. The committee was addressing two versions
- a baseline of HCS SB 26 without taxes built in and a HCS
SB 26 with a $250 million capital budget and HB 115 and HB
111, which were tied to the House's version of SB 26. Any
slides labeled House pertained to all of the fundamentals
of the House bill and if the slide had Senate it pertained
to the Senate version with its cuts and other.
Representative Thompson remarked that into the future it
appeared the state would be more and more dependent on the
ERA. He found it worrisome that the legislature had not
inflation proofed the Permanent Fund principal in the past
two years and the royalties that went into the principal
had been reduced by 50 percent. He emphasized that the more
the principal could be grown, the more money there would
be. He furthered that the legislature was contemplating
changing the draw limit from $1.2 billion dollar-for-dollar
to $1.4 billion $0.80, plus inflation proofing. He stated
that they would never reach a draw limit under that type of
scenario. He stressed the importance of growing the
principal of the Permanent Fund because it would be needed
for the state's functioning into the future unless there
were some large unforeseen changes. He was also concerned
how the proposals may hurt PFDs.
2:22:53 PM
Mr. Teal answered that the concern was valid. To address
those types of concerns he recommended looking at the model
with a lower interest rate on the Permanent Fund and to
change the inflation proofing assumptions for the Permanent
Fund. A higher fund balance meant higher PFDs and a higher
payout to the General Fund - the higher the payout the
better the state would be in terms of the deficit. He
detailed that everything was related, which was the
reasoning for using a model to generate graphs. He hoped
everyone understood the relationships. He offered to sit
down individually with members if they did not understand
what went into the model and what the impact of changes
would be.
Co-Chair Seaton asked Mr. Teal to address the model. He
reminded members that HB 111 was the House version and if
it appeared in the model it did not reflect changes made in
the Senate. He noted that members all recognized there were
two different ways to balance the budget and that both
plans would move the state away from the deficit crisis. He
requested to look at price scenarios at the top of the
model [shown on a dynamic Excel spreadsheet]. He explained
the scenario used the spring forecast and went to $88 in
the final year on the chart. He requested to look at a more
conservative price range of $50 to $70 and asked what it
did to the plan.
2:25:47 PM
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
referred to the model and demonstrated the price
difference. He explained components of the model shown on a
projector screen. The P60 scenario was slightly more
conservative than the spring forecast and started out $4
lower and was $9 lower by FY 26.
Representative Wilson asked if the model was showing a 7 to
9 percent decrease in oil. Alternatively, because an uptick
in production had occurred in the past two years, she
wondered if the model showed a flat rate. She asked how
many barrels of oil they were talking about.
Mr. Painter answered that the LFD model used the P10
forecast, which was the Department of Natural Resources'
(DNR) high forecast. He pointed out there was a 9 percent
decrease in the first year and somewhat smaller decreases
in future years. He detailed that DOR had recently released
an alternate revenue forecast using a 4 percent decline
curve - it was not built into the model, but was listed for
reference. He furthered that the change really only made a
difference in the first few years - by FY 22 it was close
to the P10 curve. In FY 18 the forecast would be about $70
million more in revenue.
Co-Chair Seaton spoke to the stress test looking at oil
prices going to $70 in the outer years and noted it did not
substantially change the look of things. He asked if there
were any changes that were not obvious. He asked where the
balanced budget would occur.
2:28:15 PM
Mr. Painter replied roughly FY 24 or FY 25 depending on the
model's accuracy.
Co-Chair Seaton observed "before that we're at 95 percent
by FY 23, is that right?"
Mr. Painter returned to the spring forecast and pointed to
the difference in several years of when the deficit would
be closed.
Co-Chair Seaton asked what happened if the capital budget
was increased to $360 million (double the $180 in the model
at present). He surmised that under the scenario the budget
would still be balanced in FY 24 and it would be 97 percent
balanced in FY 22 and the CBR would still be growing. He
asked about the growth in the Permanent Fund under the
scenario. He stated the Permanent Fund was 105 percent its
current value. He asked if the 105 percent meant the fund
was growing with inflation and had increased more than
inflation.
2:30:23 PM
Mr. Painter replied in the affirmative.
Co-Chair Seaton clarified that 100 percent meant the fund
had kept up with inflation and 105 percent meant it had
exceeded inflation. The Permanent Fund would be 5 percent
greater than it would be in FY 26 if it had just grown with
inflation.
Mr. Painter answered in the affirmative.
Co-Chair Seaton asked if other members had questions on the
scenario. He addressed a statutory repayment of the oil tax
credit and discussed production tax received by the state.
He asked about a faster repayment of the credits and asked
for an explanation of level.
Mr. Painter explained that the scenario took the current
and expected earned balance of the tax credits - with HB
111 (House version) there would be very little earned in
future years. It was primarily the existing balance and
spread the payments over the next nine years so there would
be a level amount of about $150 million per year (up from
$70 million or so under the statutory calculation), which
would leave no outstanding tax credits to be purchased in
FY 26.
Co-Chair Seaton asked for verification that all of the tax
credits would have been repaid by FY 26. Mr. Painter
answered in the affirmative.
Co-Chair Seaton asked what the budget looked like and for
verification that the 95 percent meant the state would
anticipate that revenues received were 95 percent equal to
payments.
Mr. Painter believed it represented the amount of the
current deficit. If nothing was done it would be zero
percent, but it filled up as various policy changes were
added.
2:33:45 PM
Co-Chair Seaton referred to FY 25 and asked for
verification there would be $52 million surplus at that
time. He surmised they were talking about rounding errors
in the formula because he believed Mr. Painter had stated
there was a gap of about $100 million or so in the earlier
years.
Mr. Painter answered that by FY 26 the model was not
accurate within $100 million. He detailed that the price of
oil may be significantly different and production may be
significantly different - by that time the model was lucky
to be within $1 billion.
Vice-Chair Gara wanted to see the Senate plan of the $1,000
dividend and no other revenue. He wanted to see a jobs
program. He elaborated that the state had lost 7,000 jobs
in the past year. He did not see how an "only Permanent
Fund plan" would do that.
Co-Chair Seaton agreed, but wanted to get through the
stress test on the House plan first. He noted that even
with a $360 million capital budget, if the discussion was
about a jobs program, it was twice as much as a $180
million projected capital budget. The House plan also
included a $1,200 dividend compared to a $1,000 dividend.
The comparisons would have to be shown sequentially instead
of side-by-side.
Representative Wilson asked for clarification on the budget
portion. She asked if the model showed the actual budgets
passed in FY 16, the budgeted numbers for FY 17, and the
House numbers for FY 18.
Mr. Painter agreed that the FY 16 and FY 17 numbers were
the current adopted numbers with the addition of the
governor's proposed supplemental budget for FY 17. The
baseline OMB 10-year plan scenario was used for FY 18 and
beyond (roughly the governor's budget). The House budget
was close and there was not a significant difference.
Representative Wilson surmised that the FY 16 numbers were
actuals. She asked for verification that the FY 17 figures
were actual plus the proposed supplemental. She wondered
why the model was not using the current House budget versus
the governor's budget for all of the items.
Mr. Painter replied there was no House baseline beyond FY
18. He was not sure how different the number ended up
being.
Co-Chair Seaton stated $7 million.
Mr. Painter stated they could add the $7 million in, but it
would not be seen on the chart.
2:37:44 PM
Representative Wilson assumed that the bump up shown in FY
19 was OMB's projection for the budget.
Mr. Painter answered that the primary reason was due to the
increase in retirement assistance. He elaborated that LFD
had recently received information from consultants showing
that state assistance for retirement would increase from
the current number of $134 million to $353 million. Agency
operations were actually slightly lower in the OMB 10-year
plan.
Representative Wilson wanted to hear the reason for the
large bump [in retirement costs].
Co-Chair Seaton replied that the committee could look at
actuarial analysis at some point; he did not believe the
committee would have the ability to change them.
Representative Wilson countered that the committee needed
to understand the increase.
Co-Chair Seaton returned to the model and asked about a
stress test in terms of Permanent Fund returns. He
requested to leave the level amount of tax credit
repayments and the capital budget.
Mr. Painter addressed an Excel tab that used the actual
Permanent Fund investment returns from the period of FY 07
through FY 15, which included the great recession years
where there had been a large drop and then subsequent
recoveries. The other scenario was for the same years in
reverse. He explained that the actual mean investment
return over the period had been 6.5 percent, which was not
very different. He explained that the sequencing of returns
made a large difference.
2:40:43 PM
Co-Chair Seaton noted that in the scenario even though they
were looking at the last nine years' return rates, the
model indicated the CBR would increase slightly and money
would be retained in the ERA at the end of each year. He
asked if there would be about $500 million to $1 billion in
the reserve under the scenario.
Mr. Painter replied that it was roughly $1 billion in FY
23, which was the lowest year.
Representative Guttenberg asked what the model was using
for production and price of oil. Mr. Painter responded they
were using the P10 production forecast and the spring
forecast for price.
Representative Guttenberg asked for verification the items
were built into the assumptions. Mr. Painter agreed. He
noted those items were not varied in the current scenario.
The only item being altered was the Permanent Fund returns.
Co-Chair Seaton observed that the dividend had been
decreasing slightly in the graph due to a substantial
correction and loss in the Permanent Fund. He asked for the
reason and if it was related to losses in the fund in FY
09.
Mr. Painter replied that in FY 09 the Permanent Fund loss
had been minus 18 percent. The information showed the
impact of the loss carried through the average.
Vice-Chair Gara asked to compare the difference between the
capital budget from last couple of years, the model, and
the average.
2:43:43 PM
Mr. Carpenter answered that the capital budget had been $96
million the preceding year and the governor's current
proposed budget was $115 million.
Vice-Chair Gara restated the second part of his question.
He noted the model assumed a capital budget of $360
million. He asked for the average capital budget over the
past 10 years.
Mr. Carpenter agreed that the model showed a capital budget
of $360 million. He detailed that chart he had shown
earlier in the meeting had shown a $600 million average
from FY 00 to FY 17.
Vice-Chair Gara did not see the ability to afford a $600
million capital budget. He wanted to see some growth in
construction jobs. He spoke to the $360 million capital
budget under the plan. He asked if CBR earnings were
growing or remained flat.
Mr. Carpenter pointed to an Excel scenario that assumed a
dire financial market - in the scenario the CBR balance was
still maintained and the ERA was recovering and growing.
Vice-Chair Gara asked to view the best forecast projection.
He surmised the state could afford to increase the capital
budget slightly while maintaining a growing CBR balance
under the average forecast.
Mr. Carpenter answered in the affirmative. He specified
that the scenario on the screen included a capital budget
of $360 million per year. He pointed to the upturn in the
CBR and growth in the ERA.
Co-Chair Seaton pointed to the reserves growth of about
$700 million to $800 million per year between FY 25 and FY
26.
2:46:52 PM
Mr. Teal reminded the members inflation proofing had been
built into the bill. Any time the ERA balance was more than
four times the amount of the payout, there was a transfer
from the ERA to the corpus of the fund. He continued that
it kept the ERA balance at roughly four times the payout so
it appeared that reserves were flat. He detailed it
actually indicated that the corpus of the fund was growing,
which would be reflected on the Permanent Fund graph. He
pointed to an Excel chart and noted the fund grew to $70
billion. He noted that under any scenario at a 6.95 percent
payout - the bill specified that was what it would look
like. When reverting to the stress test, it indicated the
Permanent Fund would fall substantially and then recover.
Vice-Chair Gara believed it was necessary to see a return
of construction jobs to help reverse the recession. He
asked if a $360 million capital budget, which was lower
than average but higher than the preceding year, seemed
like a responsible amount. He noted that the capital budget
had not yet been written.
Mr. Carpenter replied that it was a policy call.
2:49:17 PM
Co-Chair Seaton asked to see the model pertaining to SB 26.
Mr. Painter complied and noted the Excel model showed SB 26
with no other changes other than $185 million in budget
cuts. He noted the Senate's operating budget was $185
million lower than the governor's budget (but not below FY
17 - the baseline for the model was the governor's proposed
budget).
Co-Chair Seaton asked to see the bottom left graph on the
screen. He referred to a $300 million deficit in FY 26
indicated on the screen. He noted the bill included a
$1,000 dividend ($1,000 was also the dividend floor). He
requested a stress test on the price at P60. He stated if
the price was running in the $50 to $79 range the CBR was
continuing to decline and there would be a deficit of
approximately $485 million in FY 26. He asked to see a $360
million capital budget.
Mr. Painter asked if Co-Chair Seaton wanted the scenario to
maintain the P60.
Co-Chair Seaton answered in the affirmative. He observed
that the CBR would almost disappear in FY 26 if the
specific scenario was maintained.
2:52:49 PM
Representative Ortiz spoke to a scenario that included
approximately $180 million in budget cuts. He asked if the
reductions continued out in the model to the projected $750
[million] over the next three years.
Mr. Painter answered in the negative. He offered to include
larger cuts in the scenario if desired. The scenario had
started with cuts of $185 million.
Representative Ortiz asked for verification that the $185
million in cuts was assumed year after year in the model.
Mr. Painter clarified that the model included a shifting of
the OMB line down by $185 million on a one-time basis.
Vice-Chair Gara referred to a bar chart in the model that
assumed the Senate's education and university cuts, but it
did not assume ever returning the funds to those
allocations. He surmised the chart assumed the cuts would
take place in the current budget and would be maintained
into the future. He asked for the accuracy of his
statements.
Mr. Painter replied that the OMB baseline scenario had a
flat operating budget for FY 18 through FY 20 and grew at
2.5 percent (slightly more than inflation), meaning there
could be some increase. The OMB plan did not distinguish
between the various parts of agency operations.
Co-Chair Seaton asked to return to the spring forecast. He
asked about the $185 million that included cuts, which
would require a supplemental of slightly over $20 million.
He asked to reduce the cuts to $150 million. He observed
the CBR was declining in the scenario and the deficit was
$424 million in FY 26. He requested a stress test on the
data. He observed that with the reverse the ERA was used up
for two years and the CBR was still declining.
2:56:25 PM
Representative Wilson asked to return to the $180 million
capital budget in the model. She did not believe the Senate
was proposing to take $180 million off of the proposed
increase, but taking $180 million off of the actual budget
in the current year. She clarified there were bills that
had been passed by the legislature related to Medicaid,
crime, and education reform. She did not believe it was
possible to specify the funds would come from a specific
area. She asked for verification there was no way the chart
could include anything different than a 9 percent decrease
related to oil.
Mr. Painter replied that LFD did not have the additional
data from DOR, but the hope was to receive the data by the
end of the week.
Representative Wilson pointed to the data and surmised it
was DOR's actual spring forecast. She wondered what
happened with the scenario.
Mr. Painter asked for clarification. He asked if
Representative Wilson wanted the model to use a cut of $185
million.
Representative Wilson asked if $185 million was the current
cut in the governor's proposed capital budget.
Mr. Teal answered there was another way to show the
information. He explained that instead of shifting the
entire curve parallel, it could be changed to grow at a
rate lower than 2.5 percent. He reminded the committee that
it was a policy decision and any number desired could be
used. For example, if the legislature believed the budget
could be held flat it could put a flat budget in or some
growth rate that was less than inflation.
Representative Wilson clarified she was only trying to
understand the Senate's plan. She thought it was important
to understand whether there would be a $485 million deficit
by FY 24. She asked if the governor had included the $180
million in his proposed capital budget.
Mr. Teal answered that the Senate had asked LFD to include
the $185 million decrement as its baseline.
Representative Wilson asked how far out the deficit would
continue under the scenarios currently presented. She
remarked it would be helpful to have personal computers to
view the information presented on the screens.
Co-Chair Seaton replied that the scenarios maintained the
deficit through FY 26 - the deficit in FY 26 was slightly
over $200 million. He requested a change to the statutory
[oil credit] payout to a higher level payout in the current
scenario. He noted the committee had seen stress tests on
both projects, but LFD could only help so far because the
remainder was based on policy calls (e.g. whether the
legislature wanted to see cuts and job cuts or other). He
remarked that the scenario included the Senate's 5 percent
education cut. He stated the cut could be characterized in
numerous ways including a cut to the Alaska Pioneer's Homes
or other places in the Department of Health and Social
Services. Alternatively, there was the House's version of
the budget that increased funds to take care of a robust
economy.
3:02:47 PM
Vice-Chair Gara saw the [Senate's] plan as a "people leave
Alaska plan." He asked how fast the CBR would disappear in
the Senate's plan if its $70 million education cut and
university cut was restored and the construction jobs
budget was increased to $360 million.
Mr. Painter asked for clarification on the cut Vice-Chair
Gara wanted to see in the model.
Vice-Chair Gara stated the Senate's education cut of $70
million for K-12 and university cut of roughly $21 million
were restored. He repeated including a $360 million capital
budget. He did not believe the plan would work.
Mr. Painter answered that he had been presenting the level
tax credit payments. He mentioned returning the model to
the statutory payment.
3:04:47 PM
AT EASE
3:11:27 PM
RECONVENED
CARL DAVIS, INSTITUTE ON TAXATION AND ECONOMIC POLICY
(ITEP), WASHINGTON D.C. (via teleconference), provided a
PowerPoint presentation titled "Comparing the
Distributional Impact of Revenue Options in Alaska" dated
May 1, 2017 (copy on file). He referred to a presentation
overview on slide 1, which pertained to a study ITEP had
released the prior week using its microsimulation tax model
to evaluate the distributional consequences of different
revenue options for Alaska:
· The ITEP Microsimulation Model
· Five Revenue Options in Alaska
o Personal Income Tax
o Permanent Fund Dividend (PFD) reduction
o Sales Tax
o Payroll Tax
o Payroll Tax + Investment Income Tax
· Comparisons Across Options
· Additional Tax Incidence Research
· Questions?
Mr. Davis explained that the options considered had been
compared across families. He moved to slide 2 and provided
an introduction to ITEP:
The Institute on Taxation and Economic Policy (ITEP)
is a nonprofit, non-partisan research organization
that works on federal, state, and local tax policy
issues. ITEP's mission is to ensure that elected
officials, the media, and the general public have
access to accurate, timely, and straightforward
information that allows them to understand the effects
of current and proposed tax policies.
Mr. Davis turned to slide 3 titled "ITEP Model Background."
He detailed that the model was the company's primary tool
it used to do its work, which a team of economists kept up
to date. He provided detail from the slide:
· Built in 1994-1996, but still evolving in 2017
· Designed to:
o Predict the distributional effect of proposed tax
changes on taxpayers at different income levels
o Predict the revenue gain (loss) from proposed tax
changes
o Estimate the impact of current state and local
taxes in all 50 states
o Measure the interaction between state and federal
tax changes
· Employs the same technology used by the US Treasury,
Congressional Joint Committee on Taxation,
Congressional Budget Office, and some state
departments of revenue (e.g. TX, MN, ME)
· Consists of four basic modules: personal income tax,
property tax, consumption tax, and business tax
Mr. Davis elaborated on slide 3. He explained that many
state departments had similar models. For example,
Minnesota had a robust model that was used frequently. He
noted that Colorado had recently begun using similar models
as well. He relayed that the model allowed ITEP to estimate
the impact of many types of taxes [listed on slide]. He
noted that the company did not typically consider severance
or oil taxes and royalties.
3:15:58 PM
Mr. Davis turned to slide 4 titled "ITEP Model Data
Sources." The model's foundation was tax return data
reported by the IRS [Internal Revenue Service], which was
helpful for analytical purposes because there was data on
capital gains, dividends, interest, salaries, wages,
business income, farming, unemployment, social security,
and other. He detailed that IRS data was supplemented with
census data, the Joint Committee on Tax, the Congressional
Budget Office, state specific data sources, and other.
Compiling the information created a profile of the tax
paying population in order to have records representing low
income households, middle income households, and high
income households. He explained it was called a
microsimulation model because it started from the ground up
- it began with the individual tax payer and a tax
calculation was applied. The model could be run based on
taxpayers in a specific state or nationwide. The
calculations were summed up into tables he would show later
in the presentation.
3:18:12 PM
Mr. Davis advanced to slide 5 titled "Research Design":
· Five revenue options, each raising $500 Million per
year
o Revenue amount ($500m) chosen only to allow for
comparisons.
o Options are not mutually exclusive. In the real
world, the discussion centers around striking the
right balance, not picking the "best" single
option.
· Distributional impact on Alaska residents, grouped by
each tax unit's income level. For example:
o Lowest 20 percent = Total income below $25,000
o Middle 20 percent = Total income between $40,000
and $73,000
o Fourth 20 percent = Total income between $73,000
and $115,000
o Top 5 percent = Total income above $228,000
ƒAverage income for this group = $502,000 per
year
· Non-resident impact is considered
o More revenue from non-residents means lower
payments required from Alaskans.
Mr. Davis expounded on slide 5. He underscored that the
$500 million figure had only been used as an example. He
noted that just because the model looked at options one at
a time, it was not an effort to encourage anyone to pick a
favorite and run with it. He was aware the conversation was
about striking the appropriate balance and about putting
together a fiscal package. He explained that his references
to low income families included the bottom quintile in
Alaska [indicated on slide 5].
Mr. Davis moved to slide 6 that showed a chart pertaining
to personal income tax similar to HB 115 (rates reduced by
27.75 percent to conform to $500 million target). He
specified that because the example aimed for a $500 million
comparison point, it was necessary to scale back the tax
rates in order to hit the target. The example was
progressive throughout the income distribution. Many low
income families would be exempt from an income tax (ones
that were not would pay relatively small amounts) and in
the middle, things like the zero percent bracket and the
$4,000 personal exemption benefitted middle income families
significantly - some middle income families would pay under
1 percent of their income. The income tax would top out at
about 2.8 percent for high income earners. The statutory
rate ITEP modeled for the tax was just over 5 percent at
the top, but in practice very few families would pay
anything close to that amount due to the graduated rate
structure and benefit of the lower rates on early dollars
and income.
3:22:00 PM
Mr. Davis moved to a chart on slide 7 related to a
reduction of Permanent Fund Dividends by $784 per person,
which would raise the same amount - the action should raise
about $500 million in savings overall. The slide showed a
starkly different distributional effect, with a very high
impact at the lowest income level. The $784 represented a
larger fraction of a low income household's budget compared
to high income earning households. He pointed out that the
bars on the chart were quite a bit higher than those in the
chart related to personal income taxes. He detailed that
there was less income at the bottom overall, therefore the
7.2 percent impact at the bottom would not raise nearly the
same amount that 7.2 percent of income at the top would
raise.
Mr. Davis advanced to a chart on slide 8 related to a sales
tax of 3 percent on most goods and services (exempt were
groceries, health care, shelter, child care). He discussed
that even though the current debate was largely focused on
income taxes, PFDs, gasoline tax, ITEP wanted to look at
some other broad-based taxes as well. He discussed that
sales taxes were generally regressive for a variety of
reasons, even when exemptions for basic necessities were
offered. He specified it was partly because every state
with a sales tax ended up taxing a significant share of
business purchases - it was clear that sales taxes paid by
businesses ultimately were passed to consumers. He
furthered that even when a state tried to exempt basic
necessities such as groceries and shelter, if items used by
a grocery store were taxed, the costs were passed on to
consumers.
Mr. Davis moved to slide 9 and addressed a payroll tax of
2.43 percent on salaries, wages, and self-employment income
(the 2.43 percent was estimated by ITEP to generate $500
million per year). He detailed the tax was relatively flat
across the income distribution because it was a flat rate.
The tax trailed off at the top because high income families
tended to earn a significant share of their income from
investments, which would be exempt under a payroll tax.
3:25:09 PM
Mr. Davis referred to an income option of a payroll tax of
2.1 percent on salaries, wages, and self-employment paired
with a [6 percent] tax on investment income on slide 10.
The idea was to remedy how a standalone payroll tax would
exempt investment income. He concluded it would result in a
more proportional distribution throughout. He moved to
slide 11 and addressed the impact the bottom 20 percent of
Alaskans would experience under different revenue options.
He pointed to the 7.2 percent impact from a PFD cut and the
0.1 percent impact from a personal income tax (many
families would be entirely exempt). He added that payroll
and sales taxes fell in between the two [percentage wise].
Mr. Davis turned to slide 11 and spoke to the impact on
middle 20 percent of Alaskans. He pointed to the 2.5
percent impact from a PFD cut and the 0.7 percent impact
from a personal income tax - he noted the difference was
about threefold and was fairly substantial.
3:26:54 PM
Mr. Davis turned to slide 12 and addressed impacts on
upper-middle income Alaskans. No matter the option, the
impact tended to be fairly consistent. An income tax would
amount to about 1.2 percent of income for an upper middle
income tax payer and a PFD cut would be somewhat larger at
1.6 percent of income. He noted it had to be considered on
a case-by-case basis and it would depend heavily on family
size. He detailed that for an upper middle income Alaskan
with a family of four or five a PFD cut would be much more
significant than a personal income tax. Also, a single
taxpayer may actually pay less under a personal income tax
than through a PFD reduction.
Mr. Davis to slide 13 and spoke to the impact on the top 5
percent of Alaskans (income over $228,000). He detailed
that the group tended to have larger incomes and would pay
higher income tax. He moved to slide 14 that included other
resources he encouraged committee members to review:
· Gunnar Knapp, Matthew Berman, and Mouhcine Guettabi
(ISER)
o "Short-Run Economic Impacts of Alaska Fiscal
Options" (March 2016)
· Berman, Matthew and Random Reamey (ISER)
o "Effect of Alaska Fiscal Options on Children and
Families" (February 2017)
· Minnesota Department of Revenue
o "2017 Tax Incidence Study" (March 2017)
· Texas Comptroller of Public Accounts
o "Tax Exemptions & Tax Incidence" (February 2017)
· Colorado Department of Revenue
o "Tax Profile & Expenditure Report, 2016" (January
2017)
Mr. Davis remarked that he did not believe any of the
findings shown in the presentation should be tremendously
controversial. He moved to slide 15 and spoke about
research economists at ISER had done over the past year or
so. An ISER chart indicated that economists had reached
very similar conclusions in regard to income taxes, sales
taxes, and PFD reductions. He noted that the PFD was a
unique feature in Alaska; therefore there was no
comparative data from other states. He continued that many
state governments had studies on existing income and sales
taxes. For example, Minnesota had a very detailed tax
report that showed how the impacts varied. He mentioned
other states such as Texas and Colorado. He pointed to the
gold bar on the chart that indicated a reduction in the PFD
- it showed a representing a large fraction of income for
low income families. The red lines [flat rate income tax
and progressive income tax] were the lowest impact for low
income families. The chart reflected that income taxes
would generally be lower per dollar (ISER's study used a
$100 million annual impact instead of the $500 million
impact). He elaborated that the income tax lines in red
were below the PFD line in gold; the income tax was
generally cheaper for middle income and some upper income
families (the impact depended on family size).
3:30:54 PM
Mr. Davis relayed the full study was located at
www.itep.org.
Vice-Chair Gara spoke to payroll taxes. He asked if a
partnership distribution at the end of a year would be
captured by a payroll tax.
Mr. Davis answered that a distribution should be captured.
He detailed that the bulk of payroll tax revenue would come
from wages and salaries, but it was necessary to include
some amount of self-employment and business income under
the tax because if there were large discrepancies between
the tax treatment of wages and salaries versus business
income, it created opportunities for tax avoidance. The
scenario had occurred in the past, especially most recently
in states like Kansas.
Vice-Chair Gara asked whether it would be possible for
higher income business owners to get around a payroll tax
by paying bonuses or shares to a shareholder.
Mr. Davis answered there had to be some policing of the
distinction. He noted the topic was not his area of
expertise. The line between different categories of income
could often be somewhat fuzzy.
3:33:18 PM
Representative Guttenberg spoke to distribution impacts on
revenue options. He asked about other locations that had a
tax increase or decrease and noted there was typically an
existing sales tax or income tax. Alaska did not have
either. He asked how that changed the dynamics of the
situation facing Alaska.
Mr. Davis replied that it created a somewhat larger margin
of uncertainty in forecasting the revenue impact of
different options. He explained that when states with
existing taxes were seeking to do revenue projections they
began with what they had already collected under the
specific tax; it allowed the state's to determine how
things had changed since the collections had come in. He
relayed that revenue forecasting tended to improve over
time. Revenue estimates were likely to be the least
accurate at the point when a new tax was established. Over
time many types of taxes - including sales and income taxes
- tended to become more complicated. It was possible to
think through a relatively simple tax carefully when it was
being established. For example, many sales taxes were set
up close to 100 years ago when the economy looked very
different - many personal services were not taxed, but the
service sector had grown enormously over the past few
decades. He cited streaming video, Airbnb.com, and other
items that were relatively new. He referred to historical
mistakes that could limit the effectiveness of existing
taxes.
3:36:28 PM
Representative Guttenberg spoke to the study of sales tax.
He asked if there had been a study on how the
implementation of a sales tax impacted the amount of
internet sales the local economy.
Mr. Davis asked for clarification. He asked if
Representative Guttenberg was referring to the inability
for states to tax sales coming into the state from outside
the state.
Representative Guttenberg replied that he was interested in
a general basis answer.
Mr. Davis spoke to the complexity of a sales tax - it had
been extremely slow going to see the reality of state sales
tax laws catch up with changes in the economy. He cited e-
commerce as an example. In the last two months the nation's
largest electronic retailer - Amazon.com - had begun
collecting sales tax in every state, but only on direct
sales. There were still a large number of sales Amazon
facilitated on behalf of third-party smaller sellers where
sales tax was not being collected. There were large gaps in
state sales tax enforcement pertaining to e-retail. There
were a small number of states that taxed personal services.
Many states arguably overtaxed the purchases by businesses.
He concluded there was currently no ideal sales tax at the
state level - they all had fairly fundamental structural
problems.
3:38:50 PM
Representative Ortiz asked if a receipts tax was most
similar to a sales tax or other. He asked if it would have
more or less impact than a sales tax across the board.
Mr. Davis replied that the concept was currently under
discussion in states such as Louisiana and Oregon. Receipts
taxes were often viewed as business taxes and were
sometimes viewed as being interchangeable with corporate
income tax. He continued that literature showed a tax on
corporate profits - due to the cost structure - would tend
to be passed through to corporation shareholders. Whereas,
a gross receipts tax was much more likely to be passed
through to consumers due to the way it impacted business
cost structures. In general, receipts taxes tended to look
much like sales taxes in their overall distribution - they
often generated large amounts of revenue at relatively low
rates because they tended to be prone to tax pyramiding. He
explained that the same purchase was taxed many times
throughout the production stream - even though it may have
been taxed at a low rate each time, it could ultimately
amount to fairly high effective tax rates. He detailed it
lead to fairness problems across businesses because
businesses that tended to be vertically integrated were
able to avoid paying the gross receipts tax, whereas
businesses relying on sales and purchases found themselves
subject to the tax.
3:41:14 PM
Representative Pruitt asked if ITEP did any economic
modeling.
Mr. Davis responded that the data contained static
distributional estimates. He detailed that ITEP did not do
dynamic economic modeling. The literature on the impact of
state level taxes on state economies tended to show fairly
small effects. He continued that some studies were not even
able to determine the direction of the effect. For example,
if an increase to a gas tax lead to significantly more
revenue available for construction and the creation of
construction jobs. Teasing out the economic effect of state
level tax changes was very challenging. They had found that
the study was rarely done at the state level because it
tended to be more speculative and a more long-term
phenomenon. He furthered that when states were trying to
balance their budgets on a one or two-year cycle, the
effects would generally not show up in that short amount of
time.
Representative Pruitt noted that the ISER presentation had
included the consideration of nonresidents. He believed
that in the past ISER had told the committee about specific
methods of taxation that would bring more from nonresidents
than others. He wondered if ITEP had identified a category
that would have a larger impact from outside of the state.
Mr. Davis answered that the modeling did include
nonresident impacts, but the information did not show up
visibly in the tables. He noted that in the presentation
the sales tax bars were quite a bit lower because the sales
taxes raised a much more significant amount of revenue from
nonresidents than the PFD reduction would. He did not have
the data on hand, but he believed in the ITEP model the
sales tax was one of the more effective measures at
generating revenue from outside the state. The income tax
would generate a smaller share directly from nonresident
workers, but it would tend to generate the largest tax cuts
for wealthier Alaskans in the form of a write-off for state
and local taxes at the federal level. The PFD was shown as
the least effective option in terms of nonresident revenue
generation.
3:44:57 PM
Representative Wilson asked why the top 20 percent of
earners had been split into three categories.
Mr. Davis answered that the method was used because a very
large fraction of income was held by the top 20 percent [of
earners]; therefore, it was valuable to do a more fine
grained analysis. He elaborated that the top 20 percent in
Alaska included everyone from a couple with two incomes of
$60,000 to a family earning up to $10 million per year. He
explained that the two families were clearly in very
different financial circumstances and ITEP believed it was
valuable to break out the groups. He referred to the
Appendix A on page 15 of the study [titled "Comparing the
Distributional Impact of Revenue Options in Alaska" dated
April 2017 (copy on file)] that included a column with the
information.
Representative Wilson asked for clarification on the
document. Mr. Davis replied that the information was in
Appendix A of the ITEP study.
Co-Chair Seaton noted the document was in members' backup
material.
Representative Wilson wondered how family size was factored
in across the income board.
Mr. Davis responded that he did not believe the ITEP
distributional charts as the only tool that should be used
in evaluating the distributional impact of the options. He
believed there was also significant value in supplementing
the wider analyses with more fine grain representative
taxpayer analysis. He believed Co-Chair Seaton's staff may
have prepared some of the information looking at specific
taxpayers. He explained it allowed the creation of a
hypothetical of a single mother earning $30,000 to
determine what she would owe under the income tax and how
the PFD cut would impact her. He referenced an ISER study
conducted by Matthew Berman and Random Reamey in February
[2017] titled "The Effect of Alaska State Fiscal Options on
Children and Families." The study broke the information
down by family type. He believed the research was
interesting and helpful.
Representative Wilson discussed that some municipalities in
Alaska charged property taxes, some had sales taxes or
sales taxes only, and other areas had neither. She wondered
how to take the ITEP information and apply it across the
state that contained areas with different tax levels.
3:49:50 PM
Mr. Davis replied that it was a very important question,
especially in Alaska where the variation could be wide. The
ITEP information included a statewide average of how a 3
percent sales tax would impact families at different
levels, but if the clothing or car repairs or any other
taxable service or good was more expensive, the sales tax
would be more expensive as well. He relayed that
unfortunately, ITEP did not have local-level data in its
model; it did not have a unique value-add in the area.
Representative Wilson appreciated the breakdown, but she
surmised that in reality, the data would not really show
the true effects of adding any of the taxes into Alaska due
to the vastly different communities and taxes throughout
the state.
Mr. Davis answered that of the options the organization had
examined, the sales tax had varied the most by locality due
to the difference in prices. Under the income tax, every
Alaskan would be subject to the same income tax pools
regardless of their location. It may be that certain
localities had a higher concentration of low income
families and were finding that the bottom 80 percent of the
income distribution would pay less under an income tax than
a PFD reduction. He added that certain low income areas in
Alaska may actually be higher than that. He explained that
if there were very few high income taxpayers in a given
locality, there may be very few people that would be more
impacted by an income tax than they would be by a PFD
reduction. The overall chart used a statewide average, but
by locality it would depend on the price of goods and
services and on the levels of income.
Co-Chair Seaton thanked Mr. Davis for his presentation. He
pointed out that the Juneau Empire had recently published
the average salary of every district in the state per
capita. He noted that the average salary in a given
community was not available or it had not been made
available.
3:53:31 PM
Representative Wilson stated it was possible to go by
income in each district; however, it was necessary to look
at other existing tax obligations in each community and at
other things like the cost of goods and other.
CS FOR SENATE BILL NO. 6(JUD)
"An Act relating to the regulation and production of
industrial hemp; relating to industrial hemp pilot
programs; providing that industrial hemp is not
included in the definition of 'marijuana'; and
clarifying that adding industrial hemp to food does
not create an adulterated food product."
3:55:00 PM
SENATOR SHELLEY HUGHES, SPONSOR, relayed that the preceding
year, former Senator Johnny Ellis had introduced a bill
about hemp. She recalled receiving a phone call from a
farmer who had been very interested in the bill. The bill
had been introduced at the tail end of the previous
session; therefore, she had committed to introducing a bill
in the current session. She noted that when she had
initially introduced the bill it had been quite short - it
had been simply to remove hemp from the marijuana
definition section in statute and place it under the
Division of Agriculture defined as an agricultural product.
The current bill was slightly different in order to be in
compliance with federal law. She was still confident that
the Division of Agriculture and individuals interested in
farming hemp were comfortable with the bill.
Senator Hughes relayed that she had worked on a number of
policies to help bring the state into the 21st century in
terms of technology and other. She remarked that the state
had basically gone silent on the topic for a number of
years and it was now going back to catch up. She continued
that in the 1600s, hemp had been a stable crop in the
United States. She elaborated that the sails of European
ships traveling to America had been made of hemp.
Additionally, some early drafts of the Declaration of
Independence had been drafted on hemp paper and covered
wagon canvas had been made of hemp. In 1937 the product had
been made illegal nationwide; therefore there had been
little usage until the product had been redefined at the
federal level by the 2014 Farm Bill [the Agricultural Act
of 2014]. She elaborated that 30 states had passed
legislation - there were 17 states that were conducting a
pilot act. There were tens of thousands of products that
could be made from hemp.
Senator Hughes continued that a meat plant in Palmer was
currently being privatized. She elaborated that hemp was a
nutritional forage for livestock - in order to make the
meat plant work, the farmers needed to grow their livestock
herds. Hemp grew easily in Alaska, it was nutritious, and
was good for the soils. She had heard from others
throughout the state interested in using the product. She
referred to a person interested in using hemp for building
insulation and another person using hemp to make soaps and
body products. She highlighted that the sponsor statement
in members' packets was printed on hemp paper.
Senator Hughes explained that SB 6 defined hemp as cannabis
with a THC content of 0.3 percent. She shared that 1
percent was the threshold of intoxication. When growers
were trying to produce marijuana they aimed for 20 to 30
percent THC. The bill would also define hemp as an
agricultural product and would remove it from controlled
substances statutes. She furthered that the bill would
create a pilot program, which was part of the federal
requirement, and would allow registrants to participate.
The Division of Agriculture would have the regulatory
authority and would create a fee structure to have the
program be self-sustaining. The bill also removed CBD oils.
She noted her staff and others were available to speak to
the bill. She remarked that her office had been working
with an attorney at Hemp Law LLC who had worked across
states and helped her office understand legal requirements
in terms of compliance with federal law. She thanked the
committee for its time and noted the next day was Alaska
Agriculture Day. She believed hemp was an economic
opportunity the state should promote.
4:02:11 PM
Representative Guttenberg was supportive of the bill, but
he had concern with the conflict between hemp and pot in
outdoor growing fields. He mentioned pollen as an issue. He
thought there needed to be an understanding about the two
crops. He wondered if the Division of Agriculture or the
bill sponsor had been approached about the issue.
Senator Hughes deferred to her staff for detail.
BUDDY WHITT, STAFF, SENATOR SHELLEY HUGHES, relayed that
the sponsor's office had been approached with the concern.
He directed attention to page 3, lines 4 through 7 of the
bill and explained that the provision had been added to
address the concern - it fell under the Division of
Agriculture's responsibility to adopt regulations related
to industrial hemp. The provision stated the division was
required to establish isolation distances for the
production of industrial hemp. The reason a specific
distance had not been identified was to give the division
the leniency to decide what the distance should be. The
sponsor's office had determined it would be better for the
division to establish the distance through regulation
rather than the legislature including a distance in statute
that may not be workable or ideal. He deferred to the
department for further detail.
4:04:48 PM
Representative Guttenberg stated it was his impression
there were a limited number of outdoor facilities and
farmers - most were located in controlled greenhouses. He
shared that he had been asked to visit a garden that had a
strain growing outside. He surmised the issue may not apply
to greenhouses or inside commercial growers.
ROB CARTER, AGRONOMIST, PLANT MATERIALS CENTER, DIVISION OF
AGRICULTURE, DEPARTMENT OF NATURAL RESOURCES (via
teleconference), referred to isolation distances and
relayed they were a minimum separation required between two
or more varieties of the same species. The current
discussion pertained to cannabis sativa industrial hemp and
cannabis sativa recreational marijuana. The purpose of the
isolation distance was to keep seeds pure in the production
process. Additionally, in the case of recreational
marijuana, the purpose was to keep female crops from being
seed-free in order to have a viable product to sell. The
isolation distances were set for a multitude of other crops
(e.g. alfalfa, barley, oats, wheat, and other) that met the
federal certified seed standards; the distances were set in
accordance with documented global scientific research. He
spoke specifically to the bill and relayed that the
Division of Agriculture would conduct its due diligence to
ensure it had explored other opportunity from Colorado,
Manitoba, Saskatchewan, Canada, and the European Union
(that had been growing industrial hemp for a significant
amount of time), to make sure the isolation distances were
set in order to prevent a hemp crop from impeding the
production of a recreational crop.
4:07:37 PM
Representative Guttenberg understood that Colorado was
considering 5 or 10 miles and he recognized the federal
government had probably done no research on the specific
topic. He asked about the parameters set by other
jurisdictions.
Mr. Carter answered that Colorado had started looking at
the aforementioned ideals [5 to 10 miles between two
similar species]. The Division of Agriculture looked at the
issue from the purity standards of setting seed tolerance
isolation distances. Colorado had established its
recommendation for its isolation distances required for
cannabis production. He detailed that it depended on the
type, which was unique to this crop. There were dioecious
and monoecious types and hybrids that were all female -
each one had a different isolation distance. The
recommended isolation distance in Colorado for the highest
quality and most pure was called the foundation or
registered seed, was 16,150 feet. He furthered that
distances were set regionally based on wind patterns
because cannabis sativa is highly wind pollinated and also
pollinated by insect. Isolation distances in Canada were
anywhere between 1 meter and 5,000 meters. He believed
there would need to be regional isolation distances for
Alaska and he believed there would need to be strong
communication with registered and recognized commercial
growers through the marijuana control board in order for
the division to identify where the outdoor recreational
cannabis was being produced in order to give everyone the
right to produce crops.
4:10:05 PM
Representative Grenn referred to fiscal note OMB Component
2204 that mentioned the division anticipated the
registration of possibly 25 farms in the first year. He
asked if regulations would prohibit someone from growing
recreational marijuana and industrial hemp.
Mr. Whitt answered there was no provision in the bill that
would preclude someone from growing both; however, it would
be highly risky for a person to do both in terms of
ensuring the viability of the commercial marijuana.
Representative Kawasaki asked when states started to
legalize the manufacturing and growing of hemp.
Senator Hughes answered that the law had been changed by
the federal Farm Bill in 2014. She deferred to her staff
for further detail.
Mr. Whitt replied there were a few of states that started
their process before federal law had allowed it. He could
not speak about each state, but he relayed that when the
cart was put before the horse, states were having to make
some changes to fit federal guidelines. He referenced the
2014 Farm Bill and a 2016 omnibus bill, which had allowed
transportation of industrial hemp across state lines. There
was also the USDA Statement of Principles [on Industrial
Hemp], which had been published in 2016 and specified how
the USDA would treat the product. There were a number of
states that had put the effort in prior to the release of
federal guidelines. He offered to follow up with more
detail on the timeline.
Representative Kawasaki relayed there had been six states
prior to 2006 that had passed laws including California.
The Industrial Hemp Act had passed in 2009. He asked why it
had taken Alaska so long to get to the point it was
considering industrial hemp farming. He believed Alaska
would be the 33rd or 34th state to take on the activity.
Senator Hughes responded that although some states began
early, there had been some colonies that started early -
she relayed that George Washington, Thomas Jefferson, and
John Adams had all grown hemp. She relayed that she would
probably have worked on the issue earlier if it had been
brought to her attention earlier.
4:14:27 PM
Representative Kawasaki recalled that as a former
councilperson, the council [Fairbanks City Council] had
introduced a resolution supporting industrial hemp around
2006. He supported the bill and thought it would be a boon
for the agricultural and scientific community in Alaska.
Representative Thompson relayed that he had tried to get
something similar to the bill going in 2011. He had spoken
with the University of Alaska Fairbanks Agriculture
Department. He provided further detail about the past
effort to do an experimental grow with the community's 24-
hours of sunlight to see how the product would do in
Northern Alaska. The goal had also been to check the oil
and fiber content. The effort had ceased because it had not
been possible to obtain the seeds at that time. He was glad
to see the bill and believed hemp was a possible cash crop
that could be an economic boon for Alaska.
CSSB 6(JUD) was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the agenda for the following day.
ADJOURNMENT
4:16:26 PM
The meeting was adjourned at 4:16 p.m.