Legislature(2015 - 2016)HOUSE FINANCE 519

04/05/2016 05:00 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
+ HB 319 SNOWMOBILE REGISTRATION FEES TELECONFERENCED
Moved CSHB 319(FIN) Out of Committee
*+ HB 250 INDIV. INCOME TAX: CREDITS; RETURNS TELECONFERENCED
Heard & Held
+ HB 249 ELECTRONIC TAX RETURNS & MOTOR FUEL TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 250                                                                                                            
                                                                                                                                
     "An  Act   relating  to  the  taxation   of  income  of                                                                    
     individuals; repealing tax  credits applied against the                                                                    
     tax  on individuals  under the  Alaska  Net Income  Tax                                                                    
     Act; and providing for an effective date."                                                                                 
                                                                                                                                
5:41:59 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced himself.  He recognized the  bill was one  of the                                                                    
most controversial  piece of legislation. He  explained that                                                                    
why  an income  tax was  chosen over  other taxes.  The bill                                                                    
would establish a  personal income tax equal  to six percent                                                                    
of  taxpayers   total  federal  tax  liability   for  Alaska                                                                    
residents and nonresidents with income  from a source in the                                                                    
state.  Because the  tax that  would be  established by  the                                                                    
bill is  calculated based on  federal tax liability  and not                                                                    
on  income,   the  bill  effectively   incorporates  federal                                                                    
brackets and  exemptions and so  permits this bill,  and the                                                                    
personal income tax  system it would create to  be as simple                                                                    
and transparent as possible.                                                                                                    
                                                                                                                                
5:46:31 PM                                                                                                                    
                                                                                                                                
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT   OF    REVENUE,   introduced    the   PowerPoint                                                                    
Presentation: "Individual Income Tax: HB 250."                                                                                  
                                                                                                                                
Mr. Spanos addressed slide 2: "Individual Income Tax."                                                                          
                                                                                                                                
     "An  Act   relating  to  the  taxation   of  income  of                                                                    
     individuals; repealing tax  credits applied against the                                                                    
     tax  on individuals  under the  Alaska  Net Income  Tax                                                                    
     Act; and providing for an effective date."                                                                                 
                                                                                                                                
Mr. Spanos reviewed slide 3: "Income Tax History."                                                                              
                                                                                                                                
     Began in 1949 at 10 percent of federal tax liability                                                                       
                                                                                                                                
     By  1961,  the  tax  was  16  percent  of  federal  tax                                                                    
     liability                                                                                                                  
                                                                                                                                
     In 1975, Alaska switched  from federal tax liability to                                                                    
     its own tax brackets                                                                                                       
                                                                                                                                
          Ranged from 3 percent to 14.5 percent on taxable                                                                      
          income                                                                                                                
                                                                                                                                
     Alaska repealed  personal income tax in  1980 after oil                                                                    
     revenue boom                                                                                                               
                                                                                                                                
Mr. Spanos turned to slide 4: "Tax Proposal."                                                                                   
                                                                                                                                
     Creates a  tax on an individual's  income. The proposed                                                                    
     rate  is 6  percent of  a person's  federal income  tax                                                                    
     liability                                                                                                                  
                                                                                                                                
Mr.  Spanos   explained  slide   5:  "Income   Tax  Proposal                                                                    
(Continued)."  He  stated  that   the  slide  addressed  the                                                                    
current federal tax brackets.                                                                                                   
                                                                                                                                
Vice-Chair Saddler  looked at the third  column and wondered                                                                    
whether that was taxable income, or gross income.                                                                               
                                                                                                                                
Mr. Spanos responded that it was taxable income.                                                                                
                                                                                                                                
                                                                                                                                
Mr. Spanos slide 6: "Income Tax Proposal (Continued)."                                                                          
                                                                                                                                
     Tax applies to nonresidents' income from a source in                                                                       
     Alaska                                                                                                                     
                                                                                                                                
     Residents receive credit for taxes paid in other                                                                           
     states                                                                                                                     
                                                                                                                                
     Provides for employers to withhold taxes and remit                                                                         
     them to the state                                                                                                          
                                                                                                                                
5:50:11 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg asked how he defined resident.                                                                        
                                                                                                                                
Mr. Spanos  responded that in  the bill the  term "resident"                                                                    
was defined several times.                                                                                                      
                                                                                                                                
Representative Wilson wondered if the  $3 billion of "out of                                                                    
state" workers were defined as residents or nonresidents.                                                                       
                                                                                                                                
Mr. Spanos  stated that the  $3 billion was wages  earned in                                                                    
Alaska  by nonresidents.  He understood  that  there may  be                                                                    
other  nonresidents  who  may  receive  the  Permanent  Fund                                                                    
Dividend (PFD). He  shared that there were  other sources of                                                                    
income,  other  than  wages,  that   would  be  taxable  for                                                                    
residents.                                                                                                                      
                                                                                                                                
Representative  Wilson  did  not feel  that  the  definition                                                                    
would work.                                                                                                                     
                                                                                                                                
Vice-Chair  Saddler queried  the amount  of money  earned in                                                                    
wages  by Alaska  residents  in Alaska,  if  $3 billion  was                                                                    
earned by non-residents.                                                                                                        
                                                                                                                                
Commissioner Hoffbeck would have  to provide the information                                                                    
at a later time.                                                                                                                
                                                                                                                                
Representative  Pruitt wondered  whether military  personnel                                                                    
would  be taxed,  or was  it all  the other  individuals who                                                                    
could receive the PFD but not live the state.                                                                                   
                                                                                                                                
Mr. Spanos  responded to  the extent  that the  pay resident                                                                    
tax, if they were to pay federal income tax.                                                                                    
                                                                                                                                
Commissioner Hoffbeck  stated that  the income tax  would be                                                                    
based on their income in Alaska or from an Alaska source.                                                                       
                                                                                                                                
Representative Pruitt  thought it  was cumbersome  to manage                                                                    
the  income tax,  to  require those  living  outside of  the                                                                    
state to pay the income tax on the PFD.                                                                                         
                                                                                                                                
Commissioner Hoffbeck  replied that their  residency allowed                                                                    
for  a credit  in other  states against  the Alaska  tax. He                                                                    
explained  that some  of the  money earned  in other  states                                                                    
could be transferred if the  Alaska tax rate was higher than                                                                    
the other  state. He stated  that the individual  would need                                                                    
to fill out a state income tax return.                                                                                          
                                                                                                                                
Representative Pruitt asked about the  cost to the state. He                                                                    
was skeptical about really collecting any money.                                                                                
                                                                                                                                
Commissioner Hoffbeck  agreed that  all taxes would  have to                                                                    
be processed.                                                                                                                   
                                                                                                                                
5:56:44 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  mentioned military members.  He wondered                                                                    
if those living outside  the state, retaining residency, who                                                                    
received a  PFD would  be required to  pay the  state income                                                                    
tax.                                                                                                                            
                                                                                                                                
Mr. Spanos  replied that  other states  dealt with  the same                                                                    
issue.  He stated  that they  would be  required to  pay the                                                                    
taxes in their home state.                                                                                                      
                                                                                                                                
Vice-Chair Saddler  surmised that  they would be  subject to                                                                    
Alaska income tax.                                                                                                              
                                                                                                                                
Mr. Spanos agreed.                                                                                                              
                                                                                                                                
Representative Gara  surmised that the tax  was a percentage                                                                    
of  federal  tax. He  stressed  that  the state  taxes  were                                                                    
deducted from  the federal  tax. He  wondered how  that loop                                                                    
would be solved.                                                                                                                
                                                                                                                                
Mr. Spanos  stated the  IRS made it  fairly simple  with the                                                                    
use of W-2's.                                                                                                                   
                                                                                                                                
Mr. Spanos continued to discuss slide 6.                                                                                        
                                                                                                                                
                                                                                                                                
Mr.  Spanos  moved  to  slide   7:  "Income  Tax  Estimates:                                                                    
Estimated  tax  for married  couple  filing  jointly with  2                                                                    
children." He  reported that he  slide showed an  example of                                                                    
what an individual or family might pay in taxes.                                                                                
                                                                                                                                
Mr. Spanos provided another example  on slide 8: "Income Tax                                                                    
Estimates:  Estimated  tax  for  head of  household  with  2                                                                    
children." He pointed  out that the head of  household had a                                                                    
slightly different deduction allowance.                                                                                         
                                                                                                                                
6:01:10 PM                                                                                                                    
                                                                                                                                
Mr. Spanos advanced to slide 9: "Relative Tax Rate":                                                                            
                                                                                                                                
     43 states currently have an income tax                                                                                     
                                                                                                                                
     Among states with an income tax, Alaska's rate would                                                                       
     be lowest                                                                                                                  
                                                                                                                                
          North Dakota would be second-lowest                                                                                   
                                                                                                                                
          Average state income tax is about 30 percent of                                                                       
          federal liability, five times Alaska's proposed                                                                       
          rate                                                                                                                  
                                                                                                                                
    Six states would still have zero state income tax1                                                                          
                                                                                                                                
     Two states tax only dividends and interest2                                                                                
                                                                                                                                
Mr. Spanos discussed slide 10: "Impacts of Tax Proposal":                                                                       
                                                                                                                                
     Income from subchapter S corporations and partnerships                                                                     
     will be taxed                                                                                                              
                                                                                                                                
          Taxed on income with a source in Alaska                                                                               
                                                                                                                                
          Not currently subject to state Corporate Income                                                                       
          Tax                                                                                                                   
                                                                                                                                
     Income earned in Alaska by both non-residents and                                                                          
     residents will be taxed                                                                                                    
                                                                                                                                
     Rough estimate: 20 percent - 30 percent of Alaskans                                                                        
     would pay zero tax                                                                                                         
                                                                                                                                
Mr. Spanos scrolled to slide 11: "Revenue Impact":                                                                              
                                                                                                                                
   · DOR estimates $100 million in FY17 due to the tax                                                                          
     taking effect in January 2017                                                                                              
        o This amount is from withholding                                                                                       
        o No tax returns filed until April 2018                                                                                 
   · DOR estimates $200 million in FY18 based on modeling                                                                       
     using aggregated federal income data for Alaska                                                                            
     residents                                                                                                                  
                                                                                                                                
Mr. Spanos moved to slide 12: "Implementation Cost."                                                                            
                                                                                                                                
   · Implementing an individual income tax in 18 months                                                                         
     will be a significant challenge                                                                                            
        o Need to draft regulations                                                                                             
        o Need to design, develop, and test technology to                                                                       
          administer tax that would have estimated 450,000                                                                      
          tax returns filed annually.                                                                                           
   · Estimated $250,000 supplemental appropriation for a                                                                        
     contractor to work with DOR on an implementation plan                                                                      
   · Estimated $14,000,000 one-time capital appropriation                                                                       
     to build income tax into our current tax revenue                                                                           
     system                                                                                                                     
        o Includes withholding and online filing                                                                                
   · Annual staffing cost of about $6,000,000 for 52 FTE                                                                        
     employees                                                                                                                  
                                                                                                                                
6:04:43 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  addressed  slide  13:  "Closing  the                                                                    
Budget  Gap"   and  slide  14:   "Closing  the   Budget  Gap                                                                    
(Continued)." The  components used  to close the  budget gap                                                                    
included  the   FY  17  baseline  revenue   (after  proposed                                                                    
legislation;  FY 17  spending  reductions;  and new  revenue                                                                    
components.                                                                                                                     
                                                                                                                                
Mr.  Spanos  asked  if  he   should  address  the  sectional                                                                    
analysis.                                                                                                                       
                                                                                                                                
Co-Chair  Thompson replied  in the  negative and  relayed it                                                                    
could be  taken up  at a  later date.  He recalled  that the                                                                    
income  tax  in the  1960s  was  a  one-page form  and  very                                                                    
simple.   He  felt   that  the   current   system  was   too                                                                    
complicated. He wondered if there was a simpler method.                                                                         
                                                                                                                                
Mr. Spanos replied that the  form would still be simple, but                                                                    
it  was based  on  the complicated  federal  income tax.  He                                                                    
stated  that   the  cost   projection  was   based  one-half                                                                    
Montana's structure.  He stated  that Vermont had  a similar                                                                    
population as Alaska,  so they had relayed  that they belied                                                                    
Alaska's  proposal  was  reasonable.   He  stated  that  the                                                                    
auditors and  computer system  were essential  to processing                                                                    
the system.                                                                                                                     
                                                                                                                                
Co-Chair Thompson wondered whether  the federal system would                                                                    
be connected to the state's system.                                                                                             
                                                                                                                                
6:07:46 PM                                                                                                                    
                                                                                                                                
Mr. Spanos replied in the affirmative.                                                                                          
                                                                                                                                
Representative Wilson pointed to  slide 8, and surmised that                                                                    
one would pay  $7 dollars for a $40,000 income;  and $97 for                                                                    
$50,000.                                                                                                                        
                                                                                                                                
Mr. Spanos replied in the affirmative.                                                                                          
                                                                                                                                
Representative  Wilson surmised  that the  state would  have                                                                    
someone do all of the paperwork for $7.00.                                                                                      
                                                                                                                                
Representative Gattis referred  to nonresident pilots flying                                                                    
Alaskan routes and  sports teams. She wondered  if the state                                                                    
would recoup any of those dollars.                                                                                              
                                                                                                                                
Mr. Spanos replied  that most states had some  kind of daily                                                                    
limit income earned in the state.                                                                                               
                                                                                                                                
Representative   Gattis  hoped   the  state   did  not   use                                                                    
California as a role model.                                                                                                     
                                                                                                                                
6:10:09 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  queried the rates for  those individuals                                                                    
who earned higher than $100,000.                                                                                                
                                                                                                                                
Co-Chair Thompson asked if he was referring to slide 5.                                                                         
                                                                                                                                
Commissioner  Hoffbeck replied  that  the  highest rate  was                                                                    
2.38 percent, and agreed to provide more information.                                                                           
                                                                                                                                
Representative Guttenberg  referred to  the state  form that                                                                    
specified how much state and federal taxes were paid.                                                                           
                                                                                                                                
Commissioner  Hoffbeck  replied  that  a  person  would  pay                                                                    
whatever their  federal tax bracket  and 20 percent  of that                                                                    
for state income tax.                                                                                                           
                                                                                                                                
Representative Munoz asked about auditors.                                                                                      
                                                                                                                                
Mr. Spanos  answered replied with  a rough estimate  and the                                                                    
department relied on  a contractor to see  if they estimated                                                                    
too high or low.                                                                                                                
                                                                                                                                
Representative Munoz wondered if  the audits would be random                                                                    
and meaningful.                                                                                                                 
                                                                                                                                
Mr. Spanos replied in the affirmative.                                                                                          
                                                                                                                                
6:13:39 PM                                                                                                                    
                                                                                                                                
Representative  Gara wondered  if the  state income  tax was                                                                    
deducted from the federal income tax.                                                                                           
                                                                                                                                
Co-Chair Thompson replied in the affirmative.                                                                                   
                                                                                                                                
Representative  Gara  requested  a   chart  related  to  the                                                                    
percentages related  to what would  actually be paid  by the                                                                    
individual.                                                                                                                     
                                                                                                                                
Commissioner  Hoffbeck  agreed  that  the  department  could                                                                    
provide the information.                                                                                                        
                                                                                                                                
Representative  Gara  wondered   whether  everyone  had  the                                                                    
opportunity  to take  tax  reductions  or were  itemizations                                                                    
required.                                                                                                                       
                                                                                                                                
Mr.  Spanos responded  that only  those  who itemized  would                                                                    
qualify for the reductions.                                                                                                     
                                                                                                                                
Representative Gara queried families and single people.                                                                         
                                                                                                                                
Commissioner  Hoffbeck  thought  the  information  had  been                                                                    
provided previously.                                                                                                            
                                                                                                                                
Representative  Munoz wondered  why  the fiscal  note had  a                                                                    
smaller number of employees in the fiscal note.                                                                                 
                                                                                                                                
Commissioner Hoffbeck replied that  he limited the number of                                                                    
employees.                                                                                                                      
                                                                                                                                
6:16:39 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  asked whether someone under  16 would be                                                                    
subject the taxes.                                                                                                              
                                                                                                                                
Mr.  Spanos responded  that it  depended on  their level  of                                                                    
income. He stressed  that if they filed  federally they also                                                                    
must  file for  the state.  He shared  that the  parents may                                                                    
need to  pay taxes if the  minor earned at a  certain level.                                                                    
He agreed to provide more information.                                                                                          
                                                                                                                                
Vice-Chair  Saddler  wondered  whether  the  20  percent  of                                                                    
Alaskans who would not pay were citizens or wage earners.                                                                       
                                                                                                                                
Mr. Spanos  referenced the ISER  report. He believed  it was                                                                    
wage earners.                                                                                                                   
                                                                                                                                
Vice-Chair Saddler queried the standard deduction.                                                                              
                                                                                                                                
Mr.  Spanos responded  that  it was  $12,600  for a  married                                                                    
couple; and $6,300 for a single individual.                                                                                     
                                                                                                                                
HB  250  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
6:19:00 PM