Legislature(2015 - 2016)HOUSE FINANCE 519

04/14/2016 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+= HB 81 EXEMPTION: LICENSING OF CONTRACTORS TELECONFERENCED
<Bill Hearing Canceled>
+= 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
+= HB 194 AK SECURITIES ACT; PENALTIES; CRT. RULES TELECONFERENCED
Moved CSHB 194(FIN) Out of Committee
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."                                                                                 
                                                                                                                                
2:09:41 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
relayed that  the legislation was  the largest  component of                                                                    
the  New  Revenue  section  of  the  governor's  Sustainable                                                                    
Alaska Plan, and  would generate approximately $200,000,000.                                                                    
He furthered  that the  tax was  based on  6 percent  of the                                                                    
federal  tax liability.  He assured  the committee  that the                                                                    
stat was not proposing to create  its own set of tax tables,                                                                    
or exemptions,  or credits, but  was relying on  the federal                                                                    
tax  system. He  hypothesized  that a  family  of 4,  making                                                                    
$50,000 per year,  would pay approximately $15  in state tax                                                                    
under  the proposal.  He added  that the  first person  that                                                                    
would  pay 1  percent of  their  gross earnings  would be  a                                                                    
single filer, making  $100,000 per year, and  would pay just                                                                    
over $1000 in tax. He believed  that the tax was modest when                                                                    
compared to incomes  taxes in other states. He  said that if                                                                    
the  bill were  passed as  proposed,  the tax  would be  the                                                                    
lowest in the nation.                                                                                                           
                                                                                                                                
2:11:22 PM                                                                                                                    
                                                                                                                                
Representative  Gara  expressed  reluctance to  support  the                                                                    
legislation.   He  supported the  effort in  pushing various                                                                    
revenue proposals,  but wondered why the  state would choose                                                                    
the lowest income tax in the nation.                                                                                            
                                                                                                                                
Commissioner  Hoffbeck  explained   that  the  governor  had                                                                    
thought  that  small,  incremental adjustments  to  existing                                                                    
taxes, in addition  to a small income tax,  would spread the                                                                    
burden across all Alaskans.                                                                                                     
                                                                                                                                
2:12:24 PM                                                                                                                    
                                                                                                                                
Representative Gara wondered  whether the administration had                                                                    
planned on raising the income tax  in the future in order to                                                                    
close the budget gap.                                                                                                           
                                                                                                                                
Commissioner Hoffbeck responded in the negative.                                                                                
                                                                                                                                
Representative Gara  spoke to the  equitability of  the tax.                                                                    
He suggested  that the wealthy  lived off of  capital gains,                                                                    
which had  a federal tax  of 15  percent. He said  that many                                                                    
Alaskans paid 29 percent in  income tax. He thought that the                                                                    
bill  would mean  that  those living  foo  of capital  gains                                                                    
would pay less than a 1 percent tax on their income.                                                                            
                                                                                                                                
Commissioner Hoffbeck replied that it was a possibility.                                                                        
                                                                                                                                
Representative Gara  suggested that  a very  wealthy person,                                                                    
living on capital  gains, would pay a lower tax  rate than a                                                                    
person who "worked for a living".                                                                                               
                                                                                                                                
Commissioner  Hoffbeck  thought   that  the  assessment  was                                                                    
broad.  He admitted  that there  were provisions  within the                                                                    
federal  tax structure  that  provided  for certain  capital                                                                    
gains  benefits.  He  said  that  many  states  had  special                                                                    
capital gains taxes  to address the issue. He  said that the                                                                    
tax  was  meant to  be  as  simple and  noncontroversial  as                                                                    
possible.                                                                                                                       
                                                                                                                                
2:14:33 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler expressed  concerns that  the tax  would                                                                    
increase over time.                                                                                                             
                                                                                                                                
Commissioner Hoffbeck noted  that the state used  to have an                                                                    
income tax, which  was repealed and replaced by  oil and gas                                                                    
revenue. He  believed that protections  lay in  the totality                                                                    
of the  governor's proposed  fiscal package,  as well  as in                                                                    
spending  caps initiated  by the  legislature. He  said that                                                                    
provisions could be created that  would make it difficult to                                                                    
increase the tax.                                                                                                               
                                                                                                                                
2:16:06 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler   opined  that  spending   increases  in                                                                    
government could lead to an increase in the income tax.                                                                         
                                                                                                                                
Commissioner Hoffbeck replied that  raising of the tax would                                                                    
be at the discretion of the legislature.                                                                                        
                                                                                                                                
2:17:05 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  whether   there  would  be  a                                                                    
specific line on  the federal tax return  to accommodate the                                                                    
payment of the income tax.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck  replied  that  the tax  would  be  6                                                                    
percent of the "total tax  liability" line on federal filing                                                                    
documents. He  added that  there would  be a  few provisions                                                                    
that would  impact some,  but the  majority of  people would                                                                    
multiply  their  federal  tax  liability  by  6  percent  to                                                                    
determine their personal income tax.                                                                                            
                                                                                                                                
Representative  Wilson  asked  whether  the  department  had                                                                    
performed an  analysis on the  personal income tax  versus a                                                                    
sales tax.                                                                                                                      
                                                                                                                                
Commissioner   Hoffbeck   responded  that   the   government                                                                    
expenditure  that supported  a sales  tax or  an income  tax                                                                    
were not  materially different.  He noted  that it  cost the                                                                    
same thing  to administer  a 6 percent  sales tax  versus 15                                                                    
percent. He felt that by having  a low tax rate, the cost of                                                                    
the  administration   of  the   tax  was  higher,   but  the                                                                    
difference  in administrative  cost between  the income  tax                                                                    
and the sales tax was minimal.                                                                                                  
                                                                                                                                
Representative Wilson wondered  why the administration chose                                                                    
to implement  a small  income tax,  coupled with  motor fuel                                                                    
and fish taxes, rather than one large income tax.                                                                               
                                                                                                                                
Commissioner  Hoffbeck  reiterated  that the  governor  felt                                                                    
that rather  than have one  tax bear the entire  burden, the                                                                    
burden  should  be  spread across  multiple  layers  of  the                                                                    
state's economy.                                                                                                                
                                                                                                                                
2:20:13 PM                                                                                                                    
                                                                                                                                
Representative Wilson requested  assurances that budget cuts                                                                    
and taxes  would be spread  equally across the  residents of                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Commissioner Hoffbeck  did not have an  analysis that showed                                                                    
how each  group in the state  would be affected. He  did not                                                                    
believe  that   a  system  could   be  created   that  would                                                                    
absolutely spread the burden equally across the board.                                                                          
                                                                                                                                
Representative  Wilson   was  glad  that  all   taxes  being                                                                    
discussed at  the same time.  She feared that  raising taxes                                                                    
could result in people moving out of state.                                                                                     
                                                                                                                                
2:22:00 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg mentioned  the  balancing of  the                                                                    
burden  on  Alaskans.  He  asked  Commissioner  Hoffbeck  to                                                                    
comment on some of the  criticism from the public related to                                                                    
the proposed taxes and Permanent Fund reductions.                                                                               
                                                                                                                                
Commissioner  Hoffbeck  replied   that  dividend  check  was                                                                    
defined  by a  formula.  He contended  that  the income  tax                                                                    
would be the lowest in  the nation, and that dividends would                                                                    
still be paid.                                                                                                                  
                                                                                                                                
2:24:10 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg mentioned  the legislature working                                                                    
on a  bill on tax credits.  He wondered whether it  was fair                                                                    
to pay  out tax  credits to the  oil industry,  while taxing                                                                    
Alaskans and capping the dividend.                                                                                              
                                                                                                                                
Commissioner  Hoffbeck responded  that under  the governor's                                                                    
plan  the   credit  liability  would   be  rolled   back  by                                                                    
$400,000,000. He  mentioned the  governor's efforts  to make                                                                    
sure the  public was aware of  how the oil tax  credits were                                                                    
being used. He  spoke of the rhetoric  concerning the public                                                                    
concern  about the  credits, but  asserted that  the credits                                                                    
were substantially less than in the past.                                                                                       
                                                                                                                                
2:26:07 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  asked   whether  the  amount  of                                                                    
credits  currently  in place  justified  the  return to  the                                                                    
state.                                                                                                                          
                                                                                                                                
Representative Wilson noted a point of order.                                                                                   
Co-Chair Thompson requested that  conversation be limited to                                                                    
the subjects contained in HB 250.                                                                                               
                                                                                                                                
Representative Guttenberg thought that  the credit issue was                                                                    
germane to the discussion  about balancing the fiscal burden                                                                    
on the people of the state.                                                                                                     
                                                                                                                                
2:26:55 PM                                                                                                                    
                                                                                                                                
Co-Chair Thompson referred to  an analysis of the governor's                                                                    
plan by Gunnar Knapp.                                                                                                           
                                                                                                                                
Commissioner  Hoffbeck noted  that Mr.  Knapp's presentation                                                                    
did not get into the specifics of the oil and gas tax.                                                                          
                                                                                                                                
Co-Chair Thompson said that the  analysis covered the income                                                                    
tax and the different components of the governor's plan.                                                                        
                                                                                                                                
Commissioner Hoffbeck agreed.                                                                                                   
                                                                                                                                
Vice-Chair  Saddler understood  that the  administration had                                                                    
contracted with  economists to assess the  impact of cutting                                                                    
state  jobs to  the  economy. He  wondered whether  specific                                                                    
modeling on the income tax had been done.                                                                                       
                                                                                                                                
Commissioner Hoffbeck stated that  Mr. Knapp had included an                                                                    
analysis on broad based taxes in his presentation.                                                                              
                                                                                                                                
2:28:41 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  asked   whether  the  presentation  had                                                                    
included analysis on an income tax.                                                                                             
                                                                                                                                
Commissioner   Hoffbeck  clarified   that  there   were  two                                                                    
different version of an income  tax that had been modeled in                                                                    
the presentation.                                                                                                               
                                                                                                                                
Vice-Chair Saddler  requested clarification  as to  the type                                                                    
of taxes assessed in the presentation.                                                                                          
                                                                                                                                
Commissioner Hoffbeck  clarified that  Mr. Knapp  had looked                                                                    
at a flat rate income tax,  and a progressive income tax, as                                                                    
well as a sales tax.                                                                                                            
                                                                                                                                
2:29:27 PM                                                                                                                    
                                                                                                                                
JERRY  BURNETT,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, interjected that Mr.  Knapp referred                                                                    
to both an analysis of sales  tax with few exclusions, and a                                                                    
sales tax with multiple exclusions.                                                                                             
                                                                                                                                
Co-Chair Thompson clarified that income tax was the topic.                                                                      
                                                                                                                                
Vice-Chair  Saddler was  confused  about  what had  actually                                                                    
been modeled. He remarked about the  effects of a cut in the                                                                    
dividend  would  hurt the  poor,  and  an income  tax  would                                                                    
affect the  rich. He  said that he  expected to  see further                                                                    
analysis of the proposed income and sales taxes.                                                                                
                                                                                                                                
Commissioner  Hoffbeck stated  that all  of the  information                                                                    
was in the report.                                                                                                              
                                                                                                                                
2:30:43 PM                                                                                                                    
                                                                                                                                
Representative Gara  surmised that  the dividend  could drop                                                                    
to  $400,  under the  governor's  proposal,  which for  some                                                                    
Alaskans  was   20  percent  of  their   yearly  income.  He                                                                    
questioned  the  fairness  of  the  proposed  dividend  cut,                                                                    
compared to the proposed income tax.                                                                                            
                                                                                                                                
Commissioner Hoffbeck  stated that the wealthiest  people of                                                                    
the state  would be  paying in the  highest tax  bracket, or                                                                    
3.87 percent, under  the income tax. He did  not agreed with                                                                    
Representative Gara's  statement that the  wealthiest people                                                                    
would only be paying a 1  percent tax. He continued that the                                                                    
reduction in  the size of  the dividend will have  a greater                                                                    
impact on  lower income  families. He  admitted that  it was                                                                    
not a  perfect balance,  but was  crafted to  be as  fair as                                                                    
possible across the board.                                                                                                      
                                                                                                                                
Co-Chair Thompson  asked whether  the lowest  income earners                                                                    
in the state would pay income taxes.                                                                                            
                                                                                                                                
Commissioner Hoffbeck replied in the negative.                                                                                  
                                                                                                                                
2:33:57 PM                                                                                                                    
                                                                                                                                
Representative  Gara argued  that the  cuts and  taxes would                                                                    
not  be  balanced until  a  fair  oil  tax credit  bill  was                                                                    
crafted.  He contended  that the  federal capital  gains tax                                                                    
would be less than 1 percent for the very rich.                                                                                 
                                                                                                                                
Commissioner  Hoffbeck  confirmed  that   6  percent  of  15                                                                    
percent was less than 1 percent.                                                                                                
                                                                                                                                
Representative   Kawasaki  referred   to  a   Rasmussen  and                                                                    
Institute  for Tax  and Economic  Policy  report that  noted                                                                    
that  the Permanent  Fund proposal  was regressive,  and the                                                                    
income tax  proposal was progressive, and  asked whether the                                                                    
low income  tax proposed  meant that the  poor would  be hit                                                                    
hardest by the governor's plan.                                                                                                 
                                                                                                                                
Commissioner   Hoffbeck  replied   that  the   report  being                                                                    
referred to  had assumed a  $2000 dividend. He  reminded the                                                                    
committee  the formula  used to  determine the  dividend had                                                                    
been structured 30  years ago, and that any  plans for using                                                                    
the  earnings  reserve  required   a  restructuring  of  the                                                                    
formula. He  said that the  restructured formula  would have                                                                    
an  impact  on  the  size   of  the  dividend,  and  smaller                                                                    
dividends would  impact low income families  greater because                                                                    
it was a  larger portion of their overall  income. He argued                                                                    
that the  same amount  was being  taken from  each Alaskan's                                                                    
dividend.  He   asserted  that  the  income   tax  would  be                                                                    
progressive  in  an  attempt   to  balance  the  burden.  He                                                                    
stressed  that  the proposals  were  necessary  in order  to                                                                    
address the budget deficit. He  corrected that income tax to                                                                    
the wealthy would be 2.38, and not 3.87.                                                                                        
                                                                                                                                
2:38:13 PM                                                                                                                    
                                                                                                                                
Representative Kawasaki spoke to  the progressive element of                                                                    
the  proposal.  He  indicated that  people  counted  on  the                                                                    
dividend as income.  He asked whether the  governor had done                                                                    
other modeling with higher income tax rates.                                                                                    
                                                                                                                                
Commissioner   Hoffbeck   responded  that   originally   the                                                                    
governor looked  at 15 percent  of the federal tax  rate. He                                                                    
reminded the committee  that the dividend for  2013 had been                                                                    
less than $1000.                                                                                                                
                                                                                                                                
2:39:59 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler thought "fair"  was a subjective term. He                                                                    
wondered  whether there  were people  in  Alaska who  earned                                                                    
their living through investment income.                                                                                         
                                                                                                                                
Commissioner  Hoffbeck  said  that   he  could  provide  the                                                                    
information at a later date.                                                                                                    
                                                                                                                                
2:41:26 PM                                                                                                                    
                                                                                                                                
Representative Edgmon  felt that  the different  taxes would                                                                    
affect  different  groups  in   various  ways.  He  wondered                                                                    
whether an  analysis had  been done  in order  to understand                                                                    
the impacts on various demographics statewide.                                                                                  
                                                                                                                                
Commissioner  Hoffbeck  said that  he  could  not provide  a                                                                    
detailed  analysis on  how the  plan  would affect  specific                                                                    
individuals in the state.                                                                                                       
                                                                                                                                
Representative Edgmon  prophesized that an income  tax would                                                                    
not pass  during the  current year. He  said that  people in                                                                    
his district preferred  and income tax over a  sales tax and                                                                    
were  concerned about  the regressive  nature of  a dividend                                                                    
cap.                                                                                                                            
                                                                                                                                
                                                                                                                                
Commissioner Hoffbeck  asserted that the  administration had                                                                    
spent  the past  interim conducting  conversations with  the                                                                    
public  in order  to educate  the people  on the  issues. He                                                                    
relayed that  Alaskans understood  the need for  new revenue                                                                    
in closing  the $4  billion deficit  gap. He  contended that                                                                    
issue  of  generating  new revenue  would  come  before  the                                                                    
legislature  year-after-year until  the problem  was solved,                                                                    
and warned that during that  time, the state's savings would                                                                    
be depleted.                                                                                                                    
                                                                                                                                
2:46:50 PM                                                                                                                    
                                                                                                                                
Representative   Munoz   understood    that   trust   income                                                                    
distributions  to non-residents  would  be  taxed under  the                                                                    
legislation.                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  replied  that  the  issue  had  been                                                                    
brought to the attention of  the administration, and that an                                                                    
amendment would  be happily considered; the  state would not                                                                    
benefit from  taxing the  trusts. He said  that there  was a                                                                    
strong argument for exemption.                                                                                                  
                                                                                                                                
Representative   Munoz   understood  that   business   would                                                                    
immediately go to  other states if Alaska  implemented a tax                                                                    
on the income from the trusts.                                                                                                  
                                                                                                                                
2:48:08 PM                                                                                                                    
                                                                                                                                
Representative Munoz whether Alaska  would be the only state                                                                    
that  structured  its income  tax  as  a percentage  of  the                                                                    
federal tax  liability, and  not as  a percentage  of actual                                                                    
income.                                                                                                                         
                                                                                                                                
Commissioner Hoffbeck  confirmed that Alaska would  be using                                                                    
the federal tax structure.                                                                                                      
                                                                                                                                
2:49:18 PM                                                                                                                    
                                                                                                                                
Representative  Munoz  asked  whether  structuring  the  tax                                                                    
under   the   federal   tax    structure   could   cause   a                                                                    
constitutional conflict.                                                                                                        
                                                                                                                                
Commissioner Hoffbeck indicated  that the administration was                                                                    
aware of the potential conflict.                                                                                                
                                                                                                                                
2:49:54 PM                                                                                                                    
                                                                                                                                
Representative  Gara   queried  the  rate  of   the  state's                                                                    
previous income tax.                                                                                                            
                                                                                                                                
Commissioner Hoffbeck deferred the question to Mr. Spanos.                                                                      
                                                                                                                                
2:50:28 PM                                                                                                                    
                                                                                                                                
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT OF REVENUE, informed  the committee that in 1975,                                                                    
Alaska decoupled  from the federal income  tax liability and                                                                    
had an autonomous  tax bracket, which ranged from  3 to 14.5                                                                    
percent of federal taxable income.                                                                                              
                                                                                                                                
Representative   Gara   commented    that   the   rate   was                                                                    
substantially  higher   in  the  70's.  He   asked  why  the                                                                    
administration  would  choose  a plan  that  benefitted  the                                                                    
state's most wealthy residents,  while penalizing low income                                                                    
earners.                                                                                                                        
                                                                                                                                
Commissioner Hoffbeck  reiterated that the  governor thought                                                                    
his plan was a balanced plan.                                                                                                   
                                                                                                                                
2:52:48 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg thought  that the commissioner was                                                                    
internally  tweaking  the  bill  in respect  to  trusts  and                                                                    
federal obligations. He requested  an explanation of changes                                                                    
to provide a current analysis of the legislation.                                                                               
                                                                                                                                
2:53:46 PM                                                                                                                    
Vice-Chair Saddler asked whether  the state income tax could                                                                    
be deducted from the federal income tax, or vice versa.                                                                         
                                                                                                                                
Commissioner  Hoffbeck   replied  that  any  tax   that  was                                                                    
deductible against  the federal income tax  would by default                                                                    
become deductible  against the state tax.  Additionally, the                                                                    
state income  tax would be  a deduction against  the federal                                                                    
income tax.                                                                                                                     
                                                                                                                                
Vice-Chair Saddler  clarified that the filer  had to itemize                                                                    
in order to get the deductions.                                                                                                 
                                                                                                                                
Commissioner Hoffbeck agreed.                                                                                                   
                                                                                                                                
Vice-Chair   Saddler   queried    the   income   limit   for                                                                    
itemization.                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck did not have an answer.                                                                                   
                                                                                                                                
Mr.  Spanos spoke  to the  standard deduction  for necessary                                                                    
itemization. He said for  individuals the standard deduction                                                                    
was $6300,  and for a  married couple filing jointly  it was                                                                    
$12,600.                                                                                                                        
                                                                                                                                
HB  250  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
HB 249 CS WORKDRAFT vG.pdf HFIN 4/14/2016 1:30:00 PM
HB 249
HB 249 CFEC Letter.pdf HFIN 4/14/2016 1:30:00 PM
HB 249
HB 249 CFEC vessels affected by removal of fee cap.pdf HFIN 4/14/2016 1:30:00 PM
HB 249
HB 249 CFEC 16.02.19 Gho memo on fee ceiling.pdf HFIN 4/14/2016 1:30:00 PM
HB 249
HB 249 CFEC Letter.pdf HFIN 4/14/2016 1:30:00 PM
HB 249
HB 249 Sectional FIN.pdf HFIN 4/14/2016 1:30:00 PM
HB 249