Legislature(2017 - 2018)HOUSE FINANCE 519
02/13/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
1:35:11 PM
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, read
from a prepared statement:
The goal of HB 115, the State Revenue Restructuring
Act, is to create a balanced, stable, and sustainable
approach to resolving our state's deficit, for now and
for future Alaskans. A stable fiscal plan requires
multiple approaches and should be addressed this year
because our reserve account is running low.
For over 30 years the state has relied almost
exclusively on volatile resource revenues. This has
led to years where the state budget has been high,
with large capital budgets creating infrastructure
throughout the state. But it has also led to years
where the budget has contracted quickly to try to
match reduced revenue streams, leaving little money to
maintain our existing infrastructure or for our state
needs.
State government does not function efficiently or
effectively with so much volatility. Volatility in
state government is also unhealthy for the economy.
As we heard from Mr. King on Friday, businesses do not
feel comfortable investing in the state when they do
not know what the state will look like next year, or
the year after that. We have heard from business
leaders throughout the state that uncertainty is
freezing their investment decisions.
We also see the effect of volatility on the state's
credit rating. Even though the State of Alaska has
more assets then most other states, all three credit
rating agencies downgraded the state's credit rating
last year. Without a fiscal plan they are likely to
downgrade us again this year, because without a stable
and sustainable plan there is no way for the rating
agencies to predict what the state's finances will
look like in future years.
To provide business leaders and rating agencies with
the confidence they need to invest in Alaska, we need
a fiscal plan that will stabilize state revenues and
will be sustainable into the future. The plan must be
a comprehensive solution, not a partial one, or the
economy will continue to struggle with questions of
uncertainty and the legislature will be back in the
same situation next year.
How does HB 115 create a stable plan?
The State Revenue Restructuring Act reduces volatility
in the state budget by diversifying our revenue
sources from one single source, oil, to many. HB 115
will utilize earnings from the Permanent Fund based on
4.75% of the market value. The fund is invested in a
diverse portfolio, protecting it from fluctuations in
value of one investment type or another. As was
demonstrated last week by David Teal, a draw based on
a percent of market value of the fund is the most
stable option.
In addition, the State Revenue Restructuring Act
implements a modest income tax which will further
diversify state revenues and protect against
fluctuations in any one source.
How does HB 115 create a sustainable approach?
The intent is to craft a fiscal framework that will
not drain value from our savings but will instead
preserve those assets, so they continue to provide for
future Alaskans. A sustainable draw on the Permanent
Fund earnings will allow the fund to grow and to
continue to maintain the same value for future Alaskan
as it has for us today. Draw rates that are too high
could risk the future value of the fund if they are
drawing above the rate of inflation.
How does HB 115 create a balanced approach?
This bill asks every Alaskan and non-resident worker
to contribute to the core state services that we all
utilize, while recognizing that some are more capable
of contributing than others. The necessary
restructuring of the permanent fund earnings and of
the dividend, which is paid from those same earnings,
will impact every Alaskan but does not touch the non-
resident workers. However, rural Alaskans and low-
income Alaskans, especially those with families, will
feel this impact the deepest. A progressive income
tax, based on 15% of the federal tax liability or the
amount you pay to the federal government, will offset
this impact by collecting revenues from non-residents
and those with higher incomes. It will also collect
income from those non-resident workers who use our
state services while they are here but take their
money earner here out of state. The income tax
includes a $25 minimum tax that will be paid by all
filers, ensuring that most Alaskans will be
contributing to this revenue source.
The State Revenue Restructuring Act is the foundation
for a fiscal plan that is balanced, sustainable,
stable, and comprehensive to help remove the
uncertainty that is freezing business investment and
credit ratings in the state currently.
1:40:28 PM
JANE PIERSON, STAFF, REPRESENTATIVE NEAL FOSTER, read the
sectional analysis for HB 115:
Section 1 (page 1, line 7) - Clarifies that all
components of this bill are part of a comprehensive
revenue act.
---Appropriations from the Earnings Reserve Account---
Section 2 (page 1, line 10) - Amends AS 37.13.140, net
income of the Permanent Fund, to remove "income
available for distribution" and adds "market value" to
section title.
Section 3 (page 2, line 9) - Adds a new subsection (b)
to AS 37.13.140 determining the amount available for
distribution each year from the earnings reserve
account, equal to 4.75 percent of market value of the
entire fund. Defines how the average market value of
the fund is calculated.
Section 4 (page 2, line 19) - States that 33 percent
of the amount available for distribution under AS
37.13.140 may be directed to the dividend fund and 67
percent to the general fund.
Section 5 (page 2, line 27) - Amends AS 37.13.145(d),
relating to the Amerada Hess settlement, to clarify
that income from that settlement may not be used for
distribution. Additionally, removes references to
subsection (c), relating to inflation proofing, which
is repealed by this act.
Section 6 (page 3, line 6) - Provides that money from
the earnings reserve may be transferred to the
principal of the permanent fund for purposes of
inflation proofing the fund when the value of the
earnings reserve account is four times the annual
amount calculated under AS 37.13.140(b).
Section 7 (page 3, line 11) - Includes the unexpended
balance of the Alaska Permanent Fund Corporation's
budget in the calculation of the fund's market value;
this budget balance is already calculated as a part of
the net income of the fund under current law.
Section 8 (page 3, line 18) - Clarifies that income
from mental health trust fund, which is managed by the
Alaska Permanent Fund Corporation, is not included in
the market value of the Permanent fund.
Section 9 (page 3, line 22) - Asserts that the income
of the mental health trust fund shall continue to be
calculated as before, in the same manner as the net
income of the entire fund.
---Start of Income Tax section---
Section 10 (page 3, line 29) - AS 43.05.045(a) states
that there is a penalty if a state income form is not
filed electronically but that individuals are exempt
under AS 43.22.020 (f).
Section 11 (page 4, line 8) - Creates the Individual
Income Tax within AS 43.
Subsection: Sec. 43.22.010 (page 4, line 10) - Imposes
an income tax and a long-term capital gains tax on
residents, as well as nonresidents with income from
within the state. The tax is equal to 15% of the
taxpayer's total federal income tax due or $25.00,
whatever is greater. Long term capital gains are
additionally taxed at the lesser of 10% or the federal
tax rate difference between earned income and capital
gains. Currently capital gains are taxed by the
federal government at a lower rate than earned income.
Subsection: Sec. 43.22.020 (page 5, line 14) -
Establishes how a taxpayer will submit the tax return
for the individual income tax. It clarifies that this
tax is due and payable to the department at the same
time and in the same manner as the tax payable to the
U.S. IRS for federal taxes.
Subsection: Sec. 43.22.030 (page 6, line 17) - Defines
income from sources in the state for the purpose of
the tax. Note - the Internal Revenue Service
definition for income is adopted in a later section.
Subsection: Sec. 43.22.035 (page 7, line 12) -
Provides a credit to residents for taxes paid to
another state based on income earned in that other
state, ensuring a resident is not taxed twice on the
same income.
Subsection: Sec. 43.22.040 (page 7, line 27) - States
a person may choose to apply some or all of their PFD
as a refundable tax payment to their upcoming state
income tax due (see Sec. 12). Any remaining dividend
after the payment will be refunded to the dividend
applicant.
Subsection: Sec. 43.22.050 (page 8, line 6) -
Establishes how taxes will be withheld by employers
making payment of wages or salaries, or a person
paying crew shares, similar to the way in which
employers withhold federal income taxes.
Subsection: Sec. 43.22.055 (page 9, line 4) - Allows a
person's income tax information to be shared with a
banking institution to verify direct deposit of
refunds.
Subsection: Sec. 43.22.060 (page 9, line 7) -
Authorizes the department to create all necessary
forms and adopt regulations to implement this tax.
Subsection: Sec. 43.22.190 (page 9, line 17) -
Provides definitions of terms used in this section,
including the definition of resident for the purpose
of this tax.
---End of Income Tax section ---
Section 12 (page 10, line 9) - Directs the Permanent
Fund Division to create a place on the PFD application
where an applicant may choose to apply some or all of
their PFD to their upcoming state income tax due.
Section 13 (page 10, line 15) - Repeals AS
37.13.145(c) inflation proofing of the permanent fund.
Also, repeals sections relating to a former tax credit
for political contributions that existed under
Alaska's prior individual income tax which was
repealed in 1980.
Section 14 (page 10, line 16) Clarifies that the state
income tax created under section 11 of this act only
goes into effect starting on January 1, 2018 and will
not be applied to any income earned prior to that
date.
Section 15 (page 10, line 20) - Authorizes the
Department of Revenue to adopt regulations to
implement the act.
Section 16 (page 10, line 25) - If sections 2 through
9 take effect after June 30th of 2017, sections 2
through 9 are retroactive to June 30th, 2017. The
appropriation from the earnings reserve described in
sections 2 through 4 will be applicable in fiscal year
2017.
Section 17 (page 10, line 29) - Sections 1 through 9,
relating to the earnings reserve account and the
permanent fund, and sections 15 and 16, take effect
immediately.
Section 18 (page 10, line 31) - The effective date of
the act, except those noted in Section 17 above, is
January 1, 2018.
1:48:45 PM
Vice-Chair Gara mentioned that when he first read the bill
the capital gains tax was 10 percent. Looking through the
sectional he thought the tax appeared more complicated. He
asked if the issue could be addressed.
Co-Chair Foster acknowledged that Representative Pruitt had
joined the meeting.
Ms. Pierson did not know the answer.
Ms. Hansen responded that 10 percent would be the maximum
tax on capital gains. The tax could change if the federal
government changed the differential between the capital
gains rate on long term capital gains currently. If the
federal government increased the rate in the future, the
state's rate would decrease.
Vice-Chair Gara asked if the rate was 10 percent for short-
term and long-term capital gains based on existing law.
Ms. Hansen answered, "long-term capital gains."
Vice-Chair Gara asked if there was a provision on short
term capital gains.
Ms. Hansen responded in the negative. She indicated that
short term capital gains under federal law are currently
taxed at the same rate as other income.
Co-Chair Foster invited Ms. Hansen to begin her PowerPoint.
Ms. Hansen introduced the PowerPoint Presentation: "State
Revenue Restructuring Act HB 115" (copy on file). She
turned to slide 2: "Fiscal Foundation." She reported that
Alaska was currently undergoing some economic contractions.
She suggested that how big the recession ended up being
would depend, in part, on the approach the legislature
decided to take to address the deficit. She argued that a
diversified approach would help minimize the impact on any
one group of Alaskans and should help provide for a
smoother transition for the economy as a whole.
Ms. Hansen advanced to slide 3: "Four Pillar Plan." She
indicated that the legislation being considered in the
House contained four key pillars to a diversified plan. The
first pillar was a structured use of the Permanent Fund
(PF) earnings reserve account (ERA), the state's single
largest asset. The second pillar was new revenue from a
broad-based tax, which would allow everyone to contribute
to the services Alaska was utilizing. The third pillar was
protecting and maintaining a Permanent Fund Dividend (PFD)
for Alaskans within the restructuring of the ERA. The
fourth pillar was smart budget cuts while maintaining
functioning core services. Smart budget cuts could include
reductions to some of the state's liabilities such as the
oil and gas liability that the state currently had.
Ms. Hansen continued to slide 4: "Four Pillar Plan." She
explained that not all the components would be addressed in
one piece of legislation. However, in the State Revenue
Restructuring Act would consider a structured use of the
ERA, new revenue from a broad-based tax, and a protected
structure for the dividend.
Ms. Hansen turned to slide 5: "HB 115: Permanent Fund
Earnings":
· 4.75% Permanent Fund POMV. Inflation proofing
contingent on surplus.
· 1/3 of POMV to pay dividends. $1100 and growing over
years, with payouts more stable than current
calculation.
· 2/3 of POMV directed to the General Fund. $1.5 billion
in FY18 growing to $2 billion in FY25.
· Residents may choose to apply their PFD to their
upcoming state income tax due as a Refundable Tax
Payment. Any amount left over after paying taxes will
be refunded by the Tax Division.
Ms. Hansen detailed that the changes that were made to the
use of the PF earnings came down to 4 points. First, there
would be an annual draw based on 4.75 percent of the
Permanent Fund's full value. Inflation proofing of the
principle of the fund would be contingent on surpluses in
the ERA. The current annual transfer from the ERA to the
principle for inflation proofing was being replaced. In
years when the balance of the ERA exceeded 4 times the
Percent of Market Value (POMV) draw calculated for the
general fund in the dividend, the excess in the ERA would
be transferred to the principle. She continued that of the
4.75 percent that was available for distribution, one-third
or 33 percent would be transferred directly to the dividend
fund for the PFD. Two-thirds or 66 percent of the draw from
the ERA would be deposited into the general fund (GF). The
final component of the bill relating to the PF earnings was
that Alaskan residents could choose to apply their PFDs
against their state income taxes due. The option would be
entirely voluntary and would appear as a check box on the
dividend application.
1:53:35 PM
Ms. Hansen addressed the question of how an income tax
would be implemented on slide 6: "Income Tax." She reported
that the numbers on the slide were based on 2015 estimates
from the Department of Revenue (DOR). She had just received
updated fiscal notes but had not had the chance to update
the slide in time. The income tax would be 15 percent of
federal liability due. The amount would be listed on line
56 of the federal 1040 form which would equal the adjusted
gross income minus standard deductions and many common
exemptions and credits but would not include the self-
employment tax and some other more specialized taxes that
were generally considered beyond the traditional idea of
income. It also excluded things like federal bonds which
states were not supposed to tax. She suggested that how it
would translate exactly would be created through regulation
by DOR. It would also not include the earned income tax
credit which came after federal taxes were due.
Ms. Hansen continued that not everyone would have a tax
liability. However, everyone who filed a federal income tax
form would at least pay a minimum tax of $25. The $25
minimum tax was not included in the 2015 estimates. The
fiscal note reflected an amount of about $2 million in the
first year of implementation. Additionally, the income tax
would include a 10 percent tax on long-term capital gains.
As discussed previously, the federal government currently
taxed long-term capital gains differently than it taxed
short-term capital gains or other forms of income. For the
lowest tax brackets, long-term capital gains were not taxed
at all. For tax brackets where other incomes were taxed
between 25 and 35 percent, the federal government currently
taxed long-term capital gains at 15 percent. By adding an
additional 10 percent Alaska tax on long-term capital
gains, the differential between other incomes and long-term
capital gains would be equalized. She reported that in the
bill there was a calculation such that, if the federal
government were to tax long-terms capital gains close to an
amount of what other income was taxed at, Alaska's tax rate
on long-term capital gains would adjust accordingly.
Representative Pruitt asked if she was saying the tax was a
25 percent tax (15 plus 10). Alternatively, he wondered if
she was suggesting that the tax would be 10 percent of the
gains.
Ms. Hansen explained that capital gains were reported on
federal taxes. The capital gains would be 15 percent of
federal tax liability. However, the capital gains that was
reported on the federal tax liability would be taxed at
between zero and 15 percent compared to other income which
was taxed at a higher rate. There would also be a 10
percent tax specifically on the taxable income from long-
term capital gains. She relayed that for somebody who had
long-term capital gains who was paying taxes in Alaska,
they would be paying what would be equal to the same tax
rate they were paying on other income.
Representative Pruitt asked how it would impact 401 K plans
and retirees. That was a long-term capital gain. He
wondered if a 10 percent tax would be required or if there
would be an exemption. Ms. Hansen deferred to the
Department of Revenue (DOR). She was aware that some
retirement income had different taxing rules at the federal
level, which meant that the way it was taxed at the state
level would also be different.
Co-Chair Foster mentioned that someone from DOR was online.
Representative Pruitt would leave it up to the chair. Co-
Chair Foster would circle back to the issue later.
1:58:48 PM
Representative Wilson asked if the state would only be
imposing an additional tax on long-term capital gains but
not on short-term capital gains. Ms. Hansen responded
affirmatively. Representative Wilson wondered if the tax
only applied to residents. Ms. Hansen replied that the
calculation would also apply to any income earned within
the state.
Representative Wilson asked if it would only apply to real
estate rather than stocks and bonds. Ms. Hansen relayed
that stocks and bonds fell in the definition for potential
income earned within the state. She referred to AS
43.22.030 which defined income from sources in the state
for the purposes of non-residents. It included income from
stocks, bonds, notes, bank deposits, and other intangible
personal property having a taxable or business interest in
the state.
Representative Wilson indicated she had done taxes for a
long time and she was under the impression that if a person
had long-term or short-term capital gains it would apply in
the state they resided in as opposed to the state a person
worked in. She asked if the concept was taken from another
state. She provided an example to her question. She asked
for clarity. Ms. Hansen believed, because it was on income
from a source in the state, it would have to be stocks or
bonds considered a source in the state. She thought Mr.
Spanos might be able to speak more directly to how it was
differentiated. The person would not be taxed on all of
their long-term capital gains.
Representative Wilson was unsure of her next question. She
remarked that she did not know what, besides real estate,
would have long-term capital gains. Ms. Hansen reiterated
that the definition for the different incomes that were
considered from a source in the state was on page 6,
subsections 4 and 5. She deferred to Mr. Spanos to provide
examples of stocks and bonds that might be from the state.
2:01:47 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, thought the question was about what
long-term capital gains would be applied to Alaska other
than real property.
Representative Wilson understood that the tax would apply
to a resident. She wanted an example of a capital gain
within Alaska that applied to an out-of-state resident.
Mr. Spanos indicated that real estate was a good example. A
non-resident who owned real estate in the state, held it
for investment purposes for more than a year, and sold it
at a gain would be liable for a long-term capital gain tax.
The person would owe long-term capital gain rates on the
federal tax return. If the bill were to pass, that person
would also owe the long-term capital gain rate to Alaska in
addition to the 15 percent already taxed at the federal
level. Other income sources could include trusts. If a
person had income earned through a trust in Alaska that was
incorporated in the state and the funds were held in the
state, it would be considered a long-term capital gain.
Representative Wilson asked if the reverse applied. As an
Alaska resident owning property outside of the state, she
wondered if she would have to pay state taxes on that
property even if it was out of state.
Mr. Spanos replied that a resident of the state whose
assets were not in Alaska - as long as they were not taxed
by another state - would be taxed in Alaska. The bill had a
credit for taxes paid in other states. For example, if a
person had income for a rental in another state that was
taxed by the other state, they could get a credit for it in
Alaska and would not pay the tax twice. If it was a long-
term capital gain, the circumstance would be similar. If
the other state had a higher tax than Alaska, a person
would receive a tax credit up to the amount they would have
paid in Alaska. If the rate was lower, then that person
would pay the difference to the state.
Representative Wilson thought what was being proposed was a
nightmare. She was unfamiliar with the trust market in
Alaska but was aware that it brought in a significant
amount of revenue. She surmised that the proposed tax could
have a huge negative affect in the form of investors going
elsewhere. She wanted to make sure the committee heard from
someone who was knowledgeable about the trust market, the
resulting revenue, and the potential repercussions from the
capital gains portion of the proposed legislation.
Ms. Hansen responded that when the sponsor was drafting the
section being discussed there had originally been some
references to trusts which had since been removed. She
would follow-up with Mr. Spanos to see if the Department of
Revenue was interpreting it differently, or if it was based
on previous income tax versions in previous years where the
language had been included.
2:06:19 PM
Representative Guttenberg indicated that a previous
presenter had suggested that the state not tie taxes to the
federal taxes in case of unintended consequences for the
state. He mentioned the estimate for income tax and
refundable PFD tax payments. He thought the committee was
broaching the questions about the mechanics of how things
worked and what the state was taxing or not taxing. He
suggested having a one-pager on definitions and something
other than estimates for clarification.
Co-Chair Foster would get the information to members.
Vice-Chair Gara agreed that the state had to raise revenue.
He asked if his thinking was correct that 15 percent of
federal tax liability was equal to 15/100 of the federal
tax. Ms. Hansen replied that he was correct and added that
in the back of the documents there was an estimated income
tax. It showed the differing income levels, the associated
taxes, and the state tax payment of 15 percent which
equaled between .1 percent to 3 percent of gross income.
Vice-Chair Gara relayed that some people had misinterpreted
the legislation to reflect a 15 percent tax on income,
which was not accurate. He elaborated that a person would
take their federal tax rate, for example, 25 percent. He
continued that 15 percent of 25 percent was 3.75 percent.
If a person was in a 25 percent tax bracket under the
federal tax rate, under the proposed legislation, 15
percent of a person's federal tax liability would be about
a 3.75 percent rate for that bracket. He asked if he was
correct. Ms. Hansen thought that it sounded correct. She
would have to have the numbers in front of her to confirm
his math.
Co-Chair Seaton pointed to the tax tables provided in
members' packets [HB 115: Estimates for Income Tax and PFD
Refundable Tax Payment: Estimated Federal and State Income
Tax for Year 2016] (copy on file). He pointed to the bottom
2 lines of page 1 that reflected the federal tax as a
percent of gross income and the Alaska tax as a percent of
gross income. He read the example of $800,000 income
[listed on page 9 under single with 2 children filing as
head of household]. At $800,000 a person would incur a
federal tax of 32.38 percent and an Alaska state tax of
4.86 percent, 15 percent of the federal tax rate. He read
another example from the tables.
2:10:29 PM
Vice-Chair Gara reemphasized that the tax was 15 percent of
the federal tax rate. For example, 15 percent of a 25
percent federal tax was a 3.75 percent tax. He did not want
people walking around saying that the bill was imposing a
15 percent tax.
Vice-Chair Gara relayed there was a question about trusts.
He suggested that the treasury industry was odd in Alaska.
He was unsure of the number of attorneys and bankers it
benefitted. He understood that the state could only tax
Alaska income. He provided an example of a client from New
York City with all their investments in publicly traded
stocks on the New York Stock Exchange not being taxed.
However, their attorney and/or banker in Alaska would be
making income in Alaska off that trust and would be taxed.
He thought the state would only be able to tax Alaska
income and income made in Alaska.
Representative Wilson disagreed that the tax system was as
simple as the previous speaker stated. She suggested there
were several steps to getting to gross wages. Someone who
did not have as many deductions would have a higher federal
tax liability. Two people earning the same wages might pay
a very different income tax amount. Ms. Hansen responded
that it was based on federal tax liability. If a person was
paying a different federal tax liability she would be
correct.
Representative Wilson reiterated the differences in
deductions. She asked about a side-by-side comparison of
two different families with differing deductions. She
thought the comparison would show a very differing tax
liability to the state.
Co-Chair Foster added that tomorrow there would be an
opportunity to ask additional questions. There would also
be additional people from the departments that could answer
questions.
2:15:26 PM
Representative Pruitt had heard earlier that if there was
income derived from another state it would be taxed.
However, from what Vice-Chair Gara mentioned that the state
would not be able to tax income made in another state. He
wanted clarification. Ms. Hansen indicated that for a non-
resident, the only thing that could be taxed was income
from the state. For an Alaskan resident all income was
taxable, but they had credit against anything that had been
taxed in another state. She believed there were only 6
other states that did not have income taxes but had sales
taxes instead.
Co-Chair Seaton tried to provide additional clarification.
Representative Wilson asked if a person received credit for
the amount paid to the other state, or was a calculation
needed. She provided an example and asked if she understood
correctly. Co-Chair Seaton responded that if a state did
not have an income tax there would not be any credit. If
the state had an income tax, there could be a credit for
the amount up to the amount that would have been charged on
the income from Alaska. He provided an example. If a person
was from California, which had a 13 percent gross tax, then
that person would not be able to subtract more tax from
their Alaska earnings. That person would still have to pay
15 percent of the federal tax liability on the money earned
in Alaska.
Representative Wilson provided an example pertaining to
Missouri. Co-Chair Seaton would get DOR to provide an
explanation. Ms. Hansen added that an explanation could
also be found on page 7.
Vice-Chair Gara indicated that the taxable income was
discussed on pages 6 and 7 of the bill. He relayed that if
a person was an out-of-state worker who came to Alaska,
paid nothing in Alaska, and took money out of the state,
they would pay taxes on the money they earned in the state.
They would not be able to take everything out of the state.
The credit portion was described in .035 which only applied
to residents of the State of Alaska. A person would be pay
income tax on all their income earned in the state. Out-of-
state workers would have to begin contributing to the state
that they worked in and then left. An Alaska resident that
paid income taxes for income earned in that other state,
would receive a credit to avoid being double taxed.
2:21:01 PM
Ms. Hansen continued her review of slide 6. She indicated
that the slide was based on estimates from 2015. She had
just received an updated fiscal note which did not break
out the income in the same manner as the previous estimate.
She could not directly update the amount estimated to be
coming from non-residents. However, in 2015 over 90,000
non-residents worked in the state taking more than $2.7
billion in wages out of state. The income tax would be
implemented starting January 1, 2018. For the first year
the state, which functioned on a fiscal year, would only
see half of the revenue. The estimate for that period in
the new fiscal note was $321 million versus the
approximated $300 million reflected on the slide.
Ms. Hansen scrolled to the flow chart on slide 7: "Current
Permanent Fund System." The slide showed the existing flow
into and out of the Permanent Fund. Currently 25 to 30
percent of oil royalties went into the PF and the rest of
the royalties went into the general fund. The earnings on
the investments came out of the principle and went into the
ERA which could be spent by any legislative appropriation.
Historically the legislature had not chosen to appropriate
from that fund except for the dividend and for inflation
proofing. The option existed. She highlighted the
distributable income out of the ERA, which was currently
how the dividend was paid. The calculation was based on 21
percent of the 5-year average of the net income of the
fund. The net income of the fund did not include unrealized
gains or losses. As was demonstrated by Mr. Teal in the
previous week, it could be highly variable. For instance,
there could be a year of negative realized earnings, which
was why dividends had fluctuated between $700 and $2200.
Ms. Hansen reviewed the flow chart on slide 8: "HB 115 -
State Revenue Restructuring Act." Under the bill there
would be an additional cash flow from an income tax. The
amount would be 15 percent of federal income tax due and 10
percent of long-term capital gains which would go directly
into the general fund.
Ms. Hansen reviewed slide 9: "HB 115 - State Revenue
Restructuring Act." She reported that additionally the bill
made changes to how the earnings from the Permanent Fund
that came out of the ERA were considered available for
distribution. Previously, the calculation was based on the
5-year average - 21 percent of the statutory net income.
under the bill the amount would be calculated based on a
Percent of Market Value (POMV) of the entire fund, which
would also be averaged over 5 or 6 years. Instead of being
based on only the earnings (net income), it would be based
on the whole value of the fund - a more stable calculation.
Ms. Hansen expounded that two-thirds of the draw that would
come out of the earnings reserve, the structured draw of
4.75 percent, would go into the general fund. The amount
would be approximately $1.5 billion in FY 18 and $1.59
billion in FY 19 according to LFD numbers. According to the
Department of Revenue's estimate on its fiscal note, the
amount was closer to $1.6 billion in FY 19. The Legislative
Finance Division and DOR had slightly different assumptions
regarding the earnings over the following couple of years.
On Wednesday they would be available to answer questions on
the subject.
Ms. Hansen stated that the other third of the 4.75 percent
POMV draw would be sent directly to the dividend fund,
which was where the current draw from the earnings reserve
went. The monies would not be going through the general
fund but would be going straight into the dividend fund for
calculating the current year's dividend. The value of the
draw would be $762 million for FY 18 with an estimated
dividend of $1100.
2:26:16 PM
Ms. Hansen turned to slide 10: "HB 115 - State Revenue
Restructuring Act." She reported that the slide looked at
how the change affected the dividend distributed to
Alaskans. Once the draw from the earnings reserve was
placed into the dividend fund, it would be computed in the
same way it was presently calculated. Residents would still
have the option of donating to Pick-Click-Give or would
have the added option of using their dividend as a payment
against their state income tax due. If residents chose to
apply their dividend to their state taxes owed, once they
filed their taxes, they would receive any remainder of
their dividend as a refund. If they did not select that
option, they would receive the dividend as they had every
year.
Representative Pruitt wanted to better understand the
logistics of how the system would work. He wondered about
the burden on the individual and the burden on the state to
manage the system. He thought it sounded complex.
Ms. Hansen responded that DOR would be better able to
explain the technical details. Her understanding was that
it would not be complicated or burdensome for the state.
There was already an option for withholding quarterly
payments and prepayments. The dividend would be an
additional pre-payment option that DOR would be holding in
the tax filer's account, the same as they would for any of
the payment options already. Once a person filed their tax
return, they would know whether they owed money or if they
could expect a return, just like filing a federal tax
return. She deferred to Mr. Spanos about how withholdings
worked. However, she believed a person could set the rate
of withholding. Regarding the dividend amount being changed
by the legislature, the intention of the proposed structure
was to make the amount of funds going into the general fund
stable. Stability would remove some of the need for the
legislature to reconsider the dividend. She indicated that
the hope was that the format would protect the dividend by
creating a stable source of revenue for state government.
Ultimately, the legislature had the power of appropriation
and could not bind future legislatures.
Representative Pruitt provided an example. He wondered if
the state had to change the way in which people filed for
the PFD. He asked how the system would work. Ms. Hansen
asked if Representative Pruitt was referring to using the
dividend against the payment. Representative Pruitt
responded affirmatively.
Ms. Hansen answered that it would be an option for each
individual filer to use their dividend against their tax
liability. It would not have any direct impact on their
employer unless the employee made the choice to change
their withholding rate. Her conversations with the
Permanent Fund Division indicated that there would not be a
need to change the way individuals filed. Mr. Spanos could
speak to how money would be transferred between
departments. Typically, a person applied for their dividend
by the end of March and filed their taxes in April. The
dividend was calculated in October. If a person did not
choose to apply their dividend against their taxes, they
would receive the full dividend in October. If a person
chose to apply it against their taxes, the amount would be
transferred to DOR in October and marked as a pre-payment
for taxes filed the following April.
Representative Pruitt thought it was complex.
Co-Chair Foster asked if Mr. Spanos would like to address
the question. Mr. Spanos answered that the payment would be
like any other payment. For instance, if someone were to
select on their PFD application that they wanted a portion
of their dividend to be used for a tax payment, the
department would expect it to be similar to any other
scenario where someone made a pre-payment or quarterly
payment. It was unlikely that someone getting a refund
would want to make a payment to the tax division. The
division would piggyback the W-4 Form. There would be tax
payables for employers to withhold. The department would
not be releasing any information to employers on pre-
payments. It would be up to the employer to simply put the
data into the system and to allow the withholding to take
place.
2:35:29 PM
Representative Tilton asked if the state would place a lien
on a person's future dividends if they had a tax liability
greater than what they had paid in payments and contributed
in PFD monies by checking the box on their application. Mr.
Spanos replied that the division would handle the issue in
the same way it handled other outstanding tax payer
balances. If there was a liability after a tax return was
filed, the person would receive a bill in the mail. It
would have the payment information on it including the
interest and penalty fees. If a tax payer did not make
payments, the division would go into collections with them.
The division had an agreement with the PF Division to
withhold payments when an individual owed tax. Other
methods used by the division were levying bank accounts and
placing liens on properties.
Co-Chair Foster suggested that without knowing the amount
of the PFD until the Fall, it would be difficult for an
individual to determine the exact amount they owed in taxes
to the state. He suspected the number of the discrepancy
would not likely be large, but filers would incur penalties
and interest if there was a shortfall. He asked if he was
correct. Mr. Spanos asked for clarification. Co-Chair
Foster reiterated his question. He wondered if he had the
timeline correct.
Mr. Spanos replied that the PFD application would be at the
beginning of the year between January and March. For
instance, if he filed for his PFD in March 2017 his tax
return would not be due until April 2018. The PFD
announcement would be in October 2017. If he selected to
make a payment from his PFD, it would be in October 2017
that the payment would be transferred from the Permanent
Fund Division to the Tax Division. He would file his tax
returns between January - April 2018 and would know exactly
how much was transferred and whether he owed more or was
receiving a refund.
Ms. Hansen moved to slide 11: "HB Proposal: Total Estimated
Revenue to General Fund FY18 -Half Year of Income Tax." The
slide showed the estimated revenue to the general fund
which was based on the numbers before she received the new
fiscal notes. Using the new fiscal note, the income tax
revenue would reflect $321 million in FY 18. The total
revenue going into the general fund would be $1.84 billion.
There would be $762 million going straight to the dividend.
2:40:47 PM
Ms. Hansen advanced to slide 12: "HB Proposal: Total
Estimated Revenue to General Fund FY19 - First Full Year of
Income Tax." She reported that in FY 19, which would be the
first full fiscal year of the income tax, the estimate on
the new fiscal note was slightly lower. She would have to
ask Mr. Spanos to speak to the changes in the department's
calculations between the years. The new fiscal note
reflected income tax revenues to be $640 million in FY 19
The draw was calculated as slightly higher at $1.6 billion
in FY 19. The total revenue to the general fund was $2.2
billion with an additional $797 million going straight to
the dividend rather than coming out of the general fund.
Ms. Hansen moved to slide 13: "What kind of Alaska do we
want to live in?" She suggested that, to answer the
question about why the state needed to take action on a
comprehensive plan, another question had to be answered
first. What kind of Alaska did people want to live in? She
reasoned that finding out the standard of living and the
services that Alaskans thought made the state worth
investing in could help legislators understand how
comprehensive of a solution the state needed this year and
for the future.
Ms. Hansen continued to slide 14: "State Spending." She
noted a pole run by the Senate Majority of and responded to
by over 7028 participants revealed that 49.9 percent of
Alaskans believed state spending was about right or too low
compared to with those that believed state spending was too
high. She added that more Alaskans then in past years were
saying that they wanted to keep the level of state services
that they had currently.
Ms. Hansen discussed slide 15: "Income Tax." She reported
that out of the same poll conducted by the Senate Majority
when asked whether they could support a state income tax,
54.6 percent of participants indicated they strongly or
somewhat strongly supported the idea. The number was an
increase of more than 6 percent over the previous year.
Ms. Hansen reviewed the graph on slide 16: "2017-2026
Employment Forecast under Three Budget Scenarios." In
looking at a plan to address the state's fiscal situation
it was important to consider how the legislature's choices
would affect the state. The majority of Alaskans had
indicated that they supported the current level of spending
or that they believed that spending was too low. All the
choices made would have an effect on the economy including
changing the dividend or implementing a broad-based tax.
However, if the legislature chose not to implement a
comprehensive fiscal plan and instead continued with major
budget cuts as the main approach, the predicted effect on
employment would be more severe than other choices.
Vice-Chair Gara was looking at Mr. King's presentation
which had 3 lines. The first was a line with a combined PFD
and income tax plan similar to the one on the slide. It
stopped job losses in 2017. Another line reflected only the
PFD without income tax, which showed greater job losses.
The third line was one with cuts only. It showed the
largest job losses, approximately 25,000 jobs, that would
persist midway through the 2020s.
Ms. Hansen responded that the slide was from Mr. King's
presentation; it was his presentation to the Senate Labor
and Commerce Committee. The slide did have 3 lines, but the
dividend line and the broad-based tax line were essentially
on top of each other.
Vice-Chair Gara suggested that the difference was that the
top line was an income tax or a restructuring. Whereas, he
had a third line that he provided to House Finance that had
a combined restructuring and income tax, which had the
least job losses. He noted that he was speaking of page 19
of Mr. King's presentation from an earlier meeting.
2:45:30 PM
Representative Wilson asked where the impact on the private
sector was shown. She noted the ongoing discussions about
oil taxes. She noted the industry reporting several job
losses in the previous year. She wondered where she could
find the information on the graph. Ms. Hansen asked if
Representative Wilson was referring to the discussion on
oil and gas taxes. Representative Wilson clarified that she
was talking about job losses in the private sector. She
wondered where the private sector job losses resulting from
low oil prices would fall on the graph. She mentioned other
industries such as mining.
Ms. Hansen spoke to slide 16, which was looking at the
employment forecast for the entire state. She believed the
slide included the losses to the private sector, rather
than just looking at state jobs. It was looking at jobs
throughout the state. She highlighted that the losses that
have already occurred where the lines combined in 2015 and
2016. The deviation was the expected forecast effect on
employment for the different choices. If she was speaking
to the revenue impacts having to do with non-residents,
there were not as many non-residents working in the oil
sector which could be why DOR had slightly revised their
estimations for the income tax, but she would differ to Mr.
Spanos to speak to the point.
Representative Wilson commented that the jobs were not lost
because the PFD's were reduced, because of a broad-based
tax, or because the legislature was cutting the budget. The
jobs were lost due to the change in the price of oil.
Vice-Chair Gara referred to slide 19 of Mr. King's
presentation ["Forecasting Alaska's Economy: 2017-2026" by
Northern Economics] (copy on file). Mr. King's point was in
alignment with what Institute of Social and Economic
Research (ISER) had reported in the previous year. Every
$100 million in budget cuts cost about 1000 to 1500 private
and public-sector jobs. According to Mr. King, Alaska was
down 20,000 private-sector and public-sector jobs with $1
billion reductions in the budget. If a plan was implemented
along the lines of those on the slide, job losses would be
stemmed.
2:49:29 PM
Co-Chair Seaton indicated that the lines on slide 16 were
going down from a high employment in 2015 of about 465,000
jobs. The reduction in the lines down to 2017 to about
425,000 equated to about 20,000 jobs that were both public
and private jobs and reflected actual numbers. The
legislature was looking at making decisions about how to go
forward. Both a reduced PFD and the implementation of a
broad-based tax had the same effect of preventing job
losses. However, if the state only cut the budget, the
state would be faced with losing another 25,000 more jobs
between 2017 and 2020. The legislation being considered
would include a PFD reduction and a broad-based tax as well
as a restructuring of the Permanent Fund for a sustainable
draw.
Ms. Hansen noted that the boxes on the chart were added
because the lines were difficult to distinguish. She
thought the labels were misleading because the chart did
not reflect the effect on the economy under the different
scenarios.
Representative Wilson suggested that by combining
industries, private and public, it was difficult to
determine what was contributing to an upswing. She supposed
that an upswing might be due to keeping government strong,
which would result in more jobs in the public sector. She
thought the lines should be divided. She wondered if
private sector jobs would increase or if public sector jobs
would increase if taxes were imposed or PFD's were cut. She
wondered what types of jobs would continue. She posed a
question about a private sector economy versus a government
driven economy. Ms. Hansen replied that the question would
be a good follow-up question for Mr. King. She noted that
the slide showed job employed in the thousands. She did not
believe that under either scenario the state would be
hiring 10,000 extra state employees. Some of the jobs would
be lost from the private sector and not just from the
state.
Ms. Hansen detailed the budget scenario on slide 17: "A
$3.2 Billion Budget Scenario:" She explained that the slide
showed a different perspective of what choosing $100
billion in budget cuts versus a plan that would help
stabilize the state's revenues. There would be potential
cost shifts to the communities. The slide was taken from
OMB's presentation at the beginning of the year. The
scenario was hypothetical. They spread $100 billion budget
cut scenario out among the different communities based the
amount of state funds that were currently sent to
communities through education and other services provided
by the state. It also showed the burden on communities to
continue to provide the services they had.
2:53:46 PM
Ms. Hansen scrolled to the Legislative Finance Division
slide 18: "Real Per Capita Unrestricted General Fund
Revenue/ Budget History (2015 Dollars Per Person)." She
noted the reliance on volatile resource revenues resulting
in expansions and contractions in the state budget based on
a revenue factor outside of the state's control. It meant
that in years when the state's private economy was
shrinking due to decreased oil and gas investment, as was
currently the case, it could not help to provide a safe
glide path for the economy. The only option was to try to
match the greatly reduced resource revenue by cutting jobs
and the budget, which, in turn, would have a multiplier
effect on the state economy. She concluded that to avoid
the volatile state budget and economy, the intention of the
state revenue restructuring act was to provide a more
stable source of revenue avoiding fluctuations and
contractions. The slide showed that per capita and adjusted
for inflation the state budget had already been reduced to
some of its lowest levels.
Ms. Hansen asked members to consider why it would be
valuable for the State of Alaska to have a stable source of
revenue instead of a volatile one. One of the reasons was
the sheer amount of infrastructure the state built up over
the previous 30-40 years when it had money. If the
legislature chose to cut the budget drastically to meet the
state's expected resource revenue, the first place the cuts
would be taken from would be the capital budget. She opined
that the state would likely see a growing list of deferred
maintenance. The university had deferred maintenance
nearing $1 billion. There was a significant amount of
differed maintenance of roads, and DOT had its own way of
prioritizing how the roads would be repaired and in what
order. She indicated that if the state wanted to maintain
some of its core services and core infrastructure, a stable
revenue would be required for the state to budget in some
of those deferred maintenance costs.
HB 115 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster noted the agenda for the following meeting.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB115 Additional Documents_Income Tax Filing Status Chart_.10.17.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| HB115 Sectional version E_long form_2.10.17.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| HB115 Sectional_Version E_short form_2.10.2017.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| HB115 Sponsor Statement_2.10.2017.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| HB115 Additional Documents_Permanent Fund flow chart_2.11.17.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| HB115 Presentation _2.12.2017.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |
| NEW FN DOR T&T Tax Division.pdf |
HFIN 2/13/2017 1:30:00 PM |
HB 115 |