Legislature(2017 - 2018)HOUSE FINANCE 519

02/14/2017 01:30 PM FINANCE

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01:34:05 PM Start
01:34:19 PM HB115
03:31:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled 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."                                                                                                           
                                                                                                                                
1:35:04 PM                                                                                                                    
                                                                                                                                
JOHN  HUTCHINS,  ATTORNEY,  DEPARTMENT   OF  LAW,  introduced                                                                   
himself and was available for questions.                                                                                        
                                                                                                                                
Representative  Kawasaki remarked that  members of  the other                                                                   
body had  commented on  the single  subject rule and  whether                                                                   
it  applied  to  HB  115. He  asked  for  comments  from  the                                                                   
Department of Law (DOL).                                                                                                        
                                                                                                                                
Mr. Hutchins  answered that  the test  in the single  subject                                                                   
rule  was not  about  whether  it was  possible  to have  two                                                                   
analytically distinct  subjects covered by the  same bill; it                                                                   
was  clear from  existing Alaska  case  law that  it was  not                                                                   
true.  For example,  in  Gellert [v.  State  of Alaska],  the                                                                   
court  had looked  at a bill  that would  combine small  boat                                                                   
harbors  in coastal  cities  and  flood control  projects  in                                                                   
Fairbanks. He furthered  that Fairbanks was not  close to the                                                                   
coast,  which made  it  easy to  say  the two  subjects  were                                                                   
separate. However,  the court had determined it  was a single                                                                   
subject  related   to  navigation  and  water   control.  The                                                                   
pertinent  question  was whether  there  was a  subject  that                                                                   
would cover  everything in  the bill and  whether it  was too                                                                   
broad.  He was  confident HB  115 would  pass scrutiny  under                                                                   
that test for a variety of reasons.                                                                                             
                                                                                                                                
Mr.  Hutchins  detailed  that   the  purpose  of  the  single                                                                   
subject rule  was to  prevent tactical  use of the  committee                                                                   
structure. The  court had specified  that one of  the primary                                                                   
things  the  rule  was  trying   to  avoid  was  combining  a                                                                   
multitude  of different  constituencies  to pass  legislation                                                                   
that otherwise  could not pass  on its own. He  surmised that                                                                   
the  bill  could  perhaps  be  analytically  divided  into  a                                                                   
Permanent  Fund component  and an income  tax component,  but                                                                   
the reason  for including  both in one  bill was  not because                                                                   
neither  would  pass  on  its own.  He  continued  that  when                                                                   
considering each  component separately, neither  option was a                                                                   
popular  measure that  would  pull a  weaker  bill along.  He                                                                   
detailed that both  components were millstones  that could be                                                                   
used to  sink a  measure rather  than the  other way  around;                                                                   
therefore,  he surmised  there  was limited  concern in  that                                                                   
area.                                                                                                                           
                                                                                                                                
Mr.  Hutchins stated  that more  importantly, the  components                                                                   
were  both  part  of  a solution  to  one  problem  and  were                                                                   
interrelated -  action taken on  one of the components  would                                                                   
impact  the  desirability of  what  could  be done  with  the                                                                   
other,  while  reaching  the  same  revenue  requirement.  He                                                                   
believed it  made sense to  talk about, debate,  and consider                                                                   
amendments to the  two components simultaneously  in the same                                                                   
bill  because  they were  both  aimed  at fixing  the  budget                                                                   
problem.  For that  reason, he  would be stunned  if a  court                                                                   
decided the  bill did  not meet the  single subject  rule. He                                                                   
did not  believe the issues  could be efficiently  considered                                                                   
without being considered at the same time.                                                                                      
                                                                                                                                
1:39:55 PM                                                                                                                    
                                                                                                                                
ANGELA  RODELL,  EXECUTIVE DIRECTOR,  ALASKA  PERMANENT  FUND                                                                   
CORPORATION,  introduced   herself  and  was   available  for                                                                   
questions.                                                                                                                      
                                                                                                                                
Co-Chair Seaton  stated the  bill had  a 4.75 percent  market                                                                   
value  draw from the  Permanent  Fund. He asked  if the  draw                                                                   
would place the fund at risk of depletion.                                                                                      
                                                                                                                                
Ms. Rodell answered  it was important for the  legislature to                                                                   
know  that  the  Alaska  Permanent  Fund  Corporation  (APFC)                                                                   
board of  trustees did not  want APFC  to take a  position on                                                                   
the  bill  in  terms of  the  appropriate  draw  amount.  She                                                                   
elaborated that APFC  recognized it would be a  give and take                                                                   
and  that the  legislature would  ultimately  decide on  what                                                                   
was  best  for  the  state.  She  detailed  that  APFC  would                                                                   
respond accordingly.  The 4.75 percent draw would  generate a                                                                   
certain  amount of  money  for the  state  budget, which  the                                                                   
corporation would deliver if directed.                                                                                          
                                                                                                                                
Co-Chair Seaton  stated that  the only  other section  of the                                                                   
bill  pertaining to  the Permanent  Fund  was a  distribution                                                                   
draw (33 percent  to the Distribution Fund for  the Permanent                                                                   
Fund Dividend and  67 percent to the General  Fund). He asked                                                                   
if it  was an obstacle for  APFC to calculate  and distribute                                                                   
the draw to two different funds.                                                                                                
                                                                                                                                
Ms.  Rodell  answered  in  the   negative.  She  believed  in                                                                   
practice  APFC  would  remit  one transfer  of  cash  to  the                                                                   
Department  of Revenue  (DOR).  She detailed  that DOR  would                                                                   
then  allocate the  funds  between  the two  accounts,  which                                                                   
were under  its management.  A portion  would be  transferred                                                                   
into the  dividend fund and  67 percent would  be transferred                                                                   
to unrestricted general fund (UGF) accounts.                                                                                    
                                                                                                                                
1:43:25 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  stated  there were  various  flow                                                                   
charts  showing  how the  Permanent  Fund worked  at  present                                                                   
versus other proposals  that had arisen over  time. He stated                                                                   
it was not like  going to a percent of market  value (POMV) -                                                                   
it was  not all  one lump  sum of cash  (it involved  various                                                                   
pots of money). He asked how similar  investing the Permanent                                                                   
Fund based on POMV  would be to the structure in  HB 115 - to                                                                   
maximize the return.                                                                                                            
                                                                                                                                
Ms.  Rodell answered  it was  important  to recognize  APFC's                                                                   
mandate  to  protect  the  fund  principal  and  to  maximize                                                                   
income. She noted  the objectives could be  competing because                                                                   
in order  to maximize  growth  there was a  tendency to  take                                                                   
more  risk,  but  taking  more   risk  could  jeopardize  the                                                                   
protection of  principle. The corporation had  worked hard to                                                                   
create  a diverse  asset  allocation  that balanced  the  two                                                                   
competing requirements.  She furthered that  when considering                                                                   
the provisions in  HB 115, APFC was focused on  that the draw                                                                   
was equal to 4.75  percent of the market value  and what type                                                                   
of liquidity it would require  each fiscal year. She detailed                                                                   
that because  it was  five of  the six  previous years  there                                                                   
would  be dollar  amount  certainty on  the  draw amount.  In                                                                   
other words,  the current statutory process  for transferring                                                                   
money for  the dividend was based  on an estimated  amount of                                                                   
the statutory  net income  for the  fiscal year currently  in                                                                   
progress. The  corporation was  moving that uncertainty  from                                                                   
the calculation and  looking at the previous  five years. The                                                                   
benefit to  the legislature would  be knowing  with certainty                                                                   
(at the  start of  session) what one  of its revenue  streams                                                                   
would be for the upcoming fiscal year.                                                                                          
                                                                                                                                
Ms.  Rodell   continued  that   in  terms  of   managing  the                                                                   
investments, currently  APFC did not foresee  a needed change                                                                   
to  the  asset  allocation  and  investment  management.  The                                                                   
challenge  would be as  programs matured,  whether the  asset                                                                   
allocation of  the [Permanent Fund] Earnings  Reserve Account                                                                   
(ERA)  needed   to  be  adjusted   into  a  different   asset                                                                   
allocation that  more fully recognized the inability  of that                                                                   
account to  take on  the risk  the corpus currently  endured.                                                                   
She underscored  that  the ERA  could not afford  to lose  at                                                                   
all.                                                                                                                            
                                                                                                                                
1:47:04 PM                                                                                                                    
                                                                                                                                
Representative    Guttenberg    recalled    voting   for    a                                                                   
constitutional  amendment proposed  by former Governor  Frank                                                                   
Murkowski  related  to  POMV.  He  remarked  there  had  been                                                                   
numerous conversations  and presentations  over the  years on                                                                   
endowments  and   how  they  worked  around  the   world.  He                                                                   
remarked  that it was  not unique  in the  world, but  it was                                                                   
unique  for Alaska.  He spoke  to establishing  a fixed  draw                                                                   
from the  Permanent  Fund. He  asked if other  nations  did a                                                                   
fixed  rate draw  or  a percentage  of what  was  made on  an                                                                   
annual  basis or  in five  of the  past six  years. He  asked                                                                   
what the  usual definition was  for how much money  was taken                                                                   
off a  sovereign fund. He added  that perhaps there  would be                                                                   
inflation proofing, but perhaps there would not be.                                                                             
                                                                                                                                
Ms.  Rodell  addressed  one  of  the  important  distinctions                                                                   
between  the constitutional  amendment  in 2003  or 2004  and                                                                   
what  other  sovereign wealth  funds  were  able to  do.  She                                                                   
detailed  that  Alaska's  constitutional  amendment  required                                                                   
all  income go  to the  General  Fund. She  explained it  was                                                                   
creating  the   machinations  at  present  because   the  way                                                                   
traditional  POMV processes  work  was to  look  at the  fund                                                                   
value  and  take a  percentage  of  the market  value,  which                                                                   
became the  spend; additionally,  there  was no reference  to                                                                   
realized  and unrealized  earnings  or income  (it was  based                                                                   
fully  on  the  value).  The   APFC  board  of  trustees  had                                                                   
enthusiastically   supported  the  constitutional   amendment                                                                   
because it  cleaned up  all the income  language and  made it                                                                   
clear that  APFC would  transfer a  set percentage  annually.                                                                   
It  had meant  the  fund had  no longer  had  to worry  about                                                                   
inflation proofing  or income, because  the money was  all in                                                                   
one big pot.                                                                                                                    
                                                                                                                                
Ms. Rodell  referred to  the current  requirement for  income                                                                   
to go  to the  General Fund.  The corporation  was trying  to                                                                   
make something  work within the  language it was  required to                                                                   
operate under.  She referenced  other sovereign wealth  funds                                                                   
and  endowments  and shared  that  she  had recently  seen  a                                                                   
survey  showing that  the average  payout  on endowments  was                                                                   
4.2 to 4.3 percent  in 2016. She reminded the  committee that                                                                   
those  endowments were  able  to take  it  without regard  to                                                                   
what  actual income  was  because all  the  income was  swept                                                                   
back  into the  fund and  invested. Currently  in Alaska  the                                                                   
income was  flowing into another  account that  was available                                                                   
to be  appropriated in its  entirety regardless of  the rules                                                                   
that  were in  place  and the  legislature  was deciding  how                                                                   
much it wanted to spend on an annual basis.                                                                                     
                                                                                                                                
Ms.   Rodell  continued   that   when  discussing   inflation                                                                   
proofing,  it was very  important to  recognize that  because                                                                   
all  the income  flowed into  the ERA,  none of  the gain  or                                                                   
income  generated  by  the corpus  got  reinvested  into  the                                                                   
corpus  without   the  inflation   proofing  mechanism.   For                                                                   
example,  ten  years  back  APFC   had  purchased  an  office                                                                   
building  -  the  ERA  bought  a  pro  rata  share  of  every                                                                   
investment the  fund held  - under a  four to one  ratio, the                                                                   
office  had been  $50 million  ($40 million  from the  corpus                                                                   
and  $10  million  from  the ERA).  She  continued  that  the                                                                   
investment was sold  in 2017 and was valued  at $100 million;                                                                   
the $50  million gain went into  the ERA and the  $10 million                                                                   
the  ERA invested  into the  office building  went back  into                                                                   
the  ERA.  All  the corpus  received  was  the  original  $40                                                                   
million  investment. She  explained that  if the $60  million                                                                   
was  needed   for  other  purposes   and  it  could   not  be                                                                   
reinvested   for   another   10  years   into   a   long-term                                                                   
investment,  all that  would be  available to  put back  into                                                                   
real  estate was  the original  $40 million,  but at  present                                                                   
office buildings  cost  $100 million.  She elucidated  it was                                                                   
how  APFC  was  losing investment  power  and  why  inflation                                                                   
proofing  was  so  important.  She underscored  the  need  to                                                                   
distinguish  between  what the  ERA  could  do and  what  the                                                                   
corpus  could  do.  The accounts  were  very  different:  the                                                                   
corpus could not be spent, but the ERA could.                                                                                   
                                                                                                                                
1:52:59 PM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if there  was a mechanism  that                                                                   
would  enable APFC  to alert the  legislature  if a POMV  was                                                                   
determined to  be too  high. She asked  if a mechanism  could                                                                   
be  put  in place  to  indicate  if the  corporation  may  be                                                                   
endangered,  may  not  have  the  ability  to  invest  as  it                                                                   
wanted, or may not adequately protect the Permanent Fund.                                                                       
                                                                                                                                
Ms.  Rodell   replied   it  was  possible   to  include   the                                                                   
safeguards  into   legislation.  She  referred   to  separate                                                                   
legislation  (HB  61),  which  included  a  provision  for  a                                                                   
lookback  to  occur  every  three  years.  She  believed  the                                                                   
legislature  would  be  alerted well  before  the  three-year                                                                   
mark,  based  on her  experience  reviewing  various  reserve                                                                   
levels annually  with the legislature.  However, it  would be                                                                   
nice to codify  it in the legislation to force  a lookback to                                                                   
check on whether things were working out as anticipated.                                                                        
                                                                                                                                
Representative  Wilson asked  for verification  the bill  did                                                                   
not currently have  the provision. Ms. Rodell  replied in the                                                                   
affirmative.                                                                                                                    
                                                                                                                                
Representative Pruitt  stated that one thing he  had not seen                                                                   
in any of  the bills in  the current year was  providing APFC                                                                   
with the  tools to manage what  it had. He  cited procurement                                                                   
changes as an  example. He remarked that the  legislature was                                                                   
putting  more  weight   on  APFC  and  he  wondered   if  the                                                                   
corporation believed  some changes to give it  the ability to                                                                   
hire and  manage the  fund were  still needed.  He asked  why                                                                   
the corporation felt the items were good to have.                                                                               
                                                                                                                                
1:55:29 PM                                                                                                                    
                                                                                                                                
Ms. Rodell  answered that the  previous year the  corporation                                                                   
had  asked for  an exception  to the  state procurement  that                                                                   
had  not  been   included  in  one  of  the   bill  version's                                                                   
procurement  language. She  noted it was  an important  tool.                                                                   
Currently  the APFC was  not exempt  from state  procurement,                                                                   
while  other agencies  such  as  the Alaska  Housing  Finance                                                                   
Corporation  (AHFC)  and  the  Alaska  Retirement  Management                                                                   
Board (ARMB)  were. For  example, if  the corporation  wanted                                                                   
to  hire   an  expert   consultant  for   a  private   equity                                                                   
engineering idea,  the corporation  would have to  go through                                                                   
the  state's  procurement  process to  hire  the  engineering                                                                   
consultant.  Often  investments  did  not  have  the  six  to                                                                   
eight-week lead  time to allow  for procurement,  getting the                                                                   
individual  up   to  speed,  and   get  the  work   done;  it                                                                   
potentially  meant a  12-week  delay, which  would result  in                                                                   
lost  opportunity. The  corporation was  seeking relief  that                                                                   
its  other  partners  like  ARMB  had.  The  corporation  was                                                                   
seeking  the  ability to  manage  more  quickly and  be  more                                                                   
flexible  in  its  response.  None  of  the  bills  currently                                                                   
accounted  for the requested  change. She  would love  to see                                                                   
the detail added to a bill or to a standalone bill.                                                                             
                                                                                                                                
1:57:43 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt believed  Ms.  Rodell's testimony  was                                                                   
that the  ERA needed  to be managed  differently than  it had                                                                   
been managed  in the  past. He was  trying to understand  how                                                                   
the need for  increased liquidity impacted  the corporation's                                                                   
goal. He  asked if  the corporation's  goal remained  at 6.95                                                                   
percent  for the fund  overall  if the bill  passed with  the                                                                   
4.25 percent draw.                                                                                                              
                                                                                                                                
Ms. Rodell replied  it was a challenging question  to answer.                                                                   
Part  of it  was the  tension  surrounding the  corporation's                                                                   
desire for  the legislature  to do business  as usual  and to                                                                   
continue  to manage  the  fund  as it  always  had. The  APFC                                                                   
board target  return was 5  percent plus CPI  [Consumer Price                                                                   
Index]; the  6.95 percent was  a forecast generated  by [fund                                                                   
consultant]  Callan  Associates  based  on the  fund's  asset                                                                   
allocation.  She  elaborated it  was  the median  forecast  -                                                                   
there  was  a  50  percent  likelihood  of  achieving  better                                                                   
returns and a  50 percent likelihood of achieving  below that                                                                   
result. She explained  that instead of leaving  the ERA alone                                                                   
and merely  taking its  statutory net  income calculation  to                                                                   
pay  out dividends,  the  fund  was  being considered  for  a                                                                   
budget  stabilization  fund.  She  was  concerned  that  even                                                                   
though  the  POMV  was sustainable,  the  corporation  had  a                                                                   
fiduciary  responsibility  to  be  prudent  and  responsible.                                                                   
Hypothetically, if  all that was  left in the ERA  (after the                                                                   
budget passed  in the  current year) was  $5 billion  and the                                                                   
4.75 percent, 5.25  percent, or 6 percent draw  came with the                                                                   
expectation $3 billion  would be needed for FY  19, she would                                                                   
want to  invest the $5 billion  the same way  the corporation                                                                   
would have  at present, knowing  that it could not  afford to                                                                   
lose; a minimum of $3 billion was needed.                                                                                       
                                                                                                                                
Ms.  Rodell  continued  that it  was  challenging  to  answer                                                                   
these types of  questions because if there was  a severe down                                                                   
market (e.g.  down 24 percent  as in  2008) and there  was an                                                                   
excess  of  $2.5  billion  in  losses.  She  asked  what  the                                                                   
response would be  if she came to the legislature  in January                                                                   
of  2018  and reported  that  the  money  had all  been  lost                                                                   
because  the  market  was  off.   At  a  minimum  she  wanted                                                                   
recognition that  if the corporation was going  to invest the                                                                   
way it  always had,  there needed  to be  awareness that  the                                                                   
ERA would lose  some years. She elaborated that  if the state                                                                   
could  not  afford   the  loss,  perhaps  the   solution  was                                                                   
something  different  than  or  a  mitigation  of  was  under                                                                   
discussion.  It was  a recognition  that the  return was  not                                                                   
6.95 percent  on the  ERA or  a recognition  that there  were                                                                   
other  mechanisms that  could  be discussed.  She  recognized                                                                   
the challenge  facing the  state and the  need for  using the                                                                   
fund. She  did not want  the legislators to misinterpret  her                                                                   
statements to not touch the fund.                                                                                               
                                                                                                                                
2:02:46 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Gara  stated   regardless   of  the   percentage                                                                   
selected  (e.g. 4,  4.5,  5.25 percent)  if  there were  poor                                                                   
consecutive market  years and  the legislature implemented  a                                                                   
statutory POMV,  he surmised the  state would probably  be in                                                                   
trouble and  the issue would  have to  be dealt with  at that                                                                   
time.                                                                                                                           
                                                                                                                                
Ms. Rodell believed it was fair to say.                                                                                         
                                                                                                                                
Vice-Chair   Gara   remarked   that   no   one   believed   a                                                                   
constitutional  amendment was likely;  if there was  majority                                                                   
support  to   do  something  with   the  ERA,  it   would  be                                                                   
statutory.   He    assumed   the   legislature    would   act                                                                   
appropriately  if   there  were  numerous   consecutive  poor                                                                   
market years and  no POMV formulas worked because  there were                                                                   
no  earnings  remaining.  Separately, he  referred  to  prior                                                                   
testimony  by  David  Teal,  Director,   Legislative  Finance                                                                   
Division related  to a 4.25  or a 5.25  percent POMV  of five                                                                   
of  the past  six  years,  which  Mr. Teal  found  reasonable                                                                   
provided that  if there were  multiple negative  stock market                                                                   
years something  different would  need to  be done.  He asked                                                                   
if Ms. Rodell could agree.                                                                                                      
                                                                                                                                
Ms.  Rodell believed  all  the numbers  spoken  about in  the                                                                   
current meeting were in the realm of reasonableness.                                                                            
                                                                                                                                
Vice-Chair  Gara noted that  Ms. Rodell  had been very  clear                                                                   
that at some  point she would like to see  inflation proofing                                                                   
return,  which had  been absent  in  the past  two years.  He                                                                   
observed  that the  state's  budget  was still  strapped.  He                                                                   
asked  if she would  feel more  comfortable  if there was  an                                                                   
inflation proofing mechanism put in place.                                                                                      
                                                                                                                                
Ms.  Rodell replied  in  the affirmative.  The  only way  for                                                                   
future  generations  of Alaskans  to  get  the same  type  of                                                                   
benefits  the  population  was currently  receiving  off  the                                                                   
fund,  was  for  the Permanent  Fund  corpus  to  retain  its                                                                   
investment power;  it would  be diminished without  inflation                                                                   
proofing.                                                                                                                       
                                                                                                                                
Vice-Chair  Gara  believed  the   most  comfortable  part  of                                                                   
inflation  proofing would  be  if someone  put a  substantial                                                                   
amount of  money into the fund  principal. He thought  it was                                                                   
the most comfortable scenario for the corporation.                                                                              
                                                                                                                                
Ms.  Rodell replied  the  most comfortable  place  to be  was                                                                   
somewhere in the  waterfall, preferably at the top  - to take                                                                   
a  bit each  year. If  the legislature  opted  to allocate  a                                                                   
lump  sum  to the  fund,  she  questioned whether  the  state                                                                   
would  track  what  inflation  proofing would  have  been  in                                                                   
2016, 2017,  and other  years where  a moratorium was  taken.                                                                   
She  stated the  method  was  a possibility  without  knowing                                                                   
what inflation in those future years would be.                                                                                  
                                                                                                                                
2:07:11 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  provided  a  scenario  where  there  was  a                                                                   
formula  specified that  would cap  the amount  taken out  of                                                                   
the  ERA and  the  account grew.  He  asked  if the  scenario                                                                   
would  provide  APFC some  comfort  even  in the  absence  of                                                                   
annual inflation proofing.                                                                                                      
                                                                                                                                
Ms. Rodell replied  in the negative because the  ERA could be                                                                   
spent  for  any purpose  at  any  time. She  used  Vice-Chair                                                                   
Gara's scenario  with the  addition of  a catastrophic  event                                                                   
that  led to  a bad  budget gap  year, which  meant the  draw                                                                   
from the  ERA needed to be  larger than 4.5 to  5.25 percent.                                                                   
She  spoke to  flexibility  given to  the  ERA and  explained                                                                   
that  part of  the nice  thing about  inflation proofing  was                                                                   
that  the  funds went  back  into  the  corpus and  kept  the                                                                   
corpus  value growing.  She elaborated  that  it would  avoid                                                                   
the  current debate  of determining  what the  ERA should  be                                                                   
spent for.                                                                                                                      
                                                                                                                                
Vice-Chair Gara  asked if a hard  cap on what could  be spent                                                                   
from the ERA would cause Ms. Rodell some comfort.                                                                               
                                                                                                                                
Ms. Rodell replied "no."                                                                                                        
                                                                                                                                
2:09:20 PM                                                                                                                    
                                                                                                                                
Representative  Thompson surmised  the current  bill did  not                                                                   
include anything  to address  revenue volatility  of revenue,                                                                   
yet  it appeared  the  governor's  plan included  some  items                                                                   
that addressed the issue. He asked if he was accurate.                                                                          
                                                                                                                                
Ms.   Rodell   believed   comparing   the   two   bills   was                                                                   
challenging,  because  the HB  115  included the  income  tax                                                                   
components,  which led  to a different  revenue outcome  than                                                                   
the governor's  bill in terms  of volatility. She  stated the                                                                   
Permanent  Fund needed  to  not  be the  only  answer to  the                                                                   
budget  deficit,   because  it   would  have  volatility   in                                                                   
outcome.  She did  not know  how much  volatility in  outcome                                                                   
the legislature was willing to take.                                                                                            
                                                                                                                                
Representative  Ortiz referred  Ms. Rodell's  response  to an                                                                   
earlier  question that  she  was not  comfortable  supporting                                                                   
one  plan over  another.  Ultimately, the  legislature  would                                                                   
have to decide  on one type of  plan versus another  or on no                                                                   
plan  at  all.  He  asked  if it  was  safe  to  assume  that                                                                   
investment return  fluctuation was the biggest  threat to the                                                                   
success of any plan. He asked if that was true.                                                                                 
                                                                                                                                
Ms. Rodell  replied in  the affirmative.  She clarified  that                                                                   
they  did  not  necessarily  need   to  be  talking  about  a                                                                   
scenario where  the market was  down 20 percent  (i.e. events                                                                   
that occurred  once every 20 years).  She was referring  to a                                                                   
scenario where  the fund  returned 1 percent  per year  for a                                                                   
variety  of reasons  and  fixed income  rates  were low.  She                                                                   
cited  the volatile  2015  stock market  as  an example.  The                                                                   
concern was  not about  multiple years  of losses,  but about                                                                   
years with very  low returns, which prevented  the generation                                                                   
of  significant  income.  A  recognition   of  the  potential                                                                   
impact   was  important.   She   relayed   the  state   faced                                                                   
significant  volatility   in  revenue  sources   through  oil                                                                   
commodity prices.  There would  continue to be  volatility in                                                                   
revenue, although  it would probably be smoother  than it had                                                                   
been in  the past,  due to  the five-year  average and  other                                                                   
things.                                                                                                                         
                                                                                                                                
Representative  Ortiz  set  the volatility  aside.  He  asked                                                                   
otherwise if  it was as simple  as looking at  the difference                                                                   
between  the  various  plans  regarding  the  POMV  draw  and                                                                   
weighing  it as a  tradeoff where  the lower  the POMV  draw,                                                                   
the lower  the revenue for  the GF. He  asked if it  was that                                                                   
simple.                                                                                                                         
                                                                                                                                
Ms. Rodell answered in the affirmative.                                                                                         
                                                                                                                                
2:14:14 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt addressed the  topic of inflation  and                                                                   
noted  it had  not  been  done for  the  fund over  the  past                                                                   
couple of  years. He  believed the  current bill and  several                                                                   
bills aimed  at dealing  with the issue  with the  four times                                                                   
amount  that spilled  over.  He surmised  it  could create  a                                                                   
situation where the  corpus was not maintained  at the needed                                                                   
level going  forward. He referred  to the current  bill where                                                                   
two-thirds would  go to government and one-third  would go to                                                                   
the  dividend. He  asked if  a  form of  inflation should  be                                                                   
included. He  asked how to  design it  if so. He  wondered if                                                                   
it would merely follow the CPI.                                                                                                 
                                                                                                                                
Ms. Rodell  responded that HB 115  and HB 61 were  helpful in                                                                   
that they  both provided a  mechanism of inflation  proofing.                                                                   
She  clarified that  the  calculation of  four  times had  no                                                                   
relationship to  inflation or what would have  been deposited                                                                   
had  the  existing  statutory   remained  in  place,  but  it                                                                   
created a recognition  that some money should  flow back into                                                                   
the corpus. She  believed some ways to look at  it related to                                                                   
the  definition of  statutory net  income. She  knew that  HB                                                                   
115  had  eliminated  "available for  distribution"  and  had                                                                   
changed it  to "market value."  The legislature  could choose                                                                   
to  put  it  into  a  waterfall   or  in  the  definition  of                                                                   
statutory net income  subtract an amount out  - statutory net                                                                   
income  by definition,  would  be  the amount  available  for                                                                   
distribution  that was  deposited  into the  ERA. There  were                                                                   
probably  a couple  of formats.  It was  important the  bills                                                                   
contemplated inflation  proofing and did not do  away with it                                                                   
all  together. She  believed it  was hard  when language  was                                                                   
repealed to  reinstate it. She  recognized that the  bill did                                                                   
contain a mechanism,  albeit it was not perfect.  The perfect                                                                   
scenario  would be  something  higher up  that was  automatic                                                                   
each year.                                                                                                                      
                                                                                                                                
2:17:50 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt asked what  if part  of the  issue was                                                                   
merely  changing   definitions.  For  example,   perhaps  the                                                                   
definition  of income  was  changed.  He cited  Ms.  Rodell's                                                                   
earlier building  example where  $40 million ten  years after                                                                   
the investment  had  been made  should be valued  at "x,"  so                                                                   
that  the  income  remaining   within  the  principal  became                                                                   
whatever  would have been  adjusted. He  asked if  definition                                                                   
mechanisms could be used.                                                                                                       
                                                                                                                                
Ms.  Rodell   deferred   the  question   as  it  related   to                                                                   
constitutional  law  interpretations  and the  definition  of                                                                   
income. The  Permanent Fund  had been in  place 40  years and                                                                   
there had been  a series of attorney general  interpretations                                                                   
over the  years and different  kinds of investments  had been                                                                   
added to  the fund.  She was hesitant  to fully respond,  but                                                                   
she could follow up with his office on what options may be.                                                                     
                                                                                                                                
Co-Chair Seaton  spoke to the  four times the  draw remaining                                                                   
and  waterfall   that  would  be  designated   for  inflation                                                                   
proofing.  He  stated  the  modeling  took  effect,  but  not                                                                   
annually.  He looked  at  balancing  the draw  and  inflation                                                                   
proofing.  He  asked  if  Ms.   Rodell  was  referring  to  a                                                                   
scenario where the  draw was increased to 5  percent and 0.25                                                                   
percent was dedicated to inflation proofing.                                                                                    
                                                                                                                                
Ms. Rodell answered in the affirmative.                                                                                         
                                                                                                                                
2:20:28 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara remarked  that  having  the current  statute                                                                   
specifying   inflation  proofing   was  nice;  however,   the                                                                   
legislature  did  not  follow  it  the  past  two  years.  He                                                                   
surmised  that  one  of  the   bigger  threats  to  inflation                                                                   
proofing was the  failure for the state to have  a way out of                                                                   
the  fiscal  crisis. He  asked  Ms.  Rodell if  she  believed                                                                   
letting  the   fiscal  crisis   continue  was  a   threat  to                                                                   
inflation proofing.                                                                                                             
                                                                                                                                
Ms. Rodell  answered that her  job was to protect  the corpus                                                                   
of the fund.                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  asked for  verification  the  fund had  not                                                                   
been inflation  proofed  for two years.  Ms. Rodell  answered                                                                   
in the affirmative.                                                                                                             
                                                                                                                                
Vice-Chair Gara  understood that APFC could not  get involved                                                                   
in  politics.   He  referred   to  an  earlier   question  by                                                                   
Representative  Thompson  related to  the  various bills.  He                                                                   
recalled that  Ms. Rodell had  testified that since  the bill                                                                   
was  not only  reliant  on  Permanent  Fund revenue  to  fund                                                                   
public services,  but it also had another element  to produce                                                                   
revenue  it gave  her more  comfort.  He wondered  if he  had                                                                   
mischaracterized her statement.                                                                                                 
                                                                                                                                
Ms. Rodell  replied  that she  had been trying  to point  out                                                                   
that  the  bills  were  not  an   apples-to-oranges  [apples]                                                                   
comparison  because  there  was  other income  [in  HB  115],                                                                   
which may  have dampening  effects that  other bills  did not                                                                   
have  because  of the  combination  nature  of the  bill.  As                                                                   
opposed to pulling two bills together making it a plan.                                                                         
                                                                                                                                
Vice-Chair  Gara  asked if  Ms.  Rodell  was using  the  term                                                                   
"dampening effects"  to mean less  pressure on  the Permanent                                                                   
Fund if  there was  extra revenue  coming in besides  revenue                                                                   
from the Permanent Fund.                                                                                                        
                                                                                                                                
Ms. Rodell answered in the affirmative.                                                                                         
                                                                                                                                
2:23:04 PM                                                                                                                    
                                                                                                                                
CARL  DAVIS, RESEARCH  DIRECTOR,  INSTITUTE  ON TAXATION  AND                                                                   
ECONOMIC POLICY  (ITEP), WASHINGTON DC (via  teleconference),                                                                   
introduced  himself. He  relayed  that ITEP  was a  nonprofit                                                                   
and nonpartisan research group based in Washington, D.C.                                                                        
                                                                                                                                
Co-Chair  Seaton  asked  if Mr.  Davis  had  experience  with                                                                   
Alaska's taxes and fiscal situation.                                                                                            
                                                                                                                                
Mr. Davis replied  in the affirmative. He detailed  that ITEP                                                                   
had  done  two  reports  on  Alaska's  fiscal  situation  the                                                                   
previous year.  The first report  had looked at a  variety of                                                                   
different  packages for  raising  revenue to  help close  the                                                                   
budget gap.  The institute  maintained a microsimulation  tax                                                                   
model,  which  was  similar  to a  model  maintained  at  the                                                                   
federal  level by  the Congressional  Budget  Office and  the                                                                   
Joint Committee  on Taxation.  A number of states  maintained                                                                   
the  models  as  well. The  model  contained  information  on                                                                   
taxpayers' incomes,  consumption habits, property  owned, how                                                                   
much  gasoline they  purchased,  etcetera. When  there was  a                                                                   
proposal to change  state tax law, ITEP could  run it through                                                                   
the  model  to  determine  how  it  would  impact  a  state's                                                                   
population.  The  organization  had  the  model  for  all  50                                                                   
states and  the country. The  model could analyze  changes in                                                                   
the  dividend,  the  creation  of an  income  or  sales  tax,                                                                   
gasoline  tax changes,  and other.  The  model could  produce                                                                   
revenue figures,  similar to the information included  in the                                                                   
fiscal note by DOR.                                                                                                             
                                                                                                                                
Mr.  Davis continued  that  ITEP could  also  break down  the                                                                   
revenue  by income  level to show  whether  a tax would  fall                                                                   
primarily  on  middle,  high,  or  low-income  families.  The                                                                   
focus  of  ITEP's  reports  thus  far  had  been  largely  on                                                                   
changing  the  dividend  and the  potential  of  enacting  an                                                                   
income  tax and  how the  two may  balance. The  organization                                                                   
recognized  that Alaska  was facing a  fiscal challenge  that                                                                   
would  not be  fixed  with only  one solution.  The  solution                                                                   
would likely involve  a package of changes;  how that package                                                                   
was  comprised had  very different  impacts in  terms of  the                                                                   
distribution.  For  example,   if  the  package  relied  more                                                                   
heavily  on scaling  back the  dividend, it  may impact  low-                                                                   
income  families more  heavily.  Whereas,  a package  relying                                                                   
more on income  tax could hit higher income  families more. A                                                                   
mix of  the two may  end up with  a more proportioned  result                                                                   
where similar  shares of income  were paid by  individuals at                                                                   
different income levels.                                                                                                        
                                                                                                                                
2:26:58 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton asked  what kind of workload and  timing on a                                                                   
work  product  looking at  the  provisions  in the  bill.  He                                                                   
asked  if  the entity  could  do  the  work in  a  reasonable                                                                   
timeframe.                                                                                                                      
                                                                                                                                
Mr. Davis answered  in the affirmative. The  organization was                                                                   
intending to do  an analysis on the bill in  the next several                                                                   
weeks.  He relayed  that  ITEP  liked to  take  its time  and                                                                   
ensure it accurately  captured all the nuances.  He had taken                                                                   
a  preliminary  look  at  the  income tax  in  the  bill  and                                                                   
offered to report on how it stacked up nationally.                                                                              
                                                                                                                                
Co-Chair Foster agreed.                                                                                                         
                                                                                                                                
Mr.  Davis  reported  that it  was  tricky  comparing  income                                                                   
taxes  across  states  because   every  state  had  different                                                                   
exemptions,  deductions, and  different  rates. The  simplest                                                                   
way to  measure was to  look at the  size of the  overall tax                                                                   
relative  to a state's  economy. The  organization had  found                                                                   
that relative  to Alaskans'  personal income,  the tax  would                                                                   
collect  about 1.5 percent  of the  state's personal  income.                                                                   
He advised the  committee that the rate would  vary by income                                                                   
level. For example,  a very low-income earner  paying the $25                                                                   
minimum tax  could be paying  a rate significantly  below 1.5                                                                   
percent, whereas,  the rate could be higher  than 1.5 percent                                                                   
for  higher-income earners.  Overall,  the tax  was equal  to                                                                   
about  1.5 percent  of Alaska  personal  income. Relative  to                                                                   
other states,  the proposed  tax would  be the fourth  lowest                                                                   
broad-based  personal income  tax in  the nation.  Currently,                                                                   
the  country's  lowest  personal  income  tax  was  in  North                                                                   
Dakota,  which was the  second most  energy dependent  state.                                                                   
State's  with   significant  energy   revenues  could   raise                                                                   
revenues in  nontraditional ways. North  Dakota also had  a 5                                                                   
percent sales  tax, which  also helped explain  why it  had a                                                                   
such a  low income tax.  Additionally, Arizona  and Louisiana                                                                   
had smaller  income taxes  than the tax  proposed in  HB 115.                                                                   
Arizona got  by on  levying the 11th  highest sales  tax rate                                                                   
in the  country and Louisiana  recently took the top  spot in                                                                   
sales  tax,  which averaged  at  10  percent when  state  and                                                                   
local  taxes were  combined. He  concluded  that states  with                                                                   
income taxes  smaller than  the tax proposed  in HB  115, was                                                                   
generally  because of  significant energy  revenues or  sales                                                                   
tax revenues.                                                                                                                   
                                                                                                                                
2:30:13 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  requested  to receive  the  information  in                                                                   
writing.                                                                                                                        
                                                                                                                                
Co-Chair   Foster  agreed   to  follow   up  to  ensure   the                                                                   
information was received.                                                                                                       
                                                                                                                                
Vice-Chair Gara provided  a scenario where states  taxed at a                                                                   
percentage of  the federal income  tax rate. He  noted states                                                                   
did  not  currently use  this  method.  He  asked if  it  was                                                                   
possible  to  determine  where  the bill  ranked  with  other                                                                   
states with  income tax  in terms of  what percentage  of the                                                                   
federal tax rate states were charging.                                                                                          
                                                                                                                                
Mr. Davis responded  that the bill topped out  slightly below                                                                   
6 percent  on ordinary income,  which took 15 percent  of the                                                                   
top  federal tax  rate  of 39.6  percent.  He  stated it  was                                                                   
below  the national  median and  average  in terms  of a  top                                                                   
income  tax rate of  6.4 percent.  He continued  that it  was                                                                   
possible  to take  a  look  by income  level  to  see how  it                                                                   
stacked up on a more fine-grained level.                                                                                        
                                                                                                                                
2:32:28 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara relayed  it  would be  useful  to know  what                                                                   
percentage  of the federal  tax rate  the proposed  tax would                                                                   
charge  and how  it  stacked up  to  what percentage  of  the                                                                   
federal  tax rate other  states charged.  He understood  that                                                                   
other   states   taxed   differently   and   had   individual                                                                   
percentages  as opposed  to taxing  a  percentage of  federal                                                                   
taxes.  He  was  interested  in  the  average  percentage  of                                                                   
federal taxes charged by other states.                                                                                          
                                                                                                                                
Mr. Davis replied he could provide the information.                                                                             
                                                                                                                                
Vice-Chair Gara  asked how many  tax brackets existed  in the                                                                   
federal tax code.                                                                                                               
                                                                                                                                
Mr.  Davis reported  there were  seven  federal brackets.  He                                                                   
noted  that occasionally  the  issue was  brought  up in  the                                                                   
context of  simplicity and whether  having more  brackets was                                                                   
complicated.  He  explained  that   most  taxpayers  did  not                                                                   
notice how  many brackets existed;  there was a table  at the                                                                   
end of the  tax booklet that  reported a tax amount  based on                                                                   
the  individual's  taxable  income. The  number  of  brackets                                                                   
needed  to be  thought  through  carefully, but  the  average                                                                   
taxpayer did not generally notice.                                                                                              
                                                                                                                                
Vice-Chair  Gara stated  that there  could be  a proposal  to                                                                   
tax a  certain percentage  of the  federal tax. For  example,                                                                   
the proposal  could  pick 15 percent  of the  federal tax  to                                                                   
tax each bracket.  If one of the tax brackets  was 20 percent                                                                   
and the state taxed  15 percent of the amount,  the tax would                                                                   
be 3 percent.  He reasoned that under the scenario  the state                                                                   
would have a set  number in statute if federal  taxes went up                                                                   
and down. He asked  if Mr. Davis could provide  the seven tax                                                                   
brackets.                                                                                                                       
                                                                                                                                
Mr.  Davis  answered  in the  affirmative.  He  believed  the                                                                   
approach   was  reasonable   in   terms   of  lessening   the                                                                   
vulnerability of  the tax to  whatever changes may  be passed                                                                   
by Congress.  It was necessary  to think through  how federal                                                                   
tax  credits  came  into  play.  If  there  was  interest  in                                                                   
keeping  a linkage  to federal  tax  liability, but  limiting                                                                   
the  extent it  would  swing  with whatever  federal  changes                                                                   
were enacted,  some states  used use  fixed date  conformity.                                                                   
He  detailed   that  the   method  meant  not   automatically                                                                   
coupling to  whatever the Internal  Revenue Code  happened to                                                                   
be at a given  point in time. The method meant  coupling to a                                                                   
version of  federal law.  For example,  it would be  possible                                                                   
to specify  that Alaska's income  tax was based  upon federal                                                                   
law as of January  1, 2017. He explained that  the date could                                                                   
be  updated  from  time-to-time  if  the  federal  government                                                                   
enacted  tax changes, but  when Alaska  was debating  whether                                                                   
to  update  the  date,  it  would  have  information  at  its                                                                   
disposal  showing what  Congress had enacted  and what  would                                                                   
occur  if  the date  was  updated  to  January 1,  2018  when                                                                   
federal taxes may be significantly lower.                                                                                       
                                                                                                                                
2:37:10 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  was  interested  in  hearing  Mr.                                                                   
Davis's   perspective  on   comparing  apples-to-apples.   He                                                                   
explained that  it could be  difficult analyzing  things when                                                                   
they were  so different in  Alaska compared to  other states.                                                                   
For example,  when comparing  tax liability,  Alaska had  the                                                                   
Permanent Fund.  He noted that  other places had  sales taxes                                                                   
that could  have a cap (e.g. there  could be the same  cap on                                                                   
tax  for a  new or  old car).  He continued  that there  were                                                                   
deductions and  other calculations  for income tax.  He asked                                                                   
how accurate could  a comparison could be between  Alaska and                                                                   
other states.                                                                                                                   
                                                                                                                                
Mr. Davis  responded that  it was  complicated because  every                                                                   
taxpayer's  financial situation  was different. For  example,                                                                   
if there  were two  individuals with  identical incomes,  but                                                                   
one owned  a larger home  or had a  home in a  more expensive                                                                   
area, that individual  would pay significantly  more property                                                                   
tax.  Additionally, if  one individual's  buying habits  were                                                                   
different  they  could  pay  significantly  more  sales  tax.                                                                   
Where  an  individual's  income  was  derived  could  make  a                                                                   
difference, given  that social security income  had a partial                                                                   
or  full exemption.  Hypothetical  examples could  illustrate                                                                   
how individuals were impacted at different levels.                                                                              
                                                                                                                                
Mr.  Davis  addressed  how individuals  were  impacted  by  a                                                                   
different  mix  of policy  options.  He  detailed if  a  $500                                                                   
million  revenue package  was constructed  in the  form of  a                                                                   
sales  or income tax,  the University  of Alaska  had done  a                                                                   
study  showing  that  most  residents  would  end  up  paying                                                                   
significantly   less  under   the  income   tax  option.   He                                                                   
explained that  an income tax  could raise more  revenue from                                                                   
individuals   with  very   large  incomes   and  the   income                                                                   
collected  from low,  middle,  and even  upper  middle-income                                                                   
taxpayers were  significantly lower. He added  that something                                                                   
like the  Permanent Fund  Dividend, being  unique to  Alaska,                                                                   
complicated  comparisons  across   states.  The  organization                                                                   
tried  to  be   mindful  about  those  things,   but  it  was                                                                   
difficult  to generalize  too  much  because it  depended  on                                                                   
each taxpayer's specific financial situation.                                                                                   
                                                                                                                                
2:41:09 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  asked   who  Mr.  Davis  was  and  he                                                                   
wondered why  he was  selected to testify.  He asked  if ITEP                                                                   
had worked  on tax policy for  the Alaska Legislature  in the                                                                   
past.                                                                                                                           
                                                                                                                                
Mr. Davis reported  that the organization did  research in 50                                                                   
states;  ITEP was  a small and  could sometimes  be spread  a                                                                   
bit thin.  The previous year it  had done a  report supported                                                                   
by the Rasmussen  Foundation that had been  published online.                                                                   
The  organization was  funded  by foundations  including  the                                                                   
Annie E.  Casey Foundation and  Ford Foundation (the  list of                                                                   
donors   was   available   on    the   ITEP   website).   The                                                                   
organization's  work was largely  pro bono;  it used  the tax                                                                   
model to  help fill informational  voids at the  state level.                                                                   
At  the federal  level  there  were already  numerous  groups                                                                   
doing  distributional  and  revenue analyses  of  tax  policy                                                                   
changes. The  capacity within  government to do  the analyses                                                                   
varied  from state-to-state.  The  company frequently  helped                                                                   
to fill in the gaps.                                                                                                            
                                                                                                                                
Representative Pruitt  referred to an informational  sheet on                                                                   
the ITEP  organization  in members' packets  (copy on  file).                                                                   
He read from the company's mission statement:                                                                                   
                                                                                                                                
     ITEP  is committed  to  fair  and sustainable  tax  laws                                                                   
     that  protect  lower income  Americans  from  aggressive                                                                   
     policies  while generating  revenues  adequate to  serve                                                                   
     the  public  interest. ITEP's  timely,  accessible,  and                                                                   
     accurate  analysis   for  advocacy  groups   and  public                                                                   
     servants who share that commitment.                                                                                        
                                                                                                                                
Representative  Pruitt observed  that  the mission  statement                                                                   
did not include  a conversation related to the  impact on the                                                                   
private  sector or  the economy  as  a whole.  He asked  what                                                                   
role those things played in ITEP's modeling.                                                                                    
                                                                                                                                
Mr. Davis stayed  that there was a debate on  dynamic scoring                                                                   
and  whether tax  policy changes  should be  analyzed in  the                                                                   
light of what  broader ripple impacts the changes  would have                                                                   
on  the  economy.  It was  a  straighter  forward  matter  to                                                                   
consider  how  a  tax  proposal   would  impact  the  current                                                                   
economy. When  starting to  try to  determine impacts  on the                                                                   
broader economy,  the question became much  more complicated,                                                                   
particularly at  the state level.  He elaborated that  at the                                                                   
state  level,  states  were  generally  not  able  to  run  a                                                                   
deficit for  a sustained  amount of time;  any change  in tax                                                                   
policy would  generally lead to  a change in  spending policy                                                                   
as well. There  were states with analysts that  would attempt                                                                   
to analyze  the economic  impact of a  change in  tax policy.                                                                   
He  explained it  was  not possible  to  answer the  question                                                                   
unless  what the change  in tax  policy would  fund was  also                                                                   
analyzed.   He   detailed  if   the   money  was   spent   on                                                                   
infrastructure,    there   were    measurable   impacts    of                                                                   
infrastructure  spending  as well.  There  were  longer-term,                                                                   
less measurable impacts of education spending.                                                                                  
                                                                                                                                
2:45:50 PM                                                                                                                    
                                                                                                                                
Mr.  Davis  continued  that  the  economic  analysis  of  tax                                                                   
policy  became  much  more speculative.  He  furthered  there                                                                   
were limited  things states  could do in  terms of  their tax                                                                   
policy to impact  their economies. Evidence from  states that                                                                   
had recently changed  their personal income tax  rates showed                                                                   
that about half  of them did better after the  change and the                                                                   
other half did  worse. He explained it was hard  to tease out                                                                   
the effect  of the  tax policy change  because there  were so                                                                   
many   other   things   happening    (e.g.   a   decline   in                                                                   
manufacturing,  an influx  in  revenue due  to nice  weather,                                                                   
and other).  He concluded  the economic  impacts were  not as                                                                   
easily measured as the distributional impacts.                                                                                  
                                                                                                                                
Representative  Pruitt surmised  the organization focused  on                                                                   
what it  took to fill  the gap and  the levers a  state could                                                                   
move to  limit the  impact on  certain populations.  He asked                                                                   
for  verification  that the  economic  analysis  was for  the                                                                   
legislature to determine separately.                                                                                            
                                                                                                                                
Mr.  Davis agreed.  He added  that the  organization did  not                                                                   
make  statements or  judgements about  the appropriate  level                                                                   
of taxes,  which was  outside its purview.  Once it  had been                                                                   
decided  that  a  certain  amount of  revenue  needed  to  be                                                                   
raised, ITEP could  help fill in gaps about what  it meant to                                                                   
raise it  in various  ways. He  believed the economic  impact                                                                   
it  was much  more  speculative and  was  not something  that                                                                   
could usefully be  modeled with economic models  at the state                                                                   
level.                                                                                                                          
                                                                                                                                
2:48:18 PM                                                                                                                    
                                                                                                                                
Representative   Grenn  asked   which  state  most   recently                                                                   
implemented an income  tax. He knew Michigan  had implemented                                                                   
an  income  tax  a  few  years   back.  He  asked  about  the                                                                   
environment  in  which  the  tax  had  been  implemented  and                                                                   
whether ITEP  had done any  associated reports  the committee                                                                   
could review.                                                                                                                   
                                                                                                                                
Mr. Davis  replied Connecticut had  enacted an income  tax in                                                                   
1991  and had  expanded what  had  been a  tax on  investment                                                                   
income.  New  Jersey  had  implemented   had  implemented  an                                                                   
income  tax in  the  1970s. Generally,  the  states that  had                                                                   
enacted  income  taxes  had  been a  facing  budget  gap.  He                                                                   
continued  that  income  tax  tended  to  be  enacted  during                                                                   
tougher times.  He had  recently seen  an analysis  about the                                                                   
11 states  that had  most recently  enacted income  taxes. He                                                                   
believed  the  source of  the  study  was Arthur  Laffer.  He                                                                   
noted that  Mr. Laffer was known  for the Laffer Curve  - the                                                                   
idea  that  certain types  of  tax  cuts could  produce  such                                                                   
explosive  economic  growth  that  they  ultimately  pay  for                                                                   
themselves.                                                                                                                     
                                                                                                                                
Mr.  Davis believed  the look  at  the 11  states could  have                                                                   
been useful  if it  had been for  a randomized experiment  of                                                                   
states   spread   out   across    the   country   that   were                                                                   
demographically  or  economically  diverse. However,  all  11                                                                   
states  had been  concentrated in  the Mid-West,  Appalachia,                                                                   
and   the  North   East   -  many   states   that  could   be                                                                   
characterized  as  the  Rust Belt  including  Michigan,  West                                                                   
Virginia,   Ohio,  Pennsylvania,   and  Indiana.  There   was                                                                   
history  of states that  had recently  enacted income  taxes,                                                                   
but it was difficult  to tease out the effects  of tax policy                                                                   
changes  on the economy  versus other  bigger picture  things                                                                   
that  had  already  been  going   on  with  manufacturing  or                                                                   
westward migration.                                                                                                             
                                                                                                                                
2:51:12 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton asked  if Mr.  Davis was  familiar with  any                                                                   
other states with  a minimum tax like the one  included in HB                                                                   
115.  He detailed  the bill  had a  $25 minimum  tax for  any                                                                   
filer.                                                                                                                          
                                                                                                                                
Mr.  Davis answered  the method  of  a minimum  tax was  more                                                                   
commonly  seen in corporate  income taxes  (e.g. $100,  $250,                                                                   
or $500).  He did not believe  any state had a  minimum under                                                                   
the personal  income tax.  Many states  allowed their  income                                                                   
taxes  to  go  negative  through   refundable  credits  (e.g.                                                                   
earned income  tax credit, which  was offered in  26 states).                                                                   
He noted  that most  of the  taxes were  refundable, but  not                                                                   
all.  Alaska  was a  unique  state  with the  Permanent  Fund                                                                   
Dividend, which may  take some of the interest  in refundable                                                                   
tax  credits  off the  table.  He  shared that  Oklahoma  and                                                                   
Hawaii had no  minimum tax and offered refundable  credits to                                                                   
offset   things  like   its  sales  tax   on  groceries.   He                                                                   
reiterated  that  the minimum  tax  at  the state  level  was                                                                   
primarily confined to the corporate income tax.                                                                                 
                                                                                                                                
2:52:46 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton believed  the tax in the bill  was simple. He                                                                   
detailed  it was 15  percent of  line 56  plus 10 percent  on                                                                   
line 13. He was  trying to determine if they did  not use the                                                                   
bill's  current method  and went  to generating  each of  the                                                                   
exemptions,   deductions,   tax   brackets,  and   what   the                                                                   
percentages would  be for the tax brackets. He  asked if ITEP                                                                   
had followed  income tax  debates in  other states.  He asked                                                                   
if  the  generation  of  the   exemption  and  deduction  and                                                                   
percent for  tax brackets  was long  and complex compared  to                                                                   
the tax method in HB 115.                                                                                                       
                                                                                                                                
Mr. Davis  responded it had  been so  long since a  state had                                                                   
enacted  an income  tax,  but some  had  changed brackets  in                                                                   
more recent years.  Much of the negotiation  tended to happen                                                                   
behind closed  doors and there  were many tradeoffs  involved                                                                   
if a  bracket was  changed by  one amount,  an exemption  was                                                                   
changed  by  another,  and  the   sales  tax  base  was  also                                                                   
changed.  There  were numerous  moving  pieces.  At the  same                                                                   
time  there were  other states  like  Alabama, Virginia,  and                                                                   
West Virginia  that enacted brackets and  personal exemptions                                                                   
decades ago, which  they did not appear to  have revisited in                                                                   
subsequent  years. In some  cases, it  was a problem  because                                                                   
they  had written  their  bracket  and exemption  amounts  in                                                                   
flat  dollar terms.  Bracket creep  could  occur, where  flat                                                                   
dollar   amounts  were   not   updated   for  inflation   and                                                                   
eventually  the  personal  exemption  was so  small  in  real                                                                   
dollars  it became  meaningless and  everyone became  subject                                                                   
to the top income tax rate.                                                                                                     
                                                                                                                                
Mr.  Davis continued  that $5,000  decades  earlier may  have                                                                   
been  a  significant  bracket,   whereas  currently,  it  was                                                                   
almost a token  bracket. It was a fact under any  tax and may                                                                   
be  witnessed  even   more  under  sales  tax   in  terms  of                                                                   
negotiating  over exemptions.  State sales  tax bases  tended                                                                   
to be incredibly  narrow, not just carveouts  for things like                                                                   
groceries  or prescription  drugs.  He cited  exemptions  for                                                                   
broad   types  of   personal  services   like  haircuts   and                                                                   
massages, business  services like  accounting or  legal fees,                                                                   
and  industry  specific  exemptions. There  would  always  be                                                                   
significant  wrangling   over  which  exemptions   should  be                                                                   
created or closed for any type of broad-based tax.                                                                              
                                                                                                                                
2:56:19 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  asked  if  any   states  took  the  federal                                                                   
taxable  income line  and came  up  with their  own tax  rate                                                                   
within each  bracket to  avoid fighting  over exemptions  and                                                                   
deductions.                                                                                                                     
                                                                                                                                
Mr.  Davis  replied  in  the  affirmative.  The  states  that                                                                   
started  with federal taxable  income and  applied their  own                                                                   
brackets  were  Colorado,  Minnesota,   North  Dakota,  South                                                                   
Carolina,  and   Vermont.  He  noted  the   states  typically                                                                   
offered their  own tax credits  as well. The method  made the                                                                   
forms significantly  shorter and  simple. States  would often                                                                   
couple  to federal  adjusted  gross  income. He  agreed  that                                                                   
coupling  to  federal  taxable  income  would  make  simplify                                                                   
things  - it  came  prepackaged  with a  personal  exemption,                                                                   
standard deduction, and set of itemized deductions.                                                                             
                                                                                                                                
Vice-Chair Gara  referred to a  taxable and adjustable  gross                                                                   
lines.  He  knew  there  were  several  different  lines  for                                                                   
income on the income  tax form, but he did not  remember what                                                                   
they were.  He asked  about the  differences. He wondered  if                                                                   
it was taxable income and adjustable gross income.                                                                              
                                                                                                                                
Mr.  Davis  answered  the  two   lines  were  adjusted  gross                                                                   
income, which was  a fairly comprehensive measure  of income,                                                                   
although  it included  certain  adjustments  for things  like                                                                   
self-employment  taxes  or  moving  expenses.  There  were  a                                                                   
handful  of adjustments.  Adjusted gross  income was  a broad                                                                   
measure  of  income.  An  individual  could  subtract  up  to                                                                   
$4,000  per family  member. A  taxpayer  could also  subtract                                                                   
either  the standard  deduction or  homeowner property  taxes                                                                   
and mortgage interest.  Other items that could  be subtracted                                                                   
were  charitable  donations,  state  income  tax,  and  sales                                                                   
taxes  (in states  without income  tax).  The taxable  income                                                                   
definition  was  lower down  the  form  and  tended to  be  a                                                                   
smaller  amount  for  most  people  because  by  the  time  a                                                                   
taxpayer reached  that point,  exemptions and deductions  had                                                                   
been subtracted.                                                                                                                
                                                                                                                                
2:59:36 PM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if Mr. Davis  knew the  minimum                                                                   
earning amount before a person had to file.                                                                                     
                                                                                                                                
Mr.  Davis answered  in 2016  the minimum  was earning  level                                                                   
was $10,350 for  a single taxpayer and $20,700  for a married                                                                   
couple. There  was also the  head of household  filing status                                                                   
- a  single person taking  care of children  did not  have to                                                                   
file  unless  they   earned  over  $13,350  per   year.  Many                                                                   
taxpayers  may choose  to file  anyway to  claim tax  credits                                                                   
(e.g. child tax credit or earned income tax credit).                                                                            
                                                                                                                                
Representative  Wilson  had  thought   the  amount  was  much                                                                   
lower.  She  thought it  was  $400  or  $500 of  interest  or                                                                   
income that  a person had  to file and  that they got  it all                                                                   
back. She  asked for  verification that  a single person  did                                                                   
not  have  to  file  unless they  brought  in  a  minimum  of                                                                   
$13,000 in income.                                                                                                              
                                                                                                                                
Mr. Davis  affirmed. He  believed the  number was built  from                                                                   
taking  the personal  exemption  - nobody  was  taxed on  the                                                                   
first  $4,000  of  income.  Under   the  standard  deduction,                                                                   
nobody  was taxed  on the next  $6,000 or  so. The  exemption                                                                   
and deduction combined created a filing threshold.                                                                              
                                                                                                                                
3:01:31 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  clarified that  Mr. Davis was  talking about                                                                   
earned  income. There  was  also a  threshold  of $1,050  for                                                                   
unearned income;  if a person received more  than $1,050 from                                                                   
unearned income they qualified to file.                                                                                         
                                                                                                                                
Representative  Wilson  asked for  verification  that if  the                                                                   
dividend  was $1,100, everyone  in Alaska  would be  required                                                                   
to file.                                                                                                                        
                                                                                                                                
Co-Chair   Seaton   answered,   "either  that   or   children                                                                   
receiving that can be filed on their parents' form."                                                                            
                                                                                                                                
KEN  ALPER, DIRECTOR,  TAX DIVISION,  DEPARTMENT OF  REVENUE,                                                                   
addressed the  committee. He could not  speak authoritatively                                                                   
to  the federal  tax  code.  He asked  for  a repeat  of  the                                                                   
questions.                                                                                                                      
                                                                                                                                
Co-Chair   Seaton   referred   to   Representative   Wilson's                                                                   
question  about  what  it  took  to be  required  to  file  a                                                                   
federal tax form.                                                                                                               
                                                                                                                                
Mr. Alper  did not  know with any  certainty. He  shared that                                                                   
is  family's taxes  were prepared  by an  accountant. He  had                                                                   
three  children  and  even when  the  dividend  had  exceeded                                                                   
$2,000 a  couple of years  back, they  had been able  to file                                                                   
as part of his family return.                                                                                                   
                                                                                                                                
Representative  Wilson  stated that  the  committee had  been                                                                   
told that  a person  was not required  to file under  certain                                                                   
circumstances.  She referenced  the  $13,000 threshold  cited                                                                   
by Mr. Davis.  She surmised that if the $13,000  was correct,                                                                   
the only  people the  $25 minimum would  apply to  was people                                                                   
receiving earned  income. She asked if her  understanding was                                                                   
correct.                                                                                                                        
                                                                                                                                
Mr.  Alper replied  that the  $25  minimum tax  would be  per                                                                   
filer  and anyone  required to  file the  tax return  (anyone                                                                   
earning income  in the  state) would pay  $25 if  the formula                                                                   
sent  them  to   zero.  Minors  with  no  income,   who  were                                                                   
dependents on  someone else's return,  would be part  of that                                                                   
person's tax calculation.                                                                                                       
                                                                                                                                
Co-Chair  Seaton  pointed  to  the  tax  tables  in  members'                                                                   
packets  titled "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 a scenario                                                                   
on the third  page of a  married couple with four  children -                                                                   
there was a $25  minimum tax at $20,000 up  to $70,000. Other                                                                   
people who  were single  with no  children never reached  the                                                                   
$25 minimum  and paid  at $20,000. A  single person  with two                                                                   
children  would pay  the minimum  through  $40,000 (shown  on                                                                   
the third to  the last page); at $50,000 an  individual would                                                                   
pay $243  for the Alaskan  income tax.  He stated that  how a                                                                   
person  filed was  dependent on  whether  they were  married,                                                                   
single, or had children.                                                                                                        
                                                                                                                                
Representative   Wilson  surmised   that  a  person   earning                                                                   
$19,999 would  not pay tax  because the minimum  was $20,000.                                                                   
She thought  it had sounded like  everyone would have  to pay                                                                   
the $25  at whatever level -  she guessed it was  $30,000 for                                                                   
a married  couple with no  children. However, she  noted that                                                                   
Mr. Davis had testified  that a person could chose  to file -                                                                   
the minimum was  $13,000 for a single individual  and $20,000                                                                   
for  a married  couple -  because  they may  have low  enough                                                                   
income to  receive earned income  back. She stated that  if a                                                                   
person  was  not  eligible for  earned  income  because  they                                                                   
earned slightly  over a certain  amount, they would  not file                                                                   
or  give anything.  She  thought there  could  be two  people                                                                   
making  similar income  and  one person  may  file while  the                                                                   
other may not.  She expounded that the individual  filing was                                                                   
only doing  so to  get some income  back into the  household,                                                                   
but the bill would mean they would be charged $25.                                                                              
                                                                                                                                
3:07:37 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton clarified  the handout  did not reflect  the                                                                   
complete tax  table - it  only represented relevant  incomes.                                                                   
He explained  that if someone  filed and earned  $13,000, the                                                                   
federal  tax as  a percent  of gross  income was  0.00. If  a                                                                   
married couple  with no children  earned $20,000,  they would                                                                   
not pay  any federal tax,  but they would  pay a  $25 minimum                                                                   
tax  to the  state.  He continued  that  the  couple had  not                                                                   
reached enough income  to pay more than the $25  - as soon as                                                                   
income reached $30,000, the taxpayer would pay $140.                                                                            
                                                                                                                                
Representative  Wilson  thought there  could  be a  situation                                                                   
where a  child would have  to pay $25  as well, depending  on                                                                   
how much their interest or other income they may receive.                                                                       
                                                                                                                                
Co-Chair Seaton replied in the affirmative.                                                                                     
                                                                                                                                
Vice-Chair  Gara asked  if  the $25  minimum  tax applied  to                                                                   
every adult without a federal tax liability.                                                                                    
                                                                                                                                
Co-Chair  Seaton replied  in the negative.  He clarified  the                                                                   
minimum  $25  tax   applied  to  every  required   filer.  He                                                                   
detailed  that taxpayers  earning $30,000  would pay $140  in                                                                   
tax, but  they did not  pay $25 in  addition to that  amount.                                                                   
He  clarified  that $25  was  the  minimum tax  people  would                                                                   
contribute.                                                                                                                     
                                                                                                                                
3:09:54 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  expressed  confusion   about  who  the  $25                                                                   
minimum  tax applied  to. He  asked  if the  tax would  apply                                                                   
only to individuals  required to file, but who did  not pay a                                                                   
tax.  Alternatively,  he  asked   if  it  applied  to  people                                                                   
earning below the required filing level.                                                                                        
                                                                                                                                
Mr. Alper  referred to  page 5 of  the legislation  and read:                                                                   
"an individual required  to make a return under  the Internal                                                                   
Revenue Code shall  also file with the department  a return."                                                                   
He  clarified  the language  applied  to  individuals  filing                                                                   
with  the federal  government  for  any reason.  He  remarked                                                                   
that the examples  provided by the co-chair  the previous day                                                                   
were  a bit  stylized  because every  family's  circumstances                                                                   
were  different (some  taxpayers  would  itemize). At  around                                                                   
$20,000 a  person would have  some federal tax  liability; if                                                                   
a  person had  some federal  tax  liability that  calculation                                                                   
would govern.  He continued that  if a taxpayer  had numerous                                                                   
children  with many  deductions, even  if a  person was  at a                                                                   
higher income (the  tax calculation may bring  them to zero),                                                                   
the bill ensured  that the person would pay a  minimum of $25                                                                   
to the state.                                                                                                                   
                                                                                                                                
Vice-Chair  Gara was  trying to  understand  at what  minimum                                                                   
income a person would not have to pay the $25.                                                                                  
                                                                                                                                
Mr. Alper  answered  that a person  filing  taxes had to  pay                                                                   
the  $25. He  explained  that  "pretty much  everyone"  would                                                                   
have to pay. He believed it was $25 per household.                                                                              
                                                                                                                                
3:11:56 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara was trying  to understand  the $25  minimum.                                                                   
He did not  understand the federal  rules on who had  to file                                                                   
when they  did not  owe a tax  liability. He continued  there                                                                   
were  different categories  of  people -  those  who did  not                                                                   
have to file, those  who had to file even though  they had no                                                                   
federal  tax  liability, and  those  who  had a  federal  tax                                                                   
liability and had to file.                                                                                                      
                                                                                                                                
Mr. Alper deferred to a colleague.                                                                                              
                                                                                                                                
Vice-Chair Gara asked  who would pay the $25  minimum tax. He                                                                   
asked  if  everyone  would  pay  or if  it  only  applied  to                                                                   
individuals at a certain income level.                                                                                          
                                                                                                                                
Mr.  Alper answered  that some  fraction  of taxpayers  filed                                                                   
their  federal tax  and owed  zero; the  number changed  from                                                                   
year-to-year  and  varied  widely   throughout  the  country.                                                                   
Based on  the best  available data,  DOR presumed that  about                                                                   
25 percent of  the taxpayers in Alaska owed  zero federal tax                                                                   
for one  reason or another  (i.e. earned income  tax credits,                                                                   
the  number  of   individuals  in  a  household,   and  lower                                                                   
income).  For its fiscal  note, the  department had  presumed                                                                   
about 100,000  taxpayers out of  400,000 households  would be                                                                   
at  the zero  federal  rate. Per  the  statutory  rate of  15                                                                   
percent, those  taxpayers would  owe zero; individuals  owing                                                                   
zero federal taxes would pay $25 in state tax.                                                                                  
                                                                                                                                
Vice-Chair  Gara expressed  confusion  about  filers who  did                                                                   
not pay. He  asked if an adult  would be required to  pay the                                                                   
$25 tax  if their  only income  was a  $1,020 Permanent  Fund                                                                   
Dividend.                                                                                                                       
                                                                                                                                
Mr. Alper  believed Vice-Chair  Gara was trying  to determine                                                                   
who  had to  file  with the  federal  government  at all.  He                                                                   
deferred the question to a colleague.                                                                                           
                                                                                                                                
BRANDON   S.   SPANOS,   DEPUTY   DIRECTOR,   TAX   DIVISION,                                                                   
DEPARTMENT  OF  REVENUE (via  teleconference),  answered  the                                                                   
federal  minimum   for  individuals  required   to  file  was                                                                   
$10,300 gross  income for  individuals under  the age  of 65.                                                                   
An  individual  who  was  not a  dependent  and  received  an                                                                   
$1,100 dividend would  not have a filing requirement  if that                                                                   
was  their only  form  of income  because  it  was under  the                                                                   
$10,300  threshold.   Dependents  earning  over   $10,050  of                                                                   
unearned income  were required to  file their own  tax return                                                                   
or usually with  their parents. Individuals under  the age of                                                                   
65 filing  as head of household  who earned less  $13,250 had                                                                   
no federal  filing  requirements. Under  HB 115,  individuals                                                                   
would  not  have to  file  if  there  was no  federal  filing                                                                   
requirement. Many  people chose to  file even if  they earned                                                                   
less than  $10,000 because  they had  withholdings and  could                                                                   
get a refund.                                                                                                                   
                                                                                                                                
3:16:47 PM                                                                                                                    
                                                                                                                                
Mr. Alper added  that an individual making less  than $10,000                                                                   
may not  have to file,  but could chose  to file if  they had                                                                   
withholding  they wanted  back. Also,  if the individual  had                                                                   
dependents who  also had  to file, it  may be easier  for the                                                                   
entire household  to file  together. He  clarified that  even                                                                   
if they  did not  need to  file because  of the  individual's                                                                   
income  threshold, they  may  need to  because  of a  child's                                                                   
income threshold due to the PFD.                                                                                                
                                                                                                                                
Co-Chair  Seaton provided  a  scenario of  an  adult head  of                                                                   
household  with dependents  receiving  the PFD.  He asked  if                                                                   
each member of the household would have to pay the $25.                                                                         
                                                                                                                                
Mr. Alper answered  that if a child was filing  an individual                                                                   
return separately,  they may  individually be susceptible  to                                                                   
the $25 tax.  However, if the household filed  together there                                                                   
would be a single $25 tax.                                                                                                      
                                                                                                                                
Representative Wilson  asked for clarification.  She surmised                                                                   
that a  person would not  be subject to  the $25 tax  if they                                                                   
did not  have to file, but  decided to file because  they had                                                                   
children and could receive earned income back.                                                                                  
                                                                                                                                
Mr. Alper  believed the  individual would  be subject  to the                                                                   
$25 tax. He  thought that filing the Alaska  tax return would                                                                   
trigger the $25 minimum.                                                                                                        
                                                                                                                                
Representative  Wilson  disputed  the  statement.  She  noted                                                                   
that Mr. Alper  had pointed out that a person  was subject to                                                                   
the  $25 tax  if they  were required  to file  an income  tax                                                                   
return. However,  those earning  below a certain  income were                                                                   
not required  to file, but could  choose to do so  because it                                                                   
would  be financially  beneficial.  Under  the scenario,  she                                                                   
questioned how the state could make them pay the $25.                                                                           
                                                                                                                                
Mr.  Alper responded  that  if  a person  chose  to file  the                                                                   
federal return,  they would  be required  to file the  Alaska                                                                   
return. He  believed the  benefit received  would have  to be                                                                   
reduced by the $25.                                                                                                             
                                                                                                                                
Co-Chair Seaton  relayed it was  a good reason  for committee                                                                   
discussion. He wanted to make sure the intent was clear.                                                                        
                                                                                                                                
3:20:04 PM                                                                                                                    
                                                                                                                                
Mr. Alper  explained if  the bill became  law, DOR  wanted to                                                                   
ensure the  regulations were written  in accordance  with the                                                                   
legislature's intent.                                                                                                           
                                                                                                                                
Representative Wilson  stated that the  $25 was based  on how                                                                   
many  returns  a  household gave.  She  provided  a  scenario                                                                   
where a  household included three  adult children  with their                                                                   
children  as  well.  She  asked  for  verification  that  the                                                                   
household would  only be  charged one $25  tax if  they filed                                                                   
as a household.                                                                                                                 
                                                                                                                                
Co-Chair  Seaton  believed  it  was  the  way  the  bill  was                                                                   
currently written.                                                                                                              
                                                                                                                                
Representative Wilson  was not objecting, but  just wanted to                                                                   
understand.                                                                                                                     
                                                                                                                                
TANEEKA HANSEN,  STAFF, REPRESENTATIVE  PAUL SEATON,  replied                                                                   
that  the  ability   for  a  dependent  to   file  under  the                                                                   
household -  if they had  unearned income  such as the  PFD -                                                                   
required  the dependent  to be  under  the age  of 19.  Adult                                                                   
children  living in a  parent's household  would be  required                                                                   
to file for their own PFD.                                                                                                      
                                                                                                                                
3:22:12 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  relayed  she  was  not  referring  to                                                                   
unearned  income. She  understood  that  earned income  could                                                                   
only come  from a  parent who had  children in the  household                                                                   
based  on  their  income;  however,  they  could  still  have                                                                   
others living  in the household  who were making  some money,                                                                   
but not  enough money  to file. She  explained that  when her                                                                   
children  had  been  in  college  they  had  still  been  her                                                                   
dependents.  Although they  had  earned some  income, it  had                                                                   
not met the  filing threshold. She was trying  to ensure that                                                                   
the $25  fee was  not based  on how  many adults  lived  in a                                                                   
household.                                                                                                                      
                                                                                                                                
Ms.  Hansen  replied there  was  a  requirement to  file  for                                                                   
unearned  income  for  a dependent  if  the  unearned  income                                                                   
exceeded $1,050.  Children could be claimed by  a parent, but                                                                   
only if they were  under the age of 19. An  adult receiving a                                                                   
dividend living  in their parents'  house would need  to file                                                                   
for the  dividend. Any  child under  the age  of 19  could be                                                                   
claimed on their parents' return.                                                                                               
                                                                                                                                
Representative  Thompson noted the  bill did not  address the                                                                   
volatility  of  revenue.  He  believed  the  governor's  plan                                                                   
would. He asked for detail.                                                                                                     
                                                                                                                                
Mr.  Alper answered  HB 115  had a  relatively stable  annual                                                                   
draw from  the Permanent  Fund earnings  towards the  General                                                                   
Fund  as  well  as  another  that   flowed  directly  to  the                                                                   
dividend.   The  governor's   bill  -   the  Permanent   Fund                                                                   
Protection  Act  -  had  a  slightly   higher  draw  at  5.25                                                                   
percent.  There was  a  claw back  feature  where  if GF  oil                                                                   
revenue  from the  production tax  and royalty  grew above  a                                                                   
certain amount,  there was a  dollar-for-dollar pull  back of                                                                   
the PF draw, equal  to the amount of the oil  money above the                                                                   
$1.2   billion   threshold.    It   protected   against   the                                                                   
circumstance  in  where  the  event  of a  big  boom  in  oil                                                                   
revenue  an increase in  PF money  could overheat  government                                                                   
or cause an  unsustainable runup in expenditures.  When long-                                                                   
term modeling  was done  it included high  and low  years and                                                                   
there  could  be  a  slightly  higher  annual  draw  at  5.25                                                                   
percent with the  expectation that at some point  in the next                                                                   
25 years  there would be  a few years  where the  full amount                                                                   
was not  taken due to the  volatility provision;  the average                                                                   
draw would remain at a sustainable number.                                                                                      
                                                                                                                                
3:25:33 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt   commented  that  he   had  heard  no                                                                   
discussion  about  military  personnel   living  out-of-state                                                                   
receiving a  PFD. He asked if  the bill would mean  the state                                                                   
would have to chase the individuals for the $25.                                                                                
                                                                                                                                
Mr.  Alper answered  that  certain  types of  military  wages                                                                   
were  exempt from  the income  tax.  There were  a number  of                                                                   
rules  unique to  service personnel  and  the federal  income                                                                   
tax.  One  of the  weaknesses  was  a  lack of  expertise  on                                                                   
individual  income taxes at  DOR, given  that Alaska  had not                                                                   
had an income tax  in 35 years. The department  would need to                                                                   
learn more  about the subject.  He hoped the state  would not                                                                   
expend  significant  resources  chasing after  people  living                                                                   
out  of state;  however, people  living out  of state  should                                                                   
not be claiming a dividend.                                                                                                     
                                                                                                                                
Representative  Pruitt  noted  that  the  state  had  allowed                                                                   
provisions for  military personnel  intending on  coming back                                                                   
to Alaska.  He believed  they needed to  be very  clear about                                                                   
how they  respect military personnel  living in  Alaska those                                                                   
that planned  on living in Alaska.  He noted the  fiscal note                                                                   
addressed  100,000  taxpayers  paying  the  $25  minimum  tax                                                                   
rate. He spoke  to a withholding and estimated it  was $1 per                                                                   
pay period  (twice a month). He  asked about the cost  to the                                                                   
state  in administering  the $25  for  100,000 taxpayers.  He                                                                   
asked  how  the   department  would  ensure  the   state  was                                                                   
receiving the $25 and what would happen for nonpayment.                                                                         
                                                                                                                                
Mr.  Alper  answered  the  individuals  would  have  to  file                                                                   
because   they  were  filing   a  federal   tax  return.   If                                                                   
individuals were  not filing with the state,  but were filing                                                                   
with the  IRS, the state would  go after them for  failure to                                                                   
file. He  continued that if  an individual filed,  but failed                                                                   
to send  the $25, it  was something the  state would  have to                                                                   
address. There  were a  number of  small dollar people  owing                                                                   
money in  taxes, which was not  the highest priority.  He did                                                                   
not know if the  amount owed could be attached  to a person's                                                                   
PFD, but he  thought it was likely.  He spoke to the  cost of                                                                   
administering  the tax  and  remarked there  was  significant                                                                   
paper  involved.  The  fiscal  note indicated  that  as  many                                                                   
people  as possible  would  file electronically.  However,  a                                                                   
$25  check  required  no fewer  resources  than  required  to                                                                   
produce  a $2,500  check; there  would  still be  substantial                                                                   
data entry.                                                                                                                     
                                                                                                                                
Representative  Pruitt referred to  a bill introduced  by the                                                                   
governor the previous  year with a 6.25 percent.  He recalled                                                                   
an estimate  from DOR  of around 60  people. He believed  the                                                                   
fiscal  note  for  HB  115  was  similar.  He  asked  if  the                                                                   
estimate was still the same.                                                                                                    
                                                                                                                                
Mr.  Alper replied  in the  affirmative.  The department  was                                                                   
estimating  roughly the  same additional  staff increment  to                                                                   
administer and  be prepared to  deal with 400,000  income tax                                                                   
returns on an annual basis.                                                                                                     
                                                                                                                                
3:29:26 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt stated HB  115 was very  different; it                                                                   
was  not a  flat 6.25  percent of  a federal  tax, which  was                                                                   
simple  - information  from federal  taxes  could be  paired.                                                                   
Whereas,  HB 115  had other  moving  mechanisms connected  to                                                                   
whether  an  individual decided  to  check  the box  for  the                                                                   
dividend and/or  had paid  the $25.  He asked staffing  would                                                                   
still  be  60  people  or  if  the  Permanent  Fund  Dividend                                                                   
Division  would  also  need additional  people.  He  reasoned                                                                   
more  people would  be  needed because  he  thought the  work                                                                   
under HB 115 would be a bit more burdensome.                                                                                    
                                                                                                                                
Mr.  Alper answered  that  he  could only  speak  to the  Tax                                                                   
Division. He  believed the  Permanent Fund Dividend  Division                                                                   
had its  own fiscal note,  but he did  not believe  there was                                                                   
additional staffing  needed. The math  of the 15  percent tax                                                                   
versus the 6  percent tax proposed by the governor  the prior                                                                   
year (the 10  percent capital gains tax). He  stated that the                                                                   
arithmetic  was  largely  done   by  computers.  The  biggest                                                                   
burden  from a  staffing  point  of view  would  relate to  a                                                                   
multistate  individual; ensuring  the person  with income  in                                                                   
and outside  of Alaska  was paying  the appropriate  share to                                                                   
the state. The  underlying complexity of the  tax formula was                                                                   
secondary to that.                                                                                                              
                                                                                                                                
HB  115  was   HEARD  and  HELD  in  committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                
3:31:18 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  reviewed  the schedule  for  the  following                                                                   
day.                                                                                                                            
                                                                                                                                

Document Name Date/Time Subjects
HB115 Supporting Docuemnt_ ITEP faq_2.13.2017.pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 federal filing requirements (2016).pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 federal tax brackets (2017).pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 income tax rankings - percent of federal.pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 income tax rankings - share of income.pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 state linkages to federal income tax (2016).pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 supporting doc AKrevenueoptions0416- ITEP.pdf HFIN 2/14/2017 1:30:00 PM
HB 115
HB 115 supporting doc fairnessmatterschartbook ITEP 1-17.pdf HFIN 2/14/2017 1:30:00 PM
HB 115