Legislature(2017 - 2018)HOUSE FINANCE 519

10/26/2017 01:00 PM FINANCE

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Audio Topic
01:03:10 PM Start
01:04:24 PM HB4001
03:43:48 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
- Introduction & Overview
HOUSE BILL NO. 4001                                                                                                           
     "An Act imposing a tax on wages and net earnings from                                                                      
     self-employment; relating to the administration and                                                                        
     enforcement of the wages and net earnings from self-                                                                       
     employment tax; and providing for an effective date."                                                                      
1:04:24 PM                                                                                                                    
KEN  ALPER, DIRECTOR,  TAX DIVISION,  DEPARTMENT OF  REVENUE,                                                                   
provided  a PowerPoint  presentation  titled "Capped  Payroll                                                                   
Tax -  Bill Introduction  HB 4001  by Governor Walker"  dated                                                                   
October  26, 2017  (copy on  file).  He pointed  to the  bill                                                                   
title on slide  2 of the bill. He shared that  it was partial                                                                   
income  tax. He  moved  to slide  4  of the  legislation  and                                                                   
provided  detail  on  unrestricted general  funds  (UGF)  and                                                                   
other  projections.  He  referred   to  SB  26  that  was  in                                                                   
conference  committee and  would still  leave a shortfall  of                                                                   
$0.6  to  $0.9  billion.  He  stated  that  HB  4001  was  to                                                                   
partially fill that gap.                                                                                                        
1:08:09 PM                                                                                                                    
Mr. Alper  moved to  slide 5 and  addressed that  the primary                                                                   
issue was a  reduction in oil revenue. The  slide contained a                                                                   
chart  showing  UGF  oil  revenue,  the  GF  budget  and  oil                                                                   
surplus  from  2010  to  2018.  He  turned  to  slide  6  and                                                                   
discussed  that it  was the  budget per  capita adjusted  for                                                                   
inflation  and  population.  Operating  budget  spending  was                                                                   
currently  comparable to  spending in the  1990s. The  budget                                                                   
had been cut substantially based on historic levels.                                                                            
Representative   Ortiz  asked  for   a  restatement   of  the                                                                   
testimony related to inflation and population growth.                                                                           
Mr. Alper  replied that  the chart on  slide 6 reflected  the                                                                   
budget  adjusted  for  inflation and  population.  The  graph                                                                   
captured all  of the  information he  listed. He referred  to                                                                   
healthcare and  pointed to the  growth in healthcare  cost in                                                                   
light blue.  The dark  blue portion  represented the  overall                                                                   
agency budgets (without health and education).                                                                                  
1:13:12 PM                                                                                                                    
Mr. Alper moved to slide 7 and discussed the Office of                                                                          
Management and Budget (OMB) 10-year plan:                                                                                       
     • Not  a policy  document- an  extrapolation of  current                                                                   
     • Updated to include Preliminary Fall revenue forecast                                                                     
     •  After  the  $300+  million   increase  from  FY18-19,                                                                   
     subsequent  years mainly  reflect  inflation plus  known                                                                   
     actual liabilities (i.e. debt, retirement funding)                                                                         
     •  Status Quo  Budget  increases  from $4.7  billion  to                                                                   
     $5.5 billion in FY2027 (+$800 million)                                                                                     
     •  UGF  revenue  increases  from $2.0  billion  to  $2.8                                                                   
     billion in FY2027 (+$800 million)                                                                                          
     Structural  budget  deficit  is still  $2.7  billion  in                                                                   
Mr. Alper turned to slide 8, "OMB 10-year Plan":                                                                                
     •  Apparent  closing of  budget  gap in  later  forecast                                                                   
     years  is   primarily  based   on  the  expectation   of                                                                   
     continuing steady Permanent Fund growth                                                                                    
          o The SB26 models assume the overall fund                                                                             
          continues to grow due to indirect inflation                                                                           
          proofing, plus deposits of new royalties                                                                              
          o Annual sustainable "POMV" draw therefore                                                                            
          increases to $2.5 - $2.8 billion by FY2027                                                                            
          o Although the budget potentially comes into                                                                          
          balance in 2026, deficits before that date will                                                                       
          drive the CBRF to an unacceptably low level                                                                           
Mr. Alper  the overall fund would  continue to grow  with a 7                                                                   
percent growth  rate. Additionally,  there were new  deposits                                                                   
made  annually  from  royalties. The  deficits  were  looking                                                                   
smaller because the  annual draw would go to  $2.5 billion to                                                                   
$2.8  billion  by  FY 27.  Although  the  budget  potentially                                                                   
comes into  balance in 2026,  deficits before that  date will                                                                   
drive the CBRF to an unacceptably low level.                                                                                    
1:16:40 PM                                                                                                                    
Vice-Chair Gara  asked whether  slide 6 included  all general                                                                   
Mr.  Alper  replied  that  the  slide  included  unrestricted                                                                   
general  fund  (UGF).  He remarked  that  designated  general                                                                   
funds (DGF) were "pretty much a zero sum operation."                                                                            
Vice-Chair  Gara stated  that one  of his  concerns was  that                                                                   
the  legislature had  delayed  revenue for  so  long that  it                                                                   
would   either   be   necessary   to  go   below   the   save                                                                   
Constitutional  Budget  Reserve  (CBR), and  implemented  tax                                                                   
would take one year to implement.                                                                                               
Mr.  Alper replied  in  the affirmative  related  to the  tax                                                                   
implementation. He  agreed that the fiscal cliff  was rapidly                                                                   
Vice-Chair Gara  surmised that the administration  would have                                                                   
to propose over  drawing from the Permanent Fund  or use more                                                                   
from the CBR than recommended.                                                                                                  
SHELDON   FISHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                   
replied  that a  threshold should  be maintained  in the  CBR                                                                   
for  safety  measures.  The  options  were  cutting  more  or                                                                   
taking  more   from  the  Permanent  Fund   Earnings  Reserve                                                                   
Account (ERA).                                                                                                                  
1:19:34 PM                                                                                                                    
Representative  Kawasaki referred to  slide 6 and  challenged                                                                   
the assertion  that the budget  deficit was $2.5  billion. He                                                                   
referred to deferred maintenance and other costs.                                                                               
Mr. Alper  was not sure whether  the correct way to  refer to                                                                   
the needs  was "deficit," but  he agreed there  were numerous                                                                   
expenditures.  All of the  capital items  brought forward  in                                                                   
the early  1980s were  aging and  would need rooves,  siding,                                                                   
and upgrades. There  was a much higher capital  base than the                                                                   
state had 30 to 40 years earlier.                                                                                               
Representative  Kawasaki  queried  the anticipated  GF  spend                                                                   
for the ten years.                                                                                                              
Mr. Alper  replied that the  one-time adjustments from  FY 18                                                                   
to  FY  19 was  inflation.  He  stated  that  the FY  18  was                                                                   
unusual, because  it only had  approximately $120  million in                                                                   
GF.  He  furthered  that  there  was  approximately  $110  in                                                                   
reappropriation.  He stated that  the real number  was closer                                                                   
to $230 million.  He furthered that the Office  of Management                                                                   
and Budget (OMB)  ten-year plan utilized the FY  18 budget as                                                                   
the  base and  increased it  as inflation  starting with  the                                                                   
$230 million.                                                                                                                   
1:23:03 PM                                                                                                                    
Representative  Pruitt  referred to  the  statement that  the                                                                   
CBR would be at  an unacceptably low level. He  asked for the                                                                   
level that should not be surpassed.                                                                                             
Mr. Alper  replied $2  billion. The state  need a  reserve in                                                                   
case of a natural disaster and other.                                                                                           
Representative Pruitt  observed in the presentation  that the                                                                   
budget  would  be  balanced  by  FY  2026.  He  believed  the                                                                   
public's  concern was  that once  a tax was  started that  it                                                                   
would continue  on in  perpetuity. He  wondered why  the bill                                                                   
did not contain a sunset clause.                                                                                                
Mr.  Alper replied  that if  the state  had sufficient  funds                                                                   
that  would  make sense  to  end  the  tax,  but he  did  not                                                                   
believe it was prudent to include it in the bill.                                                                               
Representative  Pruitt  thought  a  sunset  would  force  the                                                                   
Mr. Alper  did not believe he  was the appropriate  person to                                                                   
answer the question.                                                                                                            
Representative  Pruitt  stated that  the  state  had spent  a                                                                   
significant   amount  on   capital.  He   wondered  about   a                                                                   
conversation regarding  whether the state should  continue to                                                                   
own all  of the assets.  He asked if  there was an  effort to                                                                   
look  at  the  substantial  amount   of  assets  tied  up  in                                                                   
facilities to use elsewhere.                                                                                                    
Commissioner Fisher  replied that the question  of the sunset                                                                   
was appropriate.  He remarked  that there  were assets  in "a                                                                   
couple  of different  buckets."  Some  of those  assets  were                                                                   
underutilized,  and  there  was   some  effort  to  determine                                                                   
whether  to dispose  of some of  the assets.  He stated  that                                                                   
some of  those assets were in  locations that did not  have a                                                                   
market to  dispose. He  furthered that  there was  tremendous                                                                   
value  in  holding some  other  assets,  such as  the  Atwood                                                                   
Building.  He stated  that the  Atwood Building  was a  large                                                                   
asset  and heavily  utilized.  The advantage  of owning  that                                                                   
asset  was that the  current lease  rate was  between $75  to                                                                   
$80  per square  foot.  He  stressed  that the  building  was                                                                   
completely paid off.  He remarked that leasing  a space ended                                                                   
up paying the capital cost.                                                                                                     
1:28:55 PM                                                                                                                    
Representative Pruitt  believed the land in Alaska  should be                                                                   
available  for land. He  noted that  there had been  pressure                                                                   
to  get land  into  the hands  of  Alaskans.  He believed  it                                                                   
would bridge the  gap for a number of years. He  asked if the                                                                   
administration  was  willing   to  get  DNR  working  on  the                                                                   
Commissioner Fisher would follow up on the question.                                                                            
Representative Guttenberg  asked about the disposal  of state                                                                   
assets.  He believed  that many  of the  facilities owned  by                                                                   
the state cost  the state more when they were  privatized. He                                                                   
remarked there  were many things  the state should  or should                                                                   
not be doing.                                                                                                                   
Commissioner  Fisher shared  that the  savings were  achieved                                                                   
by owning.  He did  not believe  the state received  inferior                                                                   
service  when  leasing.  He  could  discuss  whether  it  was                                                                   
beneficial to own or lease.                                                                                                     
Representative Thompson  pointed to the chart on  slide 6 and                                                                   
asked if  the tax credits,  the Permanent Fund  Dividend, and                                                                   
GO bonds were included in the graph.                                                                                            
Mr.  Alper  answered  that  the  red  section  included  debt                                                                   
service such  as GO bonds  and oil and  gas tax credits.  The                                                                   
wedge  had become  large  in  2010 due  to  oil  and gas  tax                                                                   
credits.  The Permanent  Fund  had never  been  part of  that                                                                   
graph. He  referred to  a presentation  earlier in  the week,                                                                   
and   stated  that   once   there   was  a   Permanent   Fund                                                                   
restructuring   bill,  the   administration   may  make   the                                                                   
1:34:43 PM                                                                                                                    
Mr. Alper  advanced to slide 9  and referred to  balancing of                                                                   
the budget  by FY 26. He  explained that numerous  things had                                                                   
to align to obtain a balanced budget at that time.                                                                              
     For this to work out, several things all need to                                                                           
     1. Oil production meets the new, more aggressive                                                                           
     preliminary fall forecast scenario                                                                                         
     2. Oil prices stabilize in the $60 range, adjusted for                                                                     
     3. Flat state budgets that can be contained within the                                                                     
     OMB 10-year plan despite deferred maintenance and                                                                          
     other needs                                                                                                                
     4. Senate version of SB26 with 75 percent / 25 percent                                                                     
     POMV split                                                                                                                 
     5. Permanent Fund grows at a steady 6.95 percent per                                                                       
     year without a major market correction                                                                                     
1:36:56 PM                                                                                                                    
Representative Ortiz  referred to slide  9, item 3.  He asked                                                                   
if  it  assumed  that the  capital  budget  continued  to  be                                                                   
funded as in the current year.                                                                                                  
Mr.  Alper answered  replied that  the reappropriations  were                                                                   
drawing  down  some  leftover   money  from  the  very  large                                                                   
capital budgets from  five years prior. He remarked  that the                                                                   
GF capital  budget,  but inserting  the reappropriations  and                                                                   
assuming replications  with new GF, the $230  million was the                                                                   
correct starting point.                                                                                                         
Representative  Pruitt remarked that  the Permanent  Fund had                                                                   
grown at an 8 percent average.                                                                                                  
Mr. Alper deferred to Commissioner Fisher.                                                                                      
Commissioner  Fisher replied  that the  Permanent Fund  had a                                                                   
target that grew at a real return of 5 percent.                                                                                 
Vice-Chair  Gara referenced slide  9, item  4 related  to the                                                                   
Senate version  of SB  26. He asked  whether the  divided had                                                                   
to go down to $1,000.                                                                                                           
Mr. Alper  answered that the  Percent of Market  Value (POMV)                                                                   
was the  flip side of  the $250 was  about $175  million into                                                                   
the GF.                                                                                                                         
Vice-Chair Gara was trying to  determine when the state would                                                                   
run out  of money  before the assumptions  on slide  9 worked                                                                   
out. He referred  back to slide 4 and noted  that there would                                                                   
still be  a $600 million  deficit. He  thought the  CBR would                                                                   
run out in three years, much sooner than FY 26.                                                                                 
Mr.  Alper answered  that if  everything  worked out  exactly                                                                   
right it would balance in FY 26.                                                                                                
Vice-Chair Gara asked about the dividend amount.                                                                                
Mr.  Alper  answered  the proposal  would  shorten  the  time                                                                   
before an absolute zero                                                                                                         
1:42:22 PM                                                                                                                    
Representative  Wilson   asked  if  the  management   of  the                                                                   
Permanent Fund  would change if  the legislature  began using                                                                   
it in the operating budget.                                                                                                     
Commissioner   Fisher  stated   his   understanding  of   the                                                                   
Representative   Wilson  replied   that   she  believed   the                                                                   
Permanent Fund  was invested  currently in long-term  assets.                                                                   
She thought it  would change if the legislature used  it as a                                                                   
fund source.                                                                                                                    
Commissioner  Fisher addressed  liquidity  of  the assets  in                                                                   
the fund. He  noted that publicly traded securities  could be                                                                   
sold, but private equity did not share the characteristic.                                                                      
Representative Wilson  asked if the fund would  still receive                                                                   
a high return if the use was shifted.                                                                                           
Commissioner  Fisher answered  that  the  Permanent Fund  did                                                                   
anticipate a reduction.                                                                                                         
Representative  Wilson asked  if  the $300  million the  bill                                                                   
would bring in  would be all necessary because  the Permanent                                                                   
Fund would be used for the remainder.                                                                                           
Commissioner  Fisher   answered  that  he  had   spoken  with                                                                   
numerous  leaders  of  different  areas  in  the  state.  The                                                                   
administration's  plan would take  the gap from  $2.6 billion                                                                   
to $300  million  approximately. He  acknowledged there  were                                                                   
legislators  and members  of the public  that still  believed                                                                   
the  budget needed  to  be  cut. The  bill  was  not a  final                                                                   
solution,  but it  gave a  framework with  more certainty  of                                                                   
how  the  state  would  move forward.  The  bill  would  give                                                                   
ratings   agencies   comfort   in   the   state's   financial                                                                   
1:48:14 PM                                                                                                                    
Representative  Wilson remarked  that there  was a desire  to                                                                   
lower budget than passed the previous year.                                                                                     
Commissioner  Fisher answered that  the budget presented  and                                                                   
the  OMB. He  referred to  UGF and  DGF had  been reduced  by                                                                   
about 20  percent. The  administration  was looking at  other                                                                   
ways  to make  reductions  like  a shared  services  program,                                                                   
which included  consolidating information technology  (IT) in                                                                   
the  state  departments.  The   departments  were  conducting                                                                   
efficiency improvements  on a regular basis. He  believed the                                                                   
state needed to  keep thinking about healthcare.  He referred                                                                   
to talk about a healthcare authority.                                                                                           
Representative  Wilson  looked  forward  to  seeing  a  lower                                                                   
Co-Chair  Foster  noted the  committee  would  hear from  the                                                                   
Alaska  Permanent  Fund  Corporation   (APFC)  the  following                                                                   
Mr. Alper moved to slide 10 and addressed elasticity.                                                                           
     The following items increase or decrease the size of                                                                       
     the future deficits ($millions):                                                                                           
     • House Permanent Fund bill (higher dividend) $175                                                                         
     • $10 oil price shift $300                                                                                                 
     • Federal health care changes $100                                                                                         
     • Near term major market correction $300                                                                                   
     • Increases to capital budget $50+                                                                                         
     • Major disaster response Indeterminate                                                                                    
Representative Grenn  pointed to page  9 and 10  and remarked                                                                   
that they did not include oil credits owed by the state.                                                                        
Mr. Alper agreed.                                                                                                               
1:54:47 PM                                                                                                                    
Representative  Guttenberg noted  that the  dividend rose  if                                                                   
the  population  dropped.  He   asked  about  the  population                                                                   
projections built into the presentation.                                                                                        
Mr. Alper did not  know what had been built into  the data by                                                                   
the  Department  of  Labor  and   Workforce  Development.  He                                                                   
remarked  that all  of  the items  would  provide a  positive                                                                   
benefit to the state, but not direct revenue to the state.                                                                      
Mr.  Alper turned  to  slide  11, "Earnings  Reserve  Account                                                                   
     • The  Earnings Reserve Account  is the only  portion of                                                                   
     the Permanent Fund that may be spent                                                                                       
     • It holds  the gains and losses of the  whole Permanent                                                                   
     Fund; the corpus is always made whole from losses                                                                          
     • In the  FY08-09 market crash, the ERA  balance fell to                                                                   
     just $420 million                                                                                                          
     •  If markets  experienced  similar  results this  year,                                                                   
     there would only  be enough funds in the ERA  to cover a                                                                   
     single year's deficit                                                                                                      
1:58:43 PM                                                                                                                    
Mr. Alper  summarized the first  section of the  presentation                                                                   
on slide 12 regarding why a broad-based tax was needed:                                                                         
     •  Even  a  small  tax  as  proposed  in  HB4001  covers                                                                   
     roughly half the forecasted ongoing deficits                                                                               
     •  This  buys   the  state  time  in  case   of  various                                                                   
     • A  tax combined  with PF  restructuring and  continued                                                                   
     budget discipline makes a complete fiscal plan                                                                             
     • If  we get to  where the CBRF is  gone in a  couple of                                                                   
     years  and don't  have a  revenue measure  in place,  it                                                                   
     takes over a year to collect a new tax                                                                                     
     •   At  that   point,  the   remaining  alternative   of                                                                   
     additional  unstructured  Earnings  Reserve  draw  could                                                                   
     establish a potentially catastrophic long term                                                                             
2:00:59 PM                                                                                                                    
Mr. Alper turned  to slide 14 and addressed  the tax proposal                                                                   
   · 1.5 percent tax on wages and self-employment income                                                                        
   · Tax paid by individuals earning income in Alaska; two                                                                      
     income families would pay for each person                                                                                  
   · Does not tax investments, retirement income, rental                                                                        
     income, etc.                                                                                                               
   · Tax is capped at $2,200 or twice the previous year's                                                                       
     PFD, whichever is greater                                                                                                  
       o Cap applies to incomes over $147,000 / year                                                                            
   · Revenue about $320 million at full implementation                                                                          
   · About 15 percent of revenue will come from                                                                                 
Vice-Chair  Gara  agreed  that  if the  budget  gap  was  not                                                                   
solved  the  economy  would  shrink  and  Alaskans  would  be                                                                   
harmed.  He  did  not  want  to  pass  something  that  would                                                                   
negatively  impact lower  income and  middle class  families.                                                                   
He asked about the tax rate under the bill.                                                                                     
Mr.  Alper answered  that  there were  600  Alaskans with  an                                                                   
income  over $1  million  per  year. The  bill  became a  bit                                                                   
regressive in the 5 percent.                                                                                                    
Vice-Chair Gara remarked  that at an income of  $1 million it                                                                   
seemed  to be  a benefit  to the  wealthiest.  He added  that                                                                   
higher  income individuals  were  able to  deduct from  their                                                                   
federal taxes, but lower income individuals did not.                                                                            
2:07:03 PM                                                                                                                    
Mr.  Alper  replied   that  about  30  percent   of  Alaskans                                                                   
itemized their tax  returns. It was possible  to deduct local                                                                   
income taxes or local sales taxes, but not both.                                                                                
Vice-Chair  Gara  felt  that  the  proposal  had  a  negative                                                                   
impact on lower  income people. He felt that  there should be                                                                   
an exemption  for the first  $25,000 for the  extremely poor.                                                                   
He  wondered  whether  the  proposal  taxed  every  level  of                                                                   
Mr. Alper  replied that the bill  as written taxed  the first                                                                   
dollar  earned. He  remarked  that the  origins  of the  bill                                                                   
were in the school head tax.                                                                                                    
2:10:12 PM                                                                                                                    
Representative  Grenn asked  if it  was gross  or net on  the                                                                   
federal form.                                                                                                                   
Mr.  Alper answered  that  ideally the  administration  would                                                                   
like to see definitions  in the bill, but some  would have to                                                                   
be dealt with  in regulation. He stressed that  the tax would                                                                   
be  deducted from  the  check  as a  percentage  of wages  or                                                                   
salary,  similar to  the state's  unemployment insurance  was                                                                   
deducted from the  checks. He furthered that  a self-employed                                                                   
person did not have the details within the bill.                                                                                
Representative Grenn  wondered whether the person  paying the                                                                   
cap would  be less or  more than what  they would pay  with a                                                                   
statewide 2 percent sales tax.                                                                                                  
Mr.  Alper referred  to  impacts of  different  tax types  on                                                                   
different income  levels. A person  would probably pay  a bit                                                                   
less under a sales tax.                                                                                                         
Representative Grenn requested to see the data.                                                                                 
Representative  Pruitt referred to  the current tax  proposal                                                                   
before Congress.  He asked for  the administration  to "burn"                                                                   
everything  received from  ITEP  [Institute  on Taxation  and                                                                   
Economic Policy].  He did  not want  to use information  from                                                                   
East Coast  liberals. He wondered  what the $320  million was                                                                   
based on, and the year's tax information.                                                                                       
Mr.  Alper replied  that the  most recent  complete IRS  data                                                                   
set was 2015. He  shared that the bill was built  on the 2014                                                                   
data. The  data set  was reverse engineered  to update  it to                                                                   
Representative  Pruitt queried the  number of people  who had                                                                   
left  Alaska since  2015, and  what jobs  and average  salary                                                                   
had decreased.                                                                                                                  
Mr. Alper  answered that  he did  not have information  about                                                                   
how many  people had  left the  state. The unemployment  rate                                                                   
was currently  about 3 percent  higher than it had  been when                                                                   
the current recession started.                                                                                                  
Mr.  Alper  referred  to 15  percent  from  nonresidents.  He                                                                   
asked  if  the percentage  was  higher  was because  the  tax                                                                   
would apply  to individuals who  would not have paid  the tax                                                                   
under a prior proposed tax structure.                                                                                           
2:15:58 PM                                                                                                                    
Mr. Alper  had not  seen numbers  of 7 or  8 percent  or that                                                                   
low.  He remarked  that  12.5  percent was  a  net from  non-                                                                   
residents. He  stated that a  certain number of  Alaskans had                                                                   
an income, but earned all their money out of state.                                                                             
Co-Chair Seaton clarified  that the number was  608 people in                                                                   
Alaska made  $1 million  per year; it  could not  be included                                                                   
in the tax before the committee.                                                                                                
Mr. Alper agreed.                                                                                                               
Representative  Thompson  looked at  taxes  capped at  $2,200                                                                   
(slide 14). He  pointed to a change in the cap  to $4,800. He                                                                   
wondered if the administration had done the calculation.                                                                        
2:18:50 PM                                                                                                                    
Mr.  Alper  answered  in the  affirmative.  He  guessed  they                                                                   
would scoop up  three-quarters. It did not  affect 95 percent                                                                   
of taxpayers.                                                                                                                   
Representative  Guttenberg   asked  who  collected   data  on                                                                   
revenue. He wondered if the information was broken out.                                                                         
Mr. Alper  answered  it was not  his area  of expertise.  The                                                                   
Department  of Labor and  Workforce Development  kept  a good                                                                   
data  set at  the job  classification  level. He  recommended                                                                   
hearing from DLWD if the committee wanted the information.                                                                      
Vice-Chair Gara  asked at what  level of wealth the  tax rate                                                                   
started going below the 1.5 percent.                                                                                            
Mr. Alper answered $147,333.                                                                                                    
Representative Pruitt asked if the $147,333 was taxable.                                                                        
Mr. Alper answered that it was top line income.                                                                                 
Representative Pruitt spoke to cases with contractors. He                                                                       
wondered if it would rest on the contractor (e.g. deckhand                                                                      
or other). He wondered where the onus rested.                                                                                   
Mr. Alper responded that an employer would have to report                                                                       
on a federal 1099 form.                                                                                                         
2:25:58 PM                                                                                                                    
Mr. Alper spoke to slide 15: "Tax Proposal Summary":                                                                            
     • For most Alaskans the tax is less than the PFD                                                                           
     •   Out-of-state   residents   will  pay   the   highest                                                                   
     effective rate because they do not receive PFDs                                                                            
Mr. Alper provided a background of how the state got to the                                                                     
current point of looking at a tax. He explained slide 17:                                                                       
"Alaska History of Taxes based on Income and Wages":                                                                            
     • Began in 1949 at 10 percent of federal tax liability                                                                     
     •  By  1961, the  tax  was  16 percent  of  federal  tax                                                                   
     • In  1975, Alaska switched  from federal  tax liability                                                                   
     to its own tax brackets                                                                                                    
     •  Ranged from  3  percent to  14.5  percent on  taxable                                                                   
     •  Alaska repealed  personal  income tax  in 1980  after                                                                   
     oil revenue boom                                                                                                           
     • "Alaska Fair  Tax" (HB303) passed House  in 2002. This                                                                   
     was an  income tax designed  to match the  effective tax                                                                   
     rates of a Sales Tax                                                                                                       
     • Various bills 2015-17 leading to HB115                                                                                   
Mr. Alper discussed the idea of a broad-based tax turning                                                                       
to slide 18: "Broad Based Tax Analysis":                                                                                        
     Since  the 2016  session,  multiple  analyses have  been                                                                   
     done  that  look at  the  relative impact  of  different                                                                   
     taxes, cuts, and Permanent Fund restructuring plans:                                                                       
          • Institute of Social and Economic Research at                                                                        
          • Institute for Taxation and Economic Policy                                                                          
          • Tax Foundation                                                                                                      
          • Northern Economics                                                                                                  
          • Brad Keithley                                                                                                       
          • Department of Revenue internal analyses,                                                                            
          including Chapter 3 of Fall 2016 Revenue Sources                                                                      
     You will likely hear from many of these resources                                                                          
2:30:06 PM                                                                                                                    
Mr. Alper specified a number of bills that were introduced                                                                      
from 2015 - 2017. The list of legislation was revealed on                                                                       
slide 19: "Income Tax Legislation, 2015-2017":                                                                                  
     • Approximate revenue from recent bills                                                                                    
          29th Legislature                                                                                                      
               o House 2015-16 bills; $650 million                                                                              
               o Governor's 2016 bills; $200 million                                                                            
          30th Legislature                                                                                                      
               o SB12, Bishop "School Head Tax"; $70                                                                            
               o HB146, Claman "School Head Tax"; $540                                                                          
               o HB115, passed House 2017, $700 million                                                                         
2:31:04 PM                                                                                                                    
Mr. Alper continued on slide 20: "HB 4001 is different from                                                                     
a true income tax":                                                                                                             
     • Does not tax several key types of income:                                                                                
          o Capital gains                                                                                                       
          o Retirement earnings                                                                                                 
          o S-corp distributions                                                                                                
     • Much less complex administration and staffing need                                                                       
     • Does not require individual filing for typical wage                                                                      
2:32:14 PM                                                                                                                    
Mr. Alper noted that Nevada did not have an income tax. He                                                                      
mentioned a few other states that did not have an income                                                                        
tax. However, states had a similar payroll tax.                                                                                 
Mr. Alper looked at slide 21, "HB 4001 is different from a                                                                      
true income tax":                                                                                                               
     Nevada is one of the seven states that do not have an                                                                      
     income tax. Nevada does, however, have a similar                                                                           
     payroll tax.                                                                                                               
          "Nevada's  Modified  Business Tax  (MBT), which  is                                                                   
          remitted   by   employers  (not   individuals)   on                                                                   
          aggregate  gross  wages  (of all  employees)  above                                                                   
          $50,000 per  quarter at a rate of  1.475 percent is                                                                   
          currently  the only  somewhat comparable  statewide                                                                   
               -Jared Walczak, Tax Foundation, "Could a                                                                         
               Payroll Tax Work for Alaska," October 20,                                                                        
Mr. Alper reviewed slide 22:" Process since Senate voted                                                                        
down HB115 (5/12/17)":                                                                                                          
     • June 5, Governor proposes "compromise"                                                                                   
          o Included budget, SB26, oil tax credits                                                                              
          o New revenue based on Sen. Bishop's school head                                                                      
          tax bill SB12, for at least $100 million                                                                              
          o Bishop bill actually raised only about $60-$70                                                                      
          million, had had no hearings, and had some                                                                            
          technical issues                                                                                                      
     •  June-July,  several  informal   efforts  to  build  a                                                                   
     viable   compromise   bill    based   on   SB12   before                                                                   
     •   Internal  administration   discussion  of   multiple                                                                   
     revenue  options,  and  outreach   to  both  legislative                                                                   
     bodies, led to decision to use a similar structure                                                                         
     • Converted from stair-step to flat-rate to avoid high                                                                     
     marginal tax issues at bracket crossovers                                                                                  
     •  September  22,  bill  released  at  time  of  current                                                                   
     special session call                                                                                                       
2:36:44 PM                                                                                                                    
Vice-Chair Gara  remarked that there  was an estimate  of the                                                                   
state's deficit.  He stated that the bill would  raise almost                                                                   
one-half of  the deficit, leaving  a significant  deficit. He                                                                   
wondered why only part of the deficit was addressed.                                                                            
Commissioner  Fisher replied  that there  was a narrowing  of                                                                   
the  gap over  time,  based on  the  expected  growth of  the                                                                   
Permanent  Fund.  He remarked  that  the governor  wanted  to                                                                   
present a proposal that would be accepted politically.                                                                          
Mr.  Alper  moved to  slide  23  titled "Thought  behind  the                                                                   
      •  Substantial  number  of Alaskans  ask,  in  essence,                                                                   
     "why  are we  collecting  a tax  with  one agency  while                                                                   
     paying a dividend with another?"                                                                                           
          o Certain people, while opposing a tax, are                                                                           
          prepared to give up their PFD to help operate                                                                         
     • Actually  eliminating the  dividend would be  very bad                                                                   
     policy for  many Alaskans  throughout the state,  and it                                                                   
     is  highly unlikely  to imagine a  majority approving  a                                                                   
     full elimination                                                                                                           
     • The structure of the HB 4001 "cap" acknowledges the                                                                      
     concerns of those people- basically taxing the                                                                             
     dividend back from higher income Alaskans                                                                                  
     • The hope is, a tax with this structure will be more                                                                      
     broadly acceptable than a full income tax                                                                                  
Representative Pruitt stated that hope was not a method and                                                                     
the word should never be used. He asked for the                                                                                 
administration to never include it in a presentation.                                                                           
2:43:13 PM                                                                                                                    
Mr. Alper agreed that if a person chose to not receive a                                                                        
dividend it would make everyone else's share higher.                                                                            
Mr. Alper relayed that one of the pieces necessary to build                                                                     
was a mechanism for refunds. He provided detail. He moved                                                                       
to slide 24, "Technical Language in HB 4001":                                                                                   
     Bill is about 1/3 the length of HB 115.                                                                                    
          Language  is adequate  to establish, or  authorizes                                                                   
          regulations to define, many key issues:                                                                               
          •  Defining "self-employment"  and  "from a  source                                                                   
          in the state" plus other key terms                                                                                    
          •   Interpretations   must   be   consistent   with                                                                   
          Multistate Tax Compact                                                                                                
          • Incorporates  IRS code to a limited  degree where                                                                   
          needed,  state  can   require  a  copy  of  federal                                                                   
          •  Process for  withholding  and  remitting tax  by                                                                   
          • Filing  of reports for payments  to self-employed                                                                   
          individuals and contract employees                                                                                    
          • Individual  returns by  those required to  do so,                                                                   
          mainly the self-employed                                                                                              
          • Refunds for overpayment                                                                                             
2:46:43 PM                                                                                                                    
Representative  Kawasaki  asked  about  the penalty  for  not                                                                   
filing taxes.                                                                                                                   
Mr.  Alper  did not  believe  there  was  a penalty  for  not                                                                   
filing  in the  bill.  He stated  that  there  was a  penalty                                                                   
within the regulation.  He deferred to Mr. Spanos.  He stated                                                                   
that  there  was  some  standard   penalty  language  in  the                                                                   
general  tax statutes,  which would likely  apply. He  stated                                                                   
that,   barring  any   other  direction,   the  general   tax                                                                   
authorities would be used for penalties.                                                                                        
Co-Chair Seaton  referred to line  3 of the  self-employment.                                                                   
He remarked that  the line was only from a  source within the                                                                   
state.  He  wondered  how  it   would  be  delineated  for  a                                                                   
resident or non-resident.                                                                                                       
Mr. Alper  replied that an  income tax was  a tax on  all the                                                                   
income, and a credit  was back for tax paid  in other states.                                                                   
He stated  that the bill  was written  that the tax  was only                                                                   
paid  on  what  was  earned in  Alaska,  whether  one  was  a                                                                   
resident  or non-resident.  He  stated  that without  a  1099                                                                   
form in  a small  business, there  would be a  self-reporting                                                                   
requirement with  an audit follow through. He  hoped that the                                                                   
definitions in  the bill would  give tools to assist  in what                                                                   
was  counted as  self-employed  income.  He deferred  to  Mr.                                                                   
BRANDON   S.   SPANOS,   DEPUTY   DIRECTOR,   TAX   DIVISION,                                                                   
DEPARTMENT  OF  REVENUE,  stated  that the  bill  only  taxed                                                                   
income made  within the  state. He  stressed that a  resident                                                                   
who earned  income outside  of Alaska would  not be  taxed on                                                                   
that income. He  remarked that the self-employed  would point                                                                   
to the multi-state tax compact.                                                                                                 
Co-Chair Seaton asked  for verification it was  on net income                                                                   
and not self-employment.                                                                                                        
Mr. Spanos replied in the affirmative.                                                                                          
Vice-Chair  Gara asked  if the  distribution  was counted  as                                                                   
self-employment income under the bill.                                                                                          
Mr. Alper replied in the affirmative.                                                                                           
Mr. Spanos  answered that  the bill  referenced a section  of                                                                   
the Internal  Revenue  Code -  he would have  to research  it                                                                   
and follow up.                                                                                                                  
2:52:54 PM                                                                                                                    
Representative   Wilson   looked   at   self-employment   and                                                                   
schedule  C. She stated  that  if she was  a sole  proprietor                                                                   
with no  actual income  from the  business,  would she  go to                                                                   
line  31 with  the  net profit  and loss  to  utilize as  the                                                                   
Mr. Alper answered in the affirmative.                                                                                          
Mr. Spanos concurred with Mr. Alper's reply.                                                                                    
Representative  Wilson did  not believe  a person could  take                                                                   
deductions   off   of   self-employed    income   under   the                                                                   
Mr. Spanos  agreed, if a  person had  a loss, the  bill would                                                                   
allow the loss.                                                                                                                 
2:54:49 PM                                                                                                                    
Mr. Alper advanced to slide 26, "Revenue Impact":                                                                               
     • DOR estimates $160 million in FY2019 due to the tax                                                                      
     taking effect in January 2019*                                                                                             
     • This amount is from withholding / employer payments                                                                      
     • No tax returns filed until April 2020                                                                                    
          *(Assumes 1/1/19 effective date as proposed)                                                                          
     • DOR estimates $320 million in FY2020 based on                                                                            
     modeling using aggregated federal income data for                                                                          
     Alaska residents                                                                                                           
Mr. Alper moved to slide 27 titled "Revenue Details":                                                                           
     Revenue estimates are based on 2015 IRS Data                                                                               
          • About 440,000 total resident taxpayers, revenue                                                                     
          $280-$290 million                                                                                                     
            68,000 below $10,000 income                                                                                         
            62,000 between $10 and $20,000                                                                                      
            161,000 between $20 and $50,000                                                                                     
            107,000 between $50 and $100,000                                                                                    
            38,000 between $100 and $250,000                                                                                    
            4,000 above $250,000                                                                                                
          • Net nonresident (after subtracting Alaskans who                                                                     
          earn all their income outside) 12.5 percent,                                                                          
          revenue $40 million                                                                                                   
          • Without the cap, total revenue would be $10 to                                                                      
          $20 million higher (foregone from high income                                                                         
2:57:56 PM                                                                                                                    
Representative  Pruitt  asked how  to deal  with  nonresident                                                                   
Mr. Alper  answered that the  bill included a  definition and                                                                   
regulations  would  flush the  issue  out. He  detailed  that                                                                   
from nonresidents  it was  a bit easier  when they  were wage                                                                   
Representative  Pruitt provided  a scenario  where a  company                                                                   
was  located  in  Alaska  but did  business  outside  of  the                                                                   
state. He  asked if  the income  was considered derived  from                                                                   
the state if the business was physically in Alaska.                                                                             
Mr. Spanos  replied that state's  usually taxed  residents on                                                                   
all of  their income,  and residents  and nonresidents  would                                                                   
be taxed  the same. He  furthered that  for a wage  earner it                                                                   
would be physical presence and wages would be taxed.                                                                            
3:02:02 PM                                                                                                                    
Co-Chair  Seaton  asked  if  Mr.  Spanos  was  talking  about                                                                   
property, not rents.                                                                                                            
Mr. Spanos answered that the property would not be taxable.                                                                     
Mr.  Alper  noted  that  it was  a  parallel  structure.  The                                                                   
consideration  would   be  what  percentage  of   income  was                                                                   
considered Alaskan for tax purposes.                                                                                            
Representative Pruitt  referred to individuals  earning money                                                                   
in another  state, but  who lived in  Alaska. He  wondered if                                                                   
it depended  on whether  the individual  paid tax in  another                                                                   
Mr. Alper responded  that the individual would  only be taxed                                                                   
if the work was in Alaska.                                                                                                      
3:04:35 PM                                                                                                                    
Co-Chair  Seaton   asked  about  the  difference   between  a                                                                   
taxpayer  and a  tax filer.  He  asked how  the bill  treated                                                                   
joint  filers. He  asked  if  distributions were  broken  out                                                                   
Mr.  Alper  answered  that  every  person  was  considered  a                                                                   
filer, there  was no  joint filer. It  was an individual  tax                                                                   
only; there  was no mechanism in  the bill to create  a joint                                                                   
Co-Chair  Seaton  wondered if  both  spouses had  the  $2,200                                                                   
Mr. Alper answered  that the taxes would be paid  in the dual                                                                   
income household.                                                                                                               
Co-Chair Seaton  referred to  partner distributions  or self-                                                                   
employment tax.  He wondered if  it was only assigned  to one                                                                   
of the household members.                                                                                                       
Mr. Alper answered  that he did not know. He  deferred to Mr.                                                                   
Mr. Spanos restated his understanding of the question.                                                                          
Co-Chair Seaton  replied in the  affirmative and  asked about                                                                   
a single cap.                                                                                                                   
Mr.  Spanos answered  he had  not researched  the issue,  but                                                                   
believed  that  a  partnership  could  choose  to  distribute                                                                   
whatever amount it wanted.                                                                                                      
3:10:10 PM                                                                                                                    
Mr. Alper  believed it meant  there were circumstances  where                                                                   
a couple would have to pay two caps.                                                                                            
Co-Chair   Seaton  stressed   that  he   was  attempting   to                                                                   
understand how the joint filing would occur.                                                                                    
Mr.  Alper  relayed  that  the  questions  were  easy  for  a                                                                   
payroll  or  wage  tax.  He  stated  that  the  broadening  a                                                                   
footprint   into   self-employment   required   the   special                                                                   
Co-Chair  Seaton   believed  it  was  important   to  have  a                                                                   
delineation  showing   how  the  joint  filer   impacted  the                                                                   
proposed tax.                                                                                                                   
Mr.  Spanos responded  that the  joint  filing definition  in                                                                   
the  federal code,  and noted  that there  was no  definition                                                                   
for  a  married   couple  in  the  bill,  so   each  employed                                                                   
individual  would owe their  own tax.  In order to  calculate                                                                   
your  own  returns,   they  had  to  know   their  individual                                                                   
Representative  Guttenberg used a  scenario where  Oregon had                                                                   
an income  tax. He  asked if  Oregon currently  was taxed  on                                                                   
the  entire  income.  He remarked  that  the  employer  would                                                                   
remove the tax in Alaska.                                                                                                       
Mr. Alper agreed.  He stated that a resident of  a state that                                                                   
had an  income tax,  who earned income  in Alaska,  would pay                                                                   
the  tax  to Oregon  on  all  their income.  He  stated  that                                                                   
living  in Oregon  and working  in  California initiated  the                                                                   
3:18:51 PM                                                                                                                    
Vice-Chair  Gara understood  the  difficulty of  implementing                                                                   
the tax  immediately. He asked  about the modest  payroll tax                                                                   
and wondered if it would be possible to implement.                                                                              
Mr.  Alper  answered  that  he was  really  talking  about  a                                                                   
voluntary  taxation  if  it  occurred  before  the  effective                                                                   
date. He  would not want to  implement the tax in  the middle                                                                   
of  a calendar  year  and believed  they  were stuck  waiting                                                                   
until April 2019.                                                                                                               
Vice-Chair Gara  did not mean  to implement the tax  prior to                                                                   
the bill's  effective date.  He meant  implementing it  prior                                                                   
to dealing  with regulations in  the department. He  asked if                                                                   
it  would  be  possible  to ask  the  effective  date  to  be                                                                   
January 1.                                                                                                                      
3:22:11 PM                                                                                                                    
Mr. Alper answered  there was no staff currently  attached to                                                                   
the bill;  the department  would have to  hire the  staff. He                                                                   
could  not   imagine  getting  anything   functional  between                                                                   
Thanksgiving and New Year's.                                                                                                    
Mr. Alper moved to slide 28 titled "Fiscal note                                                                                 
implementation cost":                                                                                                           
      • Implementing  an individual  income tax in  14 months                                                                   
     will be a significant logistical challenge                                                                                 
          o Need to draft regulations                                                                                           
          o Need to design, develop, and test technology to                                                                     
          administer tax system for over 400,000 taxpayers                                                                      
     •   Estimated   $300,000    supplemental   appropriation                                                                   
     request  for  a  contractor  to  work  with  DOR  on  an                                                                   
     implementation plan                                                                                                        
     • Estimated  $10,000,000 one-time capital  appropriation                                                                   
     to  build  income  tax  into  our  current  tax  revenue                                                                   
          o Includes withholding, filing, and refunds                                                                           
     •   Gradual  ramp-up   of   staffing;  eventual   annual                                                                   
     management  cost  estimate   is  $5.2  million  with  40                                                                   
     • Total cost  over six-year fiscal note  period is about                                                                   
     2.5 percent of projected revenue.                                                                                          
3:25:34 PM                                                                                                                    
Mr. Alper advanced to slide 29 and continued to address the                                                                     
fiscal note implementation cost.                                                                                                
     The  Department  of Revenue's  Fiscal  Note is  somewhat                                                                   
     conservative (meaning too high, we hope)                                                                                   
     • Assumes stand-alone system built within the Tax                                                                          
    • Items that need to be pinned down (partial list):                                                                         
          o How much can we limit individual reporting                                                                          
          needs vs. relying on employer filing?                                                                                 
          o Process for self-employment filing system                                                                           
          o Degree of electronic vs. paper filing                                                                               
          o Potential coordination with Department of Labor                                                                     
          (Employment Security Tax). This would have                                                                            
          substantial challenges due to federal funding                                                                         
Mr. Alper  provided additional detail  on slide 29.  He hoped                                                                   
to do  the work  with 30  or less people.  In comparison  the                                                                   
full income  tax bill  that had passed  the House  called for                                                                   
60 employees.                                                                                                                   
3:27:41 PM                                                                                                                    
Mr.  Alper  looked  at  slide 31,  "Impact  of  Recession  on                                                                   
Alaska's Economy":                                                                                                              
    Per the Alaska Department of Labor, since the peak:                                                                         
          • Overall economic activity in the state down 17                                                                      
          percent (much of this due to the reduction in the                                                                     
          value of every barrel of oil)                                                                                         
          • Total job losses 11,900 positions (3.3 percent)                                                                     
          • State government job losses 2,700 positions                                                                         
          (>10 percent)                                                                                                         
          • State facility closures throughout the state                                                                        
3:29:30 PM                                                                                                                    
Vice-Chair  Gara  stated that  the  DLWD had  told  committee                                                                   
members  that the  lost  jobs  were 13,500  in  the last  two                                                                   
years. He asked Mr. Alper to confirm the number.                                                                                
Mr. Alper  replied that  he would  provide that  information.                                                                   
He stressed that there was an inherent seasonality.                                                                             
Mr. Alper  turned to slide  32 titled  "ISER - Job  Impact of                                                                   
Different Options."  Each of the  options would cost  jobs in                                                                   
varying  degrees.   He  moved  to  slide  33   and  addressed                                                                   
multiple tax options  that would each raise  $500 million. It                                                                   
started   to   taper   out  because   the   highest   earning                                                                   
individuals  tended to  get their  income  from things  other                                                                   
than wages.                                                                                                                     
3:34:17 PM                                                                                                                    
Mr. Alper  addressed the final  slide titled "Comparable  Tax                                                                   
Burden." The chart  had been produced by Institute  of Social                                                                   
and  Economic  Research  (ISER).   He  detailed  that  Alaska                                                                   
mostly  collected  select sales  taxes  such as  alcohol  and                                                                   
other. The average  Alaskan paid $500 per year  to the state;                                                                   
the  average state  was  about $2,700  and  the highest  were                                                                   
over  $4,000.  If the  bill  passed  it would  mean  Alaska's                                                                   
total  taxation  would  be around  $1,000  and  Alaska  would                                                                   
still remain  the lowest  tax regime. He  did not  believe it                                                                   
would be material enough to make Alaskans move.                                                                                 
Representative   Grenn  referred  to   the  last   slide.  He                                                                   
referred  to the  state's  high property  taxes  and cost  of                                                                   
living.  He  wondered   if  ISER  had  a   comparative  study                                                                   
including local taxation.                                                                                                       
Mr.  Alper  replied  he  believed   so;  it  would  be  worth                                                                   
layering  into the presentation.  Alaska  was also unique  in                                                                   
its  over 400  municipal sales  taxes;  the weighted  average                                                                   
was  about  1.7 percent  because  Anchorage  did not  have  a                                                                   
sales tax.                                                                                                                      
3:38:13 PM                                                                                                                    
Representative  Pruitt  referred  to the  earlier  discussion                                                                   
about some  people not  wanting to  take the Permanent  Fund.                                                                   
He wondered if there  was a way to come up with  a way to use                                                                   
the money for state use.                                                                                                        
Mr. Alper  replied that  it was a  legal question.  He stated                                                                   
that if  a person chose  to take the  dividend and  donate it                                                                   
to the state that person could do that.                                                                                         
Representative  Pruitt  wondered if  there was  a  way for  a                                                                   
person  to choose  not  to claim  their  dividend. He  stated                                                                   
that it  came up all  of the time.  He believed there  should                                                                   
be a way  to provide the opportunity for  individuals wanting                                                                   
to give  their PFD.  He did  not want  to penalize others  in                                                                   
the process.                                                                                                                    
Commissioner Fisher would look into the issue.                                                                                  
Vice-Chair  Gara stated  he had  asked the  question for  two                                                                   
years.  He believed  Legislative Legal  Services agreed  that                                                                   
if  the dividend  was  made an  offer  for  people to  either                                                                   
accept or deny, it would mean it was not income.                                                                                
Commissioner Fisher would look into the issue.                                                                                  
Mr. Alper added that APFC would testify the following week                                                                      
and could possibly weigh in on the issue.                                                                                       
Commissioner Fisher would follow up.                                                                                            
Co-Chair Foster addressed the schedule for the following                                                                        

Document Name Date/Time Subjects
HB 4001 Sectional Analysis 10.25.17.pdf HFIN 10/26/2017 1:00:00 PM
DOR TAX present HB4001 payroll tax 10-26-17 final.pdf HFIN 10/26/2017 1:00:00 PM
HB 4001 Sponsor Statement.pdf HFIN 10/26/2017 1:00:00 PM
DNR Response to HFIN 102617 Land Sales Memo.pdf HFIN 10/26/2017 1:00:00 PM