Legislature(2001 - 2002)
02/22/2002 01:10 PM House JUD
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* first hearing in first committee of referral
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+ teleconferenced
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HJR 36 - CONSTITUTIONAL AMENDMENT : TAX CAPS Number 0736 CHAIR ROKEBERG announced that the last order of business would be SPONSOR SUBSTITUTE FOR HOUSE JOINT RESOLUTION NO. 36, Proposing an amendment to the Constitution of the State of Alaska relating to limiting the rate of state individual income taxes and sales taxes. Number 0641 REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor, opined that [SSHJR 36] is a bipartisan bill that everybody could and should support regardless of how they feel about any pending tax proposals. He said that [SSHJR 36] should give everyone confidence that neither a state income tax nor a state sales tax will "grow above a certain rate." He explained that the main difference between the original version and the sponsor substitute of HJR 36 is that SSHJR 36 specifies that it pertain to an individual income tax rather than a corporate income tax. In addition, SSHJR 36 eliminates language stating how an income tax would be levied and focuses instead on the fact that a tax, regardless of how it is calculated, shall not exceed a certain rate. REPRESENTATIVE CROFT noted that in members' packets is a handout highlighting that a tax cap is not a spending cap, although they are compatible and may aim for similar results - restraining state spending. He offered that a tax cap and a spending cap could be done together because there is nothing contradictory about them. He mentioned that Anchorage chose to adopt a tax cap on its "municipal tax levy" while still allowing for new construction and new property improvements. This combination provides an incentive to encourage new economic development, because new construction - new property additions - adds to the tax base and allows the municipality to provide police, fire [protection], roads, schools, and infrastructure for the population growth resulting from economic development. REPRESENTATIVE CROFT, again referring to members' packets, said that it also includes charts detailing "where the 5 percent cap" proposed by SSHJR 36 would fall with regard to the sales tax rates and the income tax rates for various states, and a legislative research report by the Legal and Research Division of the Legislative Affairs Agency. He noted that the last page of this report states that the median U.S. sales tax rate is 5 percent, which is "our information as well about the high end of the income tax bracket; that is, if you impose this as a an income tax measure, you would be at about the median level in the U.S. currently for your top income tax bracket." Put another way, he said, SSHJR 36 would ensure that neither a sales tax nor an income tax would rise above the current U.S. average. Number 0230 REPRESENTATIVE CROFT relayed that he developed the concept encompassed in HJR 36 after talking to a neighbor/constituent whose main concern did not pertain the initial rate of a tax, but rather on the fact that "they never seem to stop there: ... they grow and grow, and he did not want to see anything that had that unlimited nature to it." He mentioned that the main support, both in-state and nationally, for tax caps of various types typically comes from conservative groups, many of which have resources on the Internet. In conclusion he said that he hopes that people will support the idea of a tax cap regardless of how they feel about the various tax proposals currently going through the legislative process. CHAIR ROKEBERG asked: "Isn't it true that you are an advocate of having a, what I call, 'bundled fiscal plan?'" "How does this, because it has to be acted on by the voters and acted upon separately, fit into a bundle?" REPRESENTATIVE CROFT said: I think, personally, that we should enact a fiscal plan this session, and I'd prefer to do it in some whole way that comes close to filling, for now and the foreseeable future, the close to a $1 billion gap that we have. I think it's only responsible that we do that though I know as well as anyone the political pain that will come with it. I think it's part of our responsibility, and for me it's worth that political pain - or even not getting elected the next election - to secure our future. CHAIR ROKEBERG clarified that his question was whether Representative Croft felt that SSHJR 36 should be part of the bundle. TAPE 02-22, SIDE A Number 0001 REPRESENTATIVE CROFT said he thinks that for those opposed to a fiscal plan, SSHJR 36 can be viewed on its own merits; the tax cap or the spending cap, individually or together, can be viewed as measures that allow people to feel more comfortable about any future tax proposals. CHAIR ROKEBERG asked: "Doesn't this have to come to the floor as a separate matter and not be part of a bundle?" REPRESENTATIVE CROFT said that according to his understanding, SSHJR 36 has to be considered separately, and no particular tax proposal could be tied to it, because of a provision in the Alaska State Constitution that prohibits "putting taxes up for a vote." "And if you say, 'These taxes only come in if a certain constitutional amendment comes in,' you're in effect having the people vote on a tax," he noted. In response to a question, he said that the legislature is constitutionally prohibited from delegating its "taxing power." CHAIR ROKEBERG asked if there were any [Alaska] Supreme Court cases that specify whether a tax could be instituted via the initiative process. REPRESENTATIVE CROFT said he did not know, only that he thought there was a constitutional provision that states that the legislature cannot delegate its taxing power. CHAIR ROKEBERG said that his point is that SSHJR 36 "can't be bundled." REPRESENTATIVE CROFT concurred. REPRESENTATIVE BERKOWITZ said that he disagrees. He elaborated: Of course you can bundle it; the same way we bundle things all the time. But I think [that] properly it should be a separate subject than what we're doing for putting together a fiscal plan. ... It's my understanding, actually, that you can bundle passage of the resolution through both chambers, without requiring passage of the electorate. Nonetheless, I think that's a bad idea. REPRESENTATIVE BERKOWITZ, in response to a question, said that when a resolution to amend the constitution passes through both bodies, it then goes to the public. He explained that this is different from passing the resolution and having the resolution be adopted and become an amendment; instead, it has to pass out of both houses - both bodies - before the people get a chance to vote on it. Number 0292 REPRESENTATIVE OGAN recalled that a past proposed constitutional amendment regarding subsistence was tied to whether the Alaska National Interest Lands Conservation Act (ANILCA) was altered in specific ways. "So, I suppose we could bundle it," he acknowledged, noting, however, that Article IX, Section 1, of the Alaska State Constitution states: "The power of taxation shall never be surrendered. This power shall not be suspended or contracted away except as provided in this article." REPRESENTATIVE CROFT surmised that this constitutional provision would not prohibit an amendment instituting a tax cap such as is proposed by SSHJR 36, which doesn't impose a new tax but only specifies when it stops. Additionally, he offered his belief that a new tax could not be instituted via the initiative process. REPRESENTATIVE MEYER opined that although Representative Croft has compared SSHJR 36 to Anchorage's tax cap, it is not the same because property taxes are basically the only source of income for the Anchorage municipality; the tax cap in Anchorage ensures that property taxes will not "get out of hand," and thus also serves to limit spending. On the other hand, since [oil revenues] provide 80 percent of the state's revenue, even if a tax cap is instituted, revenues from other sources would not be restricted. He relayed that U.S. Senator Frank Murkowski has stated that either an income tax or a sales tax would hurt Alaska's economy, but has acknowledged that perhaps a seasonal sales tax might be acceptable. Representative Meyer asked Representative Croft how a seasonal sales tax would fit into SSHJR 36. REPRESENTATIVE CROFT first clarified that he did not think that the Anchorage tax cap and the tax cap proposed by SSHJR 36 are identical. And although a lot of Anchorage's revenue comes from property tax, he noted, according to his information, about 40 percent of Anchorage's revenue is "nontax" revenue: fees, fines, grants, and forfeitures. Therefore, Anchorage's tax cap is not a spending cap; it is merely a tax cap on the most significant tax that Anchorage imposes. He also clarified that he is not portraying SSHJR 36 as a spending cap; "I said they do similar things, they do not do identical things." [A tax cap] has a generally constraining effect on spending but does not cap it; there could still be spending increases. A tax cap says to taxpayers that only a certain amount of revenue will be sought from their pockets. And although a spending cap has a generally depressing effect on tax increases, there could still be a spending cap in conjunction with very high tax rates. Number 0737 REPRESENTATIVE CROFT again stated that although a tax cap and a spending cap can complement each other and have generally similar effects, they are not identical. He indicated that he would like to see SSHJR 36 advance to the House Finance Committee so that it can be compared with a proposed spending cap to see which makes more sense: to see whether people are more worried, in general, about the absolute level of state spending or about how much a tax is and how far it goes. He reiterated his belief that everybody should be able to support SSHJR 36 regardless of how they feel about the implementation of statewide taxes. In response to Representative Meyer's question regarding a seasonal sales tax, Representative Croft said that SSHJR 36 would apply to that as well; "you're rate could not get any higher" than what is stipulated in SSHJR 36. CHAIR ROKEBERG asked whether the cap on the sales tax would allow payment to vendors for collection fees, "which would be above the cap - or outside the cap" and which is common in a lot of states. REPRESENTATIVE CROFT, after acknowledging that "it" is common in a lot of states, posited that the rate of sales tax levied by the state is the amount that the state gets and thus "would be after those deductions to the vendor." He added, though, that the committee may wish to clarify that issue further via an amendment or committee substitute. CHAIR ROKEBERG indicated that he wanted to be sure that the language accommodated "those kind of surcharges." REPRESENTATIVE CROFT agreed that is would be best to clarify that issue. CHAIR ROKEBERG, referring to both SSHJR 36 and a 2001 1040 tax form, asked why "federal adjusted gross income" is used in the calculation, instead of "taxable income." He noted that the difference between those two figures includes itemized deductions from Schedule A [or] a standard deduction, and any exemptions allowed under the Internal Revenue Service (IRS) tax code. This means that exemptions for large families or home ownership would not be included in the calculation of a person's state income tax. He opined that this might result in some people paying between 6 percent and 30 percent, depending on deductions and exemptions. Number 1024 REPRESENTATIVE CROFT explained that the vast majority of other states choose from among three different lines on the federal form upon which to base their state income tax. Some states use line 33, federally adjusted gross income; some states use line 39, taxable income after deductions and exemptions; and some states use line 58, the total tax owed. He indicated that although each option has "various good arguments," his intention was to leave open for debate the issue of which option to use, and to this end, he simply chose the use of line 33 as a starting point for the discussion. CHAIR ROKEBERG mentioned that that option also allows for changes to the IRS code. REPRESENTATIVE CROFT went on to point out that language in SSHJR 36, starting on line 8, provides for an option other than use of line 33 on the federal form: "If the individual income tax is levied on any basis other than federal adjusted gross income, the total amount of tax collected statewide may not exceed what would have been collected if the tax rate had been five percent of federal adjusted gross income." He indicated that had the state collected an individual income tax this year, it would have raised about $600 million based on line 33 of the federal form or about $450 million based on line 39. He added that SSHJR 36, while still providing a tax cap, allows for changes to the IRS form and for the use of different lines on that form for calculation purposes. REPRESENTATIVE BERKOWITZ asked Representative Croft whether he had "numbers that attach to 1 percent of adjusted gross, or what each percentage of adjusted gross [is] versus taxable income versus total tax?" REPRESENTATIVE CROFT said that the deputy commissioner of the Department of Revenue, Larry Persily, gave him numbers that indicate that in order to raise about $400 million, the income tax rate would have to be 3.13 percent if it were based on gross income, 4.34 percent if it were based on taxable income, and just under 22 percent if it were based on federal tax liability. Adding that he would have to research whether "on higher ends these ratios still work out," he explained that these ratios indicate roughly that 1 percent of adjusted gross income equals either 1.4 percent of taxable income or 7 percent of tax liability. In response to a question he said that 5 percent of adjusted gross income would equal [7] percent of taxable income. Number 1247 CHAIR ROKEBERG asked Representative Croft why he picked a tax cap of 5 percent instead of 4 percent, for example. REPRESENTATIVE CROFT indicated that the idea of using 5 percent originally occurred to him because of discussions on another constitutional amendment pertaining to using 5 percent of the market value of the permanent fund. He said that he then learned that the national median sales tax rate is 5 percent, as is "the median top rate of income tax in the states that have income tax." He said that from a couple of different angles, 5 percent works as a number above which he didn't want the tax rate to rise. CHAIR ROKEBERG mentioned that a concept proposed by Representative Carl Moses for several years regarding tax credits for property taxes paid within the state shows enormous value. He asked Representative Croft whether SSHJR 36 would allow such a tax credit. REPRESENTATIVE CROFT said that SSHJR 36 would allow for such a tax credit, adding that the only limitation would be that "it could not raise more money than one that was 5 percent and based solely on federal adjusted gross income." He mentioned that as long as the calculation used does not exceed the tax cap, it would be acceptable. REPRESENTATIVE BERKOWITZ noted that according to a conversation he had with [economist] Scott Goldsmith: Raising $1 in sales tax, 93 cents comes from Alaskans; raising $1 from the permanent fund dividend, 86 cents comes from Alaskans - and you get federal tax linkage; and raising income tax dollars, 75 cents comes from Alaskans, because it's an efficient way of getting nonresident workers, plus we're allowed to deduct it from our federal taxes. REPRESENTATIVE COGHILL remarked that he'd heard this same information just the other day. REPRESENTATIVE BERKOWITZ said he would provide those specific numbers to members for future debates. CHAIR ROKEBERG announced that SSHJR 36 would be held over.
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