Legislature(2013 - 2014)BARNES 124
02/20/2013 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB68 | |
| HB9 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 68 | TELECONFERENCED | |
| *+ | HB 9 | TELECONFERENCED | |
HB 68-CORPORATE INCOME TAX
3:24:53 PM
CHAIR OLSON announced that the first order of business would be
HOUSE BILL NO. 68, "An Act relating to the computation of the
tax on the taxable income of a corporation derived from sources
within the state."
3:25:05 PM
REPRESENTATIVE SHELLEY HUGHES, Alaska State Legislature,
speaking as the bill sponsor, remarked that this bill is overdue
since corporate tax rates were set in 1981. She related that
Alaska levies corporate income tax on corporations doing
business in Alaska. The tax is a graduated tax, which means it
increases incrementally based on the amount reported income.
She explained the corporate income tax rate schedule is broken
into ten levels, with the top level taxed at the highest rate,
9.4 percent, on federal taxable income of $90,000 or more, based
on gross income minus allowable deductions.
REPRESENTATIVE HUGHES characterized HB 68 as a rational way to
get cash back into the hands of Alaskans, which would create a
stronger economy and, in turn, would also enhance overall taxes
in the long run.
REPRESENTATIVE HUGHES reiterated the corporate income tax was
established in 1981 and this bill will adjust the incremental
brackets based on the consumer price index. She offered her
belief the rate changes are fair, since the proposed changes
would incentivize all industries. She stated that the tax is
limited to approximately 5,000 C corporations and would not
apply to the 25,000 limited liability corporations (LLCs) and
limited liability partnerships (LLPs) or to the 30,000 S
corporations. She referred to a memo in members' packets
entitled "Legislative Research Services, Research Brief" [from
Susan Haymes, Legislative Analyst dated February 5, 2013]. This
document refers to the companion bill, but applies to HB 68, she
said. She then referred to the current tax schedule on page 3
of the document which shows that most companies who filed earn
less than $10,000. She concluded that this would point to
numerous small businesses in the state. The other bulk of
filers represent middle-sized businesses, she stated. In short,
this bill would create relief for the small and medium-sized
businesses.
3:28:39 PM
REPRESENTATIVE HUGHES explained that the S corporation and LLCs
were established in the 1980s so Alaska has numerous pre-1980
small and medium-sized businesses that still fall under older
rules. This bill also would affect larger businesses in Alaska
and the Lower 48, but the tax does not apply to any out of state
income. She related that under the bill, the current income
bracket for over $90,000 would be increased to $222,000 or more
at a 9.4 percent tax rate. Essentially, the bill expands the
brackets structure, she said. Under the current structure, a
large company making $550,000 would pay $47,700 in taxes, but
under HB 68 would pay under $42,000 in taxes or approximately
$6,000 less. Further, a smaller company making $40,000 would
pay $1,250 in corporate income taxes, but under HB 68 would pay
approximately half the taxes or $650. She concluded this bill
would reduce the corporate taxes. She noted that she has
received letters of support from the State Chamber of Commerce,
and the Matanuska-Susitna Business Alliance.
3:31:00 PM
CHAIR OLSON remarked this bill has a zero fiscal note.
GINGER BLAISDELL, Staff, Representative Shelley Hughes, Alaska
State Legislature, on behalf of Representative Hughes, reported
the Juneau Chamber of Commerce and the Wasilla Chamber of
Commerce have also sent letters of support.
3:31:47 PM
REPRESENTATIVE MILLETT said she finds the corporate tax
structure with 10 tier brackets as too complex. She recalled
the two or three-tier brackets other states have in place, which
she suggested might be easier. She related the National
Conference of State Legislatures (NCSL) suggested this type of
structure could be burdensome to businesses.
REPRESENTATIVE HUGHES answered she held discussions with the
sponsor of the companion bill and the goal was to make a simple
change and not create a whole new system at this time. She
deferred to the Department of Revenue to respond.
3:33:33 PM
REPRESENTATIVE REINBOLD remarked that anything the legislature
can do to move from the 50th spot and become a friendlier place
to do business is welcome. She asked which types of industries
would be affected by the bill.
REPRESENTATIVE HUGHES answered that the change would affect a
broad spectrum of businesses and any long-time business might be
from any industry.
3:34:17 PM
REPRESENTATIVE REINBOLD asked who assesses the corporate income
taxes. Speaking from her own personal experience, she said she
has observed the person rings up zero when she pays in cash at a
nail salon. She asked whether this type of potential activity
is a state or federal issue. She further asked if this type of
business would typically be a C Corporation.
REPRESENTATIVE REINBOLD answered that the tax division has
investigators.
CHAIR OLSON related the department would be testifying later on.
3:35:25 PM
REPRESENTATIVE REINBOLD related her understanding that someone
else would bear the burden if the taxes were not collected.
REPRESENTATIVE HUGHES said she is a conservative and believes
that lower taxes strengthen the economy and increases the amount
of incoming taxes by growing businesses. In terms of the
overall budget, she suggested that $3.8 million less in revenue
is a small amount, but the legislature would need to review it.
She offered her belief this would be doable.
3:36:34 PM
REPRESENTATIVE HERRON asked whether the department could respond
to whether any unintended consequence would result from the
changes in the bill.
REPRESENTATIVE JOSEPHSON referred to the zero fiscal notes,
which he assumed meant the program change wouldn't cost anything
to administer. Still, he noted it would represent a loss of
revenue. He asked for further clarification.
CHAIR OLSON related the fiscal note would measure the direct
cost.
3:38:01 PM
REPRESENTATIVE JOSEPHSON acknowledged that 1981 was a long time
ago and he could see the need for some adjustment. He referred
to page 2 of the document entitled "Legislative Research
Services, Research Brief" that read, "Under the proposed
structure, a higher percentage of companies fall under the three
lowest tax brackets;, however, overall the tax liability would
be more evenly distributed through the middle tax brackets than
it is under the current tax structure." He asked whether the
effect is that the middle tax bracket wouldn't be any greater,
but due to the sum collected it ultimately would be greater.
REPRESENTATIVE HUGHES acknowledged that was her interpretation.
REPRESENTATIVE JOSEPHSON asked whether the middle tax bracket
should create a concern - the businesses between a mom and pop
store and ExxonMobil Corporation.
REPRESENTATIVE HUGHES related it is graduated so the lowest tax
bracket would see the greater benefits in percentages. She
offered her belief that it is reasonable and the businesses
would be better off under the bill than under the current
structure.
CHAIR OLSON remarked that ExxonMobil Corporation is paying
significant taxes.
3:39:48 PM
JOHANNA BALES, Deputy Director, Tax Division, Anchorage Office,
Department of Revenue (DOR), introduced herself.
ROBYNN WILSON, Income Audit Manager, Tax Division,
Administrative Services Division, Department of Revenue (DOR),
introduced herself.
3:40:29 PM
REPRESENTATIVE JOSEPHSON asked whether the DOR's fiscal note
reflects the cost of administering the tax changes is zero, even
though the program would incur a loss of $3.8 million under the
bill.
MS. BALES answered yes; that is correct. She said it will not
cost the department any more if the tax brackets change.
3:41:28 PM
REPRESENTATIVE MILLETT asked whether the C corporations are
taxed differently than oil and gas taxes.
MS. BALES answered that the tax rate for oil and gas
corporations and other non-oil and gas corporations are the
same, but the calculation of the taxable income would differ
between oil and gas companies and other non-oil and gas
corporation. This bill would treat all C corporations the same.
3:42:11 PM
REPRESENTATIVE SADDLER asked about the net effect of HB 68 on
the oil industry.
MS. BALES answered that $3.8 million in revenue encompasses all
C corporations. She pointed out the DOR has approximately 27
oil and gas C corporations that file in the state. Under this
bill, the maximum benefit to a single corporation would be
$5,828. With the 27 oil and gas filers, the maximum benefit to
all oil and gas corporations under the bill would represent
approximately $157,000 in tax savings. She concluded that the
majority of the savings will go to non-oil and gas corporations
under the bill.
3:43:19 PM
REPRESENTATIVE REINBOLD asked for an explanation of the C
corporations. She further asked what type of businesses
typically would apply and who would investigate any potential
local tax fraud.
MS. BALES answered that all companies can be assessed as chapter
C corporations. She explained that the designation for C
corporations is found within the Internal Revenue Code (IRS).
Thus businesses operating as C corporations in Alaska would be
taxed in Alaska. The other types of corporations, such as S
corporations, limited liability corporations (LLCs) and limited
liability partnerships (LLPs) are taxed differently federally.
Therefore the S corporations, LLCs and LLPs are taxed
differently in Alaska. For example, with S corporations the
income earned is distributed to the individual shareholders and
reported on their individual income tax returns. The reason S
corporations aren't taxed in Alaska, is because Alaska does not
impose an individual income tax. She reiterated any industry or
company that sets up itself as a corporation can be a C
corporation or an S corporation depending upon how the
corporation wishes to be treated under federal law. Additional
limitations apply, such that the S corporations are limited to
no more than a hundred shareholders. Thus small businesses
generally tend to be S corporations since they don't have to pay
the Alaska corporate income tax; however, many older C
corporations are companies that have been around for a long
time, such as mom and pop restaurants, airlines, construction
companies, retailers, and tourism companies and are subject to
Alaska's corporate income tax.
3:45:51 PM
REPRESENTATIVE REINBOLD reiterated her earlier question of who
would investigate local tax fraud and why the division doesn't
use fewer brackets.
MS. BALES related that neither bill sponsor discussed collapsing
the brackets into fewer tax brackets. She said she thinks it is
a point well taken. She responded that the division
investigates tax fraud through audits and also by the DOR's
criminal investigation unit. Thus the DOR would investigate if
the department receives tips or anyone has concerns that people
aren't properly reporting income they have earned.
3:46:58 PM
REPRESENTATIVE REINBOLD suggested perhaps she should have called
DOR instead of the IRS for the few times she has been suspicious
[that someone was not reporting income.]
MS. BALES asked for clarification on whether the total purchase
was not rung up or she wasn't charged an additional sales tax.
REPRESENTATIVE REINBOLD reiterated her earlier scenario in which
she had her nails done at a nail salon and was charged $40. She
handed the clerk $40 in cash, but the sale was rung up as zero
and she also did not receive a receipt. In several instances
when this happened it raised an alarm and while she isn't
specifically accusing someone, she related when this happened
she called the IRS. She wondered if the IRS is the appropriate
agency to report this type of activity or if someone in the
state should be notified.
MS. BALES responded that the DOR would appreciate a call and
would determine if the company is subject to corporate income
taxes. She indicated that if the company is not a C corporation
it would not be subject to corporate income taxes, but the
division could also refer the case to IRS since it sounds as
though the person could be trying to avoid individual income
taxes. She reiterated the department's interest and noted a
local sales tax could also apply. She understood Anchorage does
not have a sales tax, but some jurisdictions throughout the
state do impose one.
3:48:46 PM
CHAIR OLSON related a question on behalf Representative Herron.
He asked whether there might be any unintended consequences.
MS. BALES answered that the department does not see any
unintended consequences or potential loopholes with the changes
in HB 68. She characterized this bill as being pretty straight
forward.
3:49:08 PM
REPRESENTATIVE MILLETT asked whether the DOR has a preference
for ten brackets or for using fewer brackets, such as three or
four that some other states use.
MS. BALES answered that the DOR does not have a preference. The
department's corporate income tax is set up using ten brackets.
She said that changing the number of tax brackets really doesn't
create any additional work. She viewed it as being a preference
for legislators or businesses. The department doesn't view the
current corporate income tax bracketing as creating any concern.
3:50:04 PM
REPRESENTATIVE MILLETT understood that it doesn't create a
burden for the department, but she asked whether it would it be
easier for the taxpayer.
MS. BALES related she did not think it created any burden for
businesses either. She reported that so many automated tax
preparation services calculate the taxes for businesses. She
suggested that some software companies would need to change
their programs under the current bill or if the tax brackets
were also collapsed to three brackets. She did not see the 10
tax brackets as creating any issue, but she could also
understand if [the legislature] would like to make changes from
the current corporate income tax brackets.
3:51:11 PM
REPRESENTATIVE MILLETT asked why businesses don't change from C
corporations to S corporations and avoid Alaska's corporate
income taxes.
MS. BALES answered that the department has also pondered this.
She related her understanding that when these C corporations
were initially established, the top individual income rates in
Alaska were at 55 percent, which was greater than the top
corporate income tax rates at the time. The department has
concluded that the businesses initially incorporated as C
corporations since the rates were less and they would pay less
corporate income taxes. She surmised that to change the
articles of incorporation will often involve fees for attorneys
or accountants. The department has contemplated that at any
given time these small C corporations with less than a hundred
shareholders could easily convert to S corporations and not pay
any Alaska corporate income tax at all.
3:52:36 PM
CHAIR OLSON asked whether switching the current corporate income
tax structure to three brackets would generate a fiscal note.
MS. BALES answered no; that the DOR could easily convert to less
tax brackets.
3:53:20 PM
CHAIR OLSON, after first determining no one else wished to
testify, [the Chair treated the public testimony as being
closed.]
3:53:45 PM
REPRESENTATIVE REINBOLD moved to report HB 68 out of committee
with individual recommendations and the accompanying fiscal
note. There being no objection, HB 68 was reported from the
House Labor and Commerce Standing Committee.
3:54:15 PM
The committee took a brief at-ease from 3:54 p.m. to 3:59 p.m.