Legislature(2013 - 2014)BARNES 124

02/20/2013 03:15 PM LABOR & COMMERCE

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
Moved Out of Committee
Moved Out of Committee
                   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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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.                                                                  

Document Name Date/Time Subjects
HB68 ver A.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Sponsor Statement .pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Fiscal Note-DOR-TAX-02-16-13.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Supporting Documents-Letter Juneau Chamber of Commerce.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Supporting Documents-Legislative Research 2-15-2013.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Supporting Documents-Letter AK State Chamber of Commerce.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB68 Supporting Documents-2012 Tax Division Annual Report-Ex Summary pg 4.pdf HL&C 2/20/2013 3:15:00 PM
HB 68
HB9 ver N.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Sponsor Statement.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Sectional Analysis.PDF HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Fiscal Note-DNR-REC-2-15-13.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Fiscal Note-LAW-CIV-02-15-13.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Why States Should Adopt.PDF HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-WilliamHenning BIO.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Email Joseph Everhart 12-13-12.PDF HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Email Nicole Julal 1-24-13.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Letter AK Banking Assoc 1-23-2013.PDF HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Letter Deborah Behr 1-29-2013.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Letter Joe Everhart 1-28-13.pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-Summary of 2010 Amendmets to Article 9 (UCC Law Journal).pdf HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-UCC Art. 9 Amendment (2010) Enactments.PDF HL&C 2/20/2013 3:15:00 PM
HB 9
HB9 Supporting Documents-ULC Fact Sheet.PDF HL&C 2/20/2013 3:15:00 PM
HB 9