Legislature(2017 - 2018)BARNES 124

04/01/2017 01:00 PM LABOR & COMMERCE

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Heard & Held
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Heard & Held
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+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 103(L&C) Out of Committee
          HB  36-TAX: INCOME FROM NON C CORP ENTITIES                                                                       
4:16:03 PM                                                                                                                    
CHAIR KITO  announced that the  final order of business  would be                                                               
SPONSOR SUBSTITUTE  FOR HOUSE  BILL NO. 36,  "An Act  bearing the                                                               
short title of  the 'Fair Contribution by  High Profit Businesses                                                               
Act'; requiring  certain persons in  the business of oil  and gas                                                               
production or  transportation to  pay income tax;  establishing a                                                               
tax on the income of  a sole proprietorship, partnership, limited                                                               
liability company,  or an S  corporation; relating  to exemptions                                                               
from  the tax  on corporations;  and providing  for an  effective                                                               
4:16:24 PM                                                                                                                    
REPRESENTATIVE  WOOL  moved  to   adopt  the  proposed  committee                                                               
substitute  (CS)  for  SSHB   36,  Version  30-LS0148\E,  Nauman,                                                               
3/29/17,  as the  working document.   There  being no  objection,                                                               
Version E was before the committee.                                                                                             
4:16:50 PM                                                                                                                    
REPRESENTATIVE  LES  GARA,  Alaska   State  Legislature,  as  the                                                               
sponsor  introduced   SSHB  36  via  a   PowerPoint  presentation                                                               
entitled, "HB  36:  Fair  Contribution by High  Profit Businesses                                                               
Act."    He  explained  SSHB  36  tries  to  close  a  number  of                                                               
exemptions that Alaska has [slides  1-3].  Until 1980 when Alaska                                                               
had  an  income tax,  every  business  in the  state  contributed                                                               
towards  the state's  public services  and roads  - the  business                                                               
owners paid an  income tax.  He said the  profits that the owners                                                               
owned   through  their   business,   whether  lawyers,   doctors,                                                               
engineers,  architects,  oil  field  service  companies,  or  any                                                               
business of  which the state  has 40,000,  paid a portion  of the                                                               
business's profits to the state to help support public services.                                                                
REPRESENTATIVE  GARA said  SSHB  36 tries  to  solve the  state's                                                               
current  problem,  which is  that  the  9,000 C  corporations  in                                                               
Alaska are  subject to the  state's corporate business  tax while                                                               
most other  businesses are not.   Most people see  C corporations                                                               
as  publicly traded  corporations, he  noted, but  they are  more                                                               
than that.   Although some businesses are subject  to a fisheries                                                               
tax or  a mining tax,  most other businesses    lawyers, doctors,                                                               
architects    pay no tax  to the state  other than a  $50 license                                                               
fee per  business.  So, a  company making $10 million  in profits                                                               
contributes $50 to  the state.  He advised that  SSHB 36 tries to                                                               
recognize that struggling businesses cannot  afford to pay a tax,                                                               
but that those who are doing  much better in terms of profits can                                                               
afford to  contribute to the state's  schools and infrastructure.                                                               
People who are successful benefit  from the things the state pays                                                               
for, such as  roads and infrastructure, energy  projects, and the                                                               
public  schools  that produce  the  employees  who work  for  the                                                               
business.    Members   of  society  want  to   support  the  next                                                               
generation that  benefits from those  things, which is  the point                                                               
of contributing back.                                                                                                           
4:20:00 PM                                                                                                                    
REPRESENTATIVE  GARA pointed  out  that 9,000  S corporations  in                                                               
Alaska pay  no corporate  tax [slide 4].   Regardless  of whether                                                               
these S  corporations make  $10 million  or $500,000  in profits,                                                               
their tax  is only  the $50  in license  fees paid  per business.                                                               
Obviously, jobs in this economy  are important, he continued, but                                                               
in some  sense for  the state treasury  every business  right now                                                               
actually  costs the  state money    for  roads, schools,  and the                                                               
other  infrastructure that  is provided  by  the state.   From  a                                                               
budget standpoint, one  would hate to have businesses  be a money                                                               
drain,  but  that  is  the  way things  are  set  up  in  Alaska.                                                               
Businesses certainly help with local  property taxes, but for the                                                               
state  budget businesses  cost  more money  than  the state  gets                                                               
back.   He noted that  there are  45,000 businesses in  the state                                                               
that  are not  S corporations,  and related  that when  he was  a                                                               
salaried attorney at a law firm,  the firm took in $10-15 million                                                               
in profits and paid $100 to  the state with two lines of business                                                               
license fees.   This is  the same  for doctors' offices  and many                                                               
other businesses, he continued.  He  said he didn't feel that the                                                               
law firm  contributed back and when  he became a partner  at that                                                               
firm,  he felt  the firm  should  contribute back  more than  the                                                               
license fee that it paid.                                                                                                       
REPRESENTATIVE  GARA advised  that  the  number of  non-corporate                                                               
businesses  that pay  tax in  Alaska is  zero, regardless  of the                                                               
amount  of their  profits [slide  5].   He said  the corporations                                                               
that  do pay  tax are  the roughly  9,000 C  corporations in  the                                                               
state as there is a tax  structure for C corporations.  The types                                                               
of  business  not  currently  paying  tax  in  Alaska  include  S                                                               
corporations, limited  liability companies  (LLCs), partnerships,                                                               
and sole proprietorships.  Those  are the classes of the [45,000]                                                               
businesses that don't pay a tax in Alaska.                                                                                      
4:22:27 PM                                                                                                                    
REPRESENTATIVE GARA  stated that  the matter  of fairness  is one                                                               
reason why  he introduced SSHB 36  [slides 8-9].  He  offered his                                                               
belief that people  who are successful in society  should chip in                                                               
to help  society run.   The state's  current exemption,  which is                                                               
every business that  is not a C corporation, does  not help close                                                               
the state's deficit.                                                                                                            
REPRESENTATIVE   GARA  pointed   out  that   Alaska  law   has  a                                                               
confidentiality provision and every business  that does not pay a                                                               
tax is  considered a  taxpayer under Alaska  law because  that is                                                               
how  the law  is written  [slides 10-11].   That  confidentiality                                                               
provision  for  taxpayers,  even   taxpayers  that  pay  no  tax,                                                               
requires that  the Department of  Revenue not reveal the  name of                                                               
any business that  does not pay a  tax.  In some  sense, he said,                                                               
it is  almost good not to  know the names of  the businesses that                                                               
don't pay taxes.   The purpose of  the bill is not  to target any                                                               
business.   It  is to  say  that if  a business  makes a  certain                                                               
amount of  income it should  chip in  toward the ability  for the                                                               
state to provide public services.                                                                                               
REPRESENTATIVE  GARA stated  that SSHB  36 tries  to draw  a line                                                               
between those businesses  that are successful and  those that are                                                               
struggling because  it is  not wanted  to tax  a business  out of                                                               
business [slide 12].  He said he  drew a line that says the first                                                               
$200,000  of  profit/net income  is  nontaxable  under the  bill,                                                               
which  he thinks  is  generous.   The bill  does  not change  the                                                               
current corporate tax  on C corporations, he  explained, and less                                                               
profitable  businesses  will  remain   fully  exempted  from  any                                                               
business tax under SSHB 36.   He allowed there could be differing                                                               
views on whether the $200,000 mark is the right mark.                                                                           
4:24:58 PM                                                                                                                    
REPRESENTATIVE GARA  advised that  SSHB 36  would not  tax Alaska                                                               
Native corporations  specifically, which the bill  states [slides                                                               
13-14].  Most,  if not all, Native corporations are  covered as C                                                               
corporations  given the  number of  shareholders that  they have,                                                               
and if they make  a profit, they probably pay a  tax to the state                                                               
under  the C  corporation  tax.   He  said it  is  the same  with                                                               
village  corporations and  that  the  village corporations  often                                                               
don't make a profit.                                                                                                            
REPRESENTATIVE GARA pointed  out that the tax  schedule set under                                                               
SSHB 36  is lower than  the schedule under the  current corporate                                                               
tax,  mostly  because the  first  $200,000  of income  is  exempt                                                               
[slide 15].   He noted  that the top  tax rate under  the current                                                               
corporate tax for  C corporations is 9.4 percent  of income above                                                               
$222,000 a year, and that there  is a smaller tax on lower levels                                                               
of income.  He explained that  by exempting the first $200,000 of                                                               
income  the proposed  tax is  a lower  tax and  the proposed  tax                                                               
gradually  moves  the  tax  from  5 percent  to  9.4  percent  at                                                               
$1,000,000.    He allowed  it  is  for  the committee  to  decide                                                               
whether those are  the right graduations, but  that the exemption                                                               
under the current  C corporation statute only  excludes the first                                                               
$25,000 of  income.  One  reason a  less aggressive tax  than the                                                               
corporate  tax  is  sought  is that  many  larger  companies  and                                                               
publicly  traded   companies  are  going   to  be  under   the  C                                                               
corporation  tax.    A  larger company  probably  has  a  greater                                                               
ability to   weather the  storm  in  down years  with a  tax than                                                               
would a much smaller company.                                                                                                   
REPRESENTATIVE GARA  reiterated that  the first $200,000  is tax-                                                               
free  and then  the  tax  starts at  5  percent  for income  over                                                               
$200,000.  At $500,000 the tax  goes to 7.5 percent and at income                                                               
above $1  million it caps out  at the current corporate  tax rate                                                               
of 9.4  percent, whereas  the current corporate  tax rate  is 9.4                                                               
percent  at income  above $222,000.    He noted  that the  bill's                                                               
effective  tax rate  is even  lower because,  like the  corporate                                                               
tax, it is deductible from federal  income tax.  Thus, under this                                                               
bill the effective  payment may possibly be  20-39 percent lower.                                                               
For  example, a  9.4 percent  tax would  be closer  in effect  to                                                               
about 6 percent tax because it is deductible from federal tax.                                                                  
4:29:10 PM                                                                                                                    
REPRESENTATIVE GARA  pointed out that  there is one  exception to                                                               
what he  has said so  far - Alaska  has a separate  corporate tax                                                               
for oil and gas producers and  pipeline owners [slide 17].  If it                                                               
is  a C  corporation it  pays the  9.4 percent  tax at  $222,000.                                                               
Under current  law, an oil and  gas producer or a  pipeline owner                                                               
that  is formed  as an  S  corporation or  as an  LLC avoids  the                                                               
corporate tax.  He said SSHB  36 would put all companies that are                                                               
inside the  state's oil and  gas corporate tax into  the existing                                                               
corporate tax structure - an oil  and gas producer formed as an S                                                               
corporation would be treated as a  C corporation.  That tax has a                                                               
different definition  on income  than the  corporate tax  for all                                                               
non-oil and  gas companies.   He  noted that  under the  bill, if                                                               
[Hilcorp Alaska,  LLC], the fourth  largest oil and  gas producer                                                               
in the  state, made profits it  would be subject to  the existing                                                               
oil and gas corporate tax, while currently it is not.                                                                           
REPRESENTATIVE  GARA said  SSHB 36  uses the  same definition  of                                                               
taxable income as  existing law because he didn't  want to create                                                               
a new definition.  He stated:  "There is one definition of income                                                               
for non-oil and  gas companies that's based on  a multi-state tax                                                               
compact  that's  designed  so  many states  don't  tax  the  same                                                               
income.   Income for oil  and gas  companies will be  defined the                                                               
way  it's defined  for  oil  and gas  companies;  it's a  complex                                                               
formula that is ? referred to as worldwide apportionment."                                                                      
4:31:29 PM                                                                                                                    
REPRESENTATIVE  GARA  continued  his discussion  of  how  taxable                                                               
income is  defined (slide 19).   A few policy calls  were made in                                                               
the bill,  he said, and  one was whether  to tax the  business or                                                               
the individual shareholders.   It was decided to levy  the tax on                                                               
the business to minimize the  cost of administration for both the                                                               
business and the  state, but primarily to minimize  the costs for                                                               
the businesses  and their  shareholders.   Rather than  make each                                                               
shareholder or each partner pay  tax separately, SSHB 36 provides                                                               
that the business pay the tax  on the business's net income.  The                                                               
business  can then  apportion its  net  income and  the tax  paid                                                               
between its shareholders.                                                                                                       
REPRESENTATIVE  GARA  reported  that  the  corporate  income  tax                                                               
produces roughly $100  million annually (slide 20),  but that the                                                               
amount of  oil and  gas corporate income  tax produced  each year                                                               
depends very much on oil prices.   For example, in 2016 there was                                                               
a  negative  amount.   It  was  negative, he  explained,  because                                                               
companies pay  estimated taxes  and by  the end  of the  year the                                                               
Department  of  Revenue  (DOR)  owed money  back.    The  current                                                               
projections for  2017 and  2018 are about  $100 million  and $200                                                               
million, respectively, as oil prices are projected to rise.                                                                     
4:33:23 PM                                                                                                                    
REPRESENTATIVE  GARA stated  that originally  the thought  was to                                                               
only cover  those corporations that  are not covered  (slide 21).                                                               
So,  he continued,  why does  this bill  go beyond  corporations?                                                               
Why  does  it  add  partnerships?     Why  does  it  add  general                                                               
businesses?   He explained that  as an  attorney he could  form a                                                               
law  firm as  a corporation,  which many  law firms  do.   Or, he                                                               
could form a law  firm as a partnership.  Or, he  could form as a                                                               
sole proprietorship and  hire a number of lawyers.   He said that                                                               
if a law firm  took in $10 million in profits,  he could not find                                                               
an answer  as to  why he should  pay a  tax if he  files as  an S                                                               
corporation but not  if he files as a sole  proprietorship.  It's                                                               
the same  business activity,  the same  benefits from  the state,                                                               
and the same  cost to the state (for example,  the court system).                                                               
He said he therefore doesn't  think the form that someone creates                                                               
a corporation under  should determine whether or  not that person                                                               
pays a tax;  rather, the activity and the level  of profit should                                                               
determine whether  or not someone pays  a tax.  He  added that he                                                               
cannot come  up with a logical  reason why he would  tax the same                                                               
business that  forms as an  LLC differently than a  business that                                                               
does the  same exact thing  and makes the  same exact money  as a                                                               
sole proprietorship, for example.                                                                                               
REPRESENTATIVE GARA  said much  time was  spent on  ensuring that                                                               
there would be no double  taxation under the bill (slides 22-23).                                                               
Any income taxed under SSHB 36  would be exempted from a personal                                                               
income tax  if one were adopted  in Alaska.  The  bill is modeled                                                               
as  much as  possible under  existing  law -  the definitions  of                                                               
income  used in  the bill  are the  same as  under existing  law.                                                               
Also,  he continued,  the bill  avoids double  taxation in  cases                                                               
where one business  owns another business.  There would  not be a                                                               
tax on the owner  business as well as a tax  on the business that                                                               
it  owns.   The owning  business is  already going  to be  paying                                                               
taxes  on the  business that  it  owns.   Additionally, he  said,                                                               
current  C  corporation  law  says that  if  a  corporation  pays                                                               
another tax,  such as a  fishing or  mining tax, those  taxes are                                                               
deducted from the company's corporate  tax, and this same rule is                                                               
followed in SSHB 36.                                                                                                            
REPRESENTATIVE GARA  stated that  the bill's  biggest goal  is to                                                               
make sure  everyone is   chipping in together   (slide 24).   The                                                               
bill  is  one  way  to  help address  the  state's  $2.8  billion                                                               
deficit.    In  looking  at  the  various  plans  out  there,  he                                                               
continued,  there  are  none  on   the  table  that  would  allow                                                               
legislators  to both  fill the  deficit  and return  to having  a                                                               
capital budget.  A number  of different approaches are needed, he                                                               
said, and  it is  his hope  that as many  good ideas  as possible                                                               
will  advance  forward and  people  will  decide which  ones  are                                                               
needed as a fiscal plan.                                                                                                        
4:38:38 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON observed that  the first bullet on slide                                                               
19  states, "To  minimize  the costs  of  administration, tax  is                                                               
placed on  the business and  the individual owners".   He further                                                               
observed that  the second  bullet on  slide 19  states, "Business                                                               
will  apportion taxes  based on  ownership shares,  so that  each                                                               
owner does not  have to hire their own accountant".   He said the                                                               
second bullet seems to be the opposite of the first bullet.                                                                     
REPRESENTATIVE GARA replied  that the tax would be  placed on the                                                               
business  so  only one  filing  would  have to  be  made.   If  a                                                               
business had 20  shareholders and the individual  was taxed, then                                                               
20 filings  would have to be  made and those 20  different people                                                               
might have  to hire 20  different accountants.   When the  tax is                                                               
placed on  the business, then  the business will  apportion taxes                                                               
based on a  person's shares for what the person's  net income was                                                               
and what the taxable portion attributed  to that was.  Then, each                                                               
person can figure out his or her federal taxes.                                                                                 
4:39:37 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  said it  appears to  be in  the Gardner                                                               
memo that  Alaska is  one of  only two  states that  fully exempt                                                               
this sort of income.  He inquired whether this is correct.                                                                      
REPRESENTATIVE GARA offered his belief  that that is correct.  He                                                               
further offered his belief that 41  states have an income tax and                                                               
business  owners pay  their share  of  the income  they get  from                                                               
their  law firm,  oil  field  services company,  or  store as  an                                                               
income tax.   Some states have both an income  tax and a business                                                               
tax, he  advised, and most states  that don't have an  income tax                                                               
have  some   sort  of   law  like  SSHB   36  that   taxes  non-C                                                               
corporations;  they may  just tax  S corporations  and LLCs.   He                                                               
reiterated his  earlier statement that he  doesn't understand why                                                               
a state would tax the same business  as an LLC but let them avoid                                                               
taxation if they formed under some  other form.  He added that he                                                               
thinks some states go beyond LLCs.                                                                                              
4:40:44 PM                                                                                                                    
REPRESENTATIVE BIRCH  expressed his  concern that the  bill would                                                               
[create double taxation]  and that, in the absence  of imposing a                                                               
statewide  personal  income  tax,  an entry-level  tax  on  pass-                                                               
through businesses  would in fact  double up.   He said  the bill                                                               
needs  a  lot  more  work  because he  is  very  concerned  about                                                               
cranking up  the taxes when  [the legislature] is not  making the                                                               
budget reduction that needs to be done.                                                                                         
REPRESENTATIVE GARA  answered that  much care  and work  has been                                                               
taken to ensure there will be no  double tax under the bill.  "If                                                               
an  income tax  were to  be adopted,"  he explained,  "the income                                                               
that you pay under this tax would  not be subject ? to the income                                                               
tax."  He pointed out that  this provision is on page 2, starting                                                               
on line 5.  He added that  SSHB 36 also avoids the other possible                                                               
double taxation issue of an  entity that owns another entity that                                                               
would  be taxed  under this  bill.   He said  he understands  the                                                               
concern  of  whether  members believe  people  should  be  paying                                                               
taxes, but that there is no double taxation under SSHB 36.                                                                      
4:42:29 PM                                                                                                                    
CHAIR KITO turned to invited testimony.                                                                                         
4:42:56 PM                                                                                                                    
JOHN  LETOURNEAU, Certified  Public  Accountant,  Thomas, Head  &                                                               
Greisen, PC, stated he doesn't  have prepared testimony, but, per                                                               
the sponsor's  invitation, he is  before the committee  to answer                                                               
questions on  SSHB 36 as a  person who is a  practicing certified                                                               
public  accountant (CPA)  and involved  in  preparing income  tax                                                               
returns  for  C  corporations,  S corporations,  LLCs,  and  sole                                                               
4:43:32 PM                                                                                                                    
REPRESENTATIVE BIRCH  posed a  scenario of  a group  of attorneys                                                               
that have  an S  corporation.   He asked  whether the  tax return                                                               
would roll down to where  it would be individually accountable to                                                               
each partner.                                                                                                                   
MR. LETOURNEAU  replied yes.  He  posed a scenario of  a group of                                                               
attorneys that  choose to form  a corporation and do  business as                                                               
an Alaska for-profit corporation that elects  to be taxed as an S                                                               
corporation.  The attorneys as  shareholders would be allocated a                                                               
share of  the taxable income of  the S corporation, he  said, and                                                               
they would  report that on their  federal income tax return.   If                                                               
the attorneys  were residents  of the  state of  California, they                                                               
would also pay tax  on their share of the income  to the State of                                                               
California.   If the attorneys  were residents of Alaska  and all                                                               
the  operations of  the law  firm were  in the  state of  Alaska,                                                               
there would be no income tax on the profits of the law firm.                                                                    
4:44:50 PM                                                                                                                    
REPRESENTATIVE KNOPP surmised that the  focus is really on taxing                                                               
S corporations.   He asked  whether the  multi-national companies                                                               
operating in  Alaska, such  as Tesoro,  Walmart, or  Fred Meyer's                                                               
would be C  corporations subject to taxation  under the structure                                                               
currently in place.                                                                                                             
MR.  LETOURNEAU responded  yes and  offered his  belief that  the                                                               
most  common form  of business  organization for  a large  multi-                                                               
national entity  is to be taxed  in the U.S. as  a C corporation.                                                               
However, he pointed out, certain  transportation companies in the                                                               
oil and  gas industry    public  pipelines    have elected  to be                                                               
organized as limited liability companies  (LLCs).  They would not                                                               
be taxed under  the C corporation rules for income  tax, but they                                                               
might be taxed under the special oil and gas rules.                                                                             
REPRESENTATIVE KNOPP posed  a scenario of an oil  and gas company                                                               
doing business in Alaska as an  S corporation that the state does                                                               
not tax.   He inquired whether  an S corporation or  an LLC might                                                               
consider changing to a C corporation should SSHB 36 pass.                                                                       
MR. LETOURNEAU answered  that it is possible  for an organization                                                               
to make different tax elections.   However, in his experience, an                                                               
organization that would consider that  would be driven largely by                                                               
the federal  tax implications  first and  foremost and  then they                                                               
would consider the state tax  implications.  So, he continued, it                                                               
would  be unusual  for an  entity  that had  elected to  be an  S                                                               
corporation for  federal income tax  purposes to elect  to change                                                               
to a C  corporation simply as a result of  this proposed statute.                                                               
But, he added, any analysis would be very company specific.                                                                     
4:47:40 PM                                                                                                                    
REPRESENTATIVE WOOL recalled [slide  6] says 9,000 C corporations                                                               
[do pay tax] and [slide 4]  says 9,000 S Corporations [do not pay                                                               
tax].  He  asked whether those numbers are  a typographical error                                                               
or a coincidence.                                                                                                               
LAURA  CHARTIER, Staff,  Representative  Les  Gara, Alaska  State                                                               
Legislature, confirmed the numbers are  correct.  She pointed out                                                               
that the fiscal note repeats those  same data points.  Out of the                                                               
18,000 corporations, roughly half  are C corporations and roughly                                                               
half are S corporations, which is the federal designation.                                                                      
REPRESENTATIVE WOOL remarked  that it is a  funny coincidence and                                                               
seems like  a lot of  corporations for a  state with less  than a                                                               
million people.  He recalled that  Alaska had an income tax prior                                                               
to  1980  and inquired  whether  it  is  correct that  all  these                                                               
entities would have  paid state tax through their  income tax and                                                               
so this corporate tax was not necessary.                                                                                        
REPRESENTATIVE  GARA replied  that  this  exemption didn't  exist                                                               
before 1980 because all the  non-C corporations distributed their                                                               
profits  to their  owners and  then  their owners  would pay  the                                                               
income tax on  that share of their profits.   When the income tax                                                               
was eliminated in 1980, he continued,  the state did not impose a                                                               
business tax and so that left  C corporations taxed and all other                                                               
business and corporate  forms untaxed other than  the $50 license                                                               
fee.  He  asked Mr. Letourneau whether this is  something that an                                                               
accountant could  do for a  business if SSHB  36 were to  pass as                                                               
currently written.                                                                                                              
MR. LETOURNEAU offered his belief  that, yes, an accountant could                                                               
file the tax return  based on this bill.  Based on  how it is set                                                               
forth  in  the  bill,  he  said  he  would  anticipate  that  the                                                               
Department of  Revenue (DOR) would  issue regulations  and forms,                                                               
which he doesn't  think would be tremendously  different than the                                                               
forms and regulations  governing C corporations.   He stated that                                                               
accountants already  deal with taxation of  C corporations, LLCs,                                                               
S  corporations,  and  sole  proprietorships,  and  therefore  he                                                               
doesn't think this  is something an accountant would  have a hard                                                               
time helping clients and taxpayers comply with.                                                                                 
4:50:54 PM                                                                                                                    
REPRESENTATIVE  GARA said  his concern  is that  a C  corporation                                                               
might say the  tax is lower under this new  bill and might decide                                                               
to become an  S corporation but recalled that  Mr. Letourneau had                                                               
responded that that would be  difficult.  He asked Mr. Letourneau                                                               
to address C corporations becoming S corporations.                                                                              
MR. LETOURNEAU  answered that the  Alaska state  corporate income                                                               
tax is adopted  by reference to the Internal  Revenue Code (IRC).                                                               
There is a provision that if  a C corporation elects to become an                                                               
S corporation  it is considered  a prospective election  with the                                                               
possibility that the  C corporation could pay a toll  charge.  It                                                               
is  referred  to  as  a  toll charge  in  the  applicable  Alaska                                                               
statute.  It's called a built-in  gains tax, he continued, and is                                                               
a  tax that  Congress has  chosen to  levy when  a C  corporation                                                               
chooses to change  its form of organization.   This would present                                                               
a substantial issue for any  C corporation thinking that it could                                                               
change  to an  S  corporation.   He further  pointed  out that  S                                                               
corporations  are much  more restricted  than  C corporations  in                                                               
terms of their allowable shareholders,  so not all C corporations                                                               
would have the opportunity to convert to S corporations.                                                                        
4:53:14 PM                                                                                                                    
MATTHEW  GARDNER,  Senior  Fellow,   Institute  on  Taxation  and                                                               
Economic Policy, provided invited testimony  on SSHB 36.  He said                                                               
that most  states currently tax the  income of both of  the broad                                                               
types of  businesses that  have been  discussed    C corporations                                                               
through the  corporate income  tax and  pass-through corporations                                                               
through   the  personal   income   tax.     Nine  states   depart                                                               
meaningfully from this,  he continued, and within  that there are                                                               
two states  that exempt all  the income of  pass-through entities                                                               
while  fully taxing  the income  of  C corporations.   Those  two                                                               
states are Alaska and Florida.                                                                                                  
MR. GARDNER  explained that in the  42 states with both  types of                                                               
taxes, the  main concern of  policymakers about  the relationship                                                               
between  these two  types of  business taxes  is whether  the tax                                                               
system  is  prompting businesses  to  make  their entity  choices                                                               
based  on the  tax rules.   If  there is  a big  gap between  the                                                               
personal corporate income  tax rate and the  corporate income tax                                                               
rate,  are companies,  going to  change their  entity form  based                                                               
only on  tax reasons?   In most states  and at the  federal level                                                               
this isn't really  a concern, he said.  Where  this concern crops                                                               
up most is  in exactly the situation that Alaska  finds itself in                                                               
now and has found itself in for  the last 30 years, which is that                                                               
Alaska has  a corporate tax rate  that tops out around  9 percent                                                               
and a pass-through business tax rate of 0 percent.                                                                              
MR.  GARDNER  recounted  that  15  years  ago  a  deputy  revenue                                                               
commissioner argued  that in a place  with no state income  tax a                                                               
person would be  an idiot to start  up a C corporation.   He said                                                               
he thinks  that is overstating  things because there  are non-tax                                                               
reasons, regulatory reasons in  particular, why businesses choose                                                               
the entity  that they choose.   The federal tax system  is a much                                                               
bigger driver to the extent tax rates matter at all.                                                                            
MR.  GARDNER noted,  however, that  other things  equal there  is                                                               
still  a clear  incentive in  place  in Alaska  for companies  to                                                               
shift  toward the  pass-through  form.   He  said  SSHB 36  would                                                               
reduce that incentive by narrowing  the gap between the 0 percent                                                               
rate  that currently  exists on  pass-through businesses  and the                                                               
9.4  percent  top  marginal  rate  that  currently  exists  on  C                                                               
corporations.   The  proposed bill  wouldn't  end that  incentive                                                               
because the  rates aren't exactly  equal between the two,  but it                                                               
would sharply  reduce that  incentive.  The  main benefit  of the                                                               
proposal, he continued, is that it  would get the state of Alaska                                                               
closer to the  principle of tax neutrality  where individuals and                                                               
businesses make their investment  decisions based on the economic                                                               
merits  of  those  choices rather  than  making  those  decisions                                                               
purely  or even  primarily for  tax  reasons, which  is the  main                                                               
point that he wanted to add to the discussion.                                                                                  
4:57:11 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON inquired whether  a corporation, such as                                                               
Coca  Cola, that  is nationally  a C  corporation could  pursue a                                                               
different structure within Alaska.                                                                                              
MR.  GARDNER replied  that such  a  corporation could  not.   The                                                               
choice of entity  for a multi-national company like  Coca Cola is                                                               
a monolithic  choice and  it is  going to  be made  primarily for                                                               
reasons  having to  do with  the federal  tax laws  and with  the                                                               
other regulatory framework within which these companies operate.                                                                
4:58:04 PM                                                                                                                    
CHAIR  KITO stated  that public  testimony  on SSHB  36 would  be                                                               
taken on  [April 3,  2017].   He noted that  the public  can also                                                               
provide written  comments via  email, letter,  or other  means to                                                               
his office and those would be included in the committee packet.                                                                 

Document Name Date/Time Subjects
HB124 Fiscal Note DCCED-CBPL 3.24.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 124
HB124 Sponsor Statement 3.22.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 124
HB036 Fiscal Note DOR-TAX 3.24.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Sponsor Statement version I 2.28.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Sectional Analysis version I 2.28.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Brief Explanation of Changes ver J to ver I 2.28.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Supporting Documents-Alaska Journal of Commerce Article 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Supporting Documents-Current Oil Tax Apportionment 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Supporting Documents-Legislative Research Report 04.131 Corp Taxation in AK 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Supporting Documents-Side by Side Comparison Current Corporate Tax and HB 36 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Supporting Documents-Taxes in Other States 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 version E 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Brief explanation of changes version I to version E 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Sectional Analysis version E 3.31.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Sponsor Statement version E 3.29.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 36
HB036 Presentation-Sponsor 4.1.17.pptx HL&C 4/1/2017 1:00:00 PM
HB 36
HB124 Sectional Analysis 4.4.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 124
HB103 Supporting Documents-Letters of Opposition 4.1.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 103
HB103 Supporting Documents-Letters of Support 4.1.17.pdf HL&C 4/1/2017 1:00:00 PM
HB 103