Legislature(2017 - 2018)BARNES 124

04/03/2017 03:15 PM LABOR & COMMERCE

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03:21:53 PM Start
03:22:49 PM Confirmation Hearing(s)
03:42:55 PM HB126
03:47:22 PM HB36
04:38:44 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Confirmation Hearings: TELECONFERENCED
Alcoholic Beverage Control Board
<Bill Hearing Canceled>
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
-- Public Testimony --
Moved CSHB 126(MLV) Out of Committee
-- Public Testimony --
           HB 36-TAX: INCOME FROM NON C CORP ENTITIES                                                                       
3:47:22 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                                                               
date."       [Before  the committee  was  the proposed  committee                                                               
substitute  (CS)  for  SSHB   36,  Version  30-LS0148\E,  Nauman,                                                               
3/29/17,  ("Version  E"),  which   was  adopted  as  the  working                                                               
document on 4/1/17.]                                                                                                            
CHAIR KITO opened public testimony on SSHB 36.                                                                                  
3:47:48 PM                                                                                                                    
HEIDI  HEINRICH, General  Manager,  Lucky  Wish Bone  Restaurant,                                                               
testified in opposition  to SSHB 36.  She said  she has been with                                                               
the Lucky  Wish Bone Restaurant for  38 years, most of  that time                                                               
as the  general manager, and  she also  owns a small  coffee shop                                                               
that  is  an active  member  of  the  community.   She  said  the                                                               
economic  atmosphere that  the Lucky  Wish  Bone is  experiencing                                                               
this year  makes her  fear SSHB  36 even more.   The  business is                                                               
seeing a  reduction in sales  of 10-20 percent from  the previous                                                               
year, she  advised, and  in speaking  with other  business owners                                                               
and vendors, it is apparent  that it is an industry-wide problem.                                                               
Alaska is facing a recession.                                                                                                   
MS.  HEINRICH stated  that while  titled "The  Fair Contributions                                                               
for High  Profit Business Act",  the bill  begins with a  list of                                                               
$25,000 as  the first profit margin.   A year-end profit  of this                                                               
amount is  hardly a  high profit operation,  she said.   Breaking                                                               
those numbers down  month to month would mean a  profit of $2,083                                                               
a month.  As a businessperson  she can say that overseeing a crew                                                               
and  maintaining overhead,  plus  all the  other daily  stresses,                                                               
would certainly  not be  worth it  at the  end of  the day.   The                                                               
formula used for  SSHB 36 is not accounting for  total sales, she                                                               
continued, and  more it is  not accounting for  (indisc.) profit.                                                               
Despite Representative Gara's  assurances, at the end  of the day                                                               
SSHB 36 is suggesting a legal form of double taxation.                                                                          
MS.  HEINRICH stated  that a  business like  the Lucky  Wish Bone                                                               
Restaurant  would not,  at the  end of  the day,  be able  to see                                                               
income as profit to owners.  As  a business with a small group of                                                               
people, the restaurant pays its  employees over minimum wage, has                                                               
health  benefits available,  and  shares with  its employees  the                                                               
profit that  there is  at the end  of the year.   This  last, she                                                               
noted, is the only one that  is not already mandated in some form                                                               
by the government.                                                                                                              
MS.  HEINRICH pointed  out the  probability of  the minimum  wage                                                               
being raised to  possibly $15 an hour this year,  and the cost of                                                               
worker's  compensation going  up.   At some  point, she  said, it                                                               
becomes too  expensive to continue  to maintain a  small business                                                               
and breaking  points will come.   She offered her belief  that by                                                               
this time next year, many  businesses currently in operation will                                                               
have closed their  doors, unable to make the long  hours and hard                                                               
work pay the  bills.  And, she continued, this  is without adding                                                               
another hit to the bottom line with SSHB 36.                                                                                    
MS.  HEINRICH maintained  that fixing  the mess  state government                                                               
has gotten Alaskans  into should not be on the  backs of just the                                                               
business  owners.   She suggested  that a  sales tax  could be  a                                                               
driving force to a better economy  and would collect tax from all                                                               
Alaskans and visitors  alike.  She has  heard Representative Gara                                                               
and others worry  about a sales tax  hurting low-income families,                                                               
but  there is  the blow  that they  will take  if the  businesses                                                               
across  the state  that employ  them  begin to  close.   Business                                                               
owners are hardworking people, she  continued, often working many                                                               
longer and  harder hours than  the people they employ.   Business                                                               
owners  offer and  provide employment  for their  fellow Alaskans                                                               
and contribute to the economy.   Without business owners Alaska's                                                               
economy would  be in even  worse shape.   There are more  ways to                                                               
deal  with Alaska's  government deficit  than just  SSHB 36,  she                                                               
3:51:42 PM                                                                                                                    
REPRESENTATIVE  WOOL understood  Ms.  Heinrich  as having  stated                                                               
that the [proposed] minimum profit would be $25,000.                                                                            
MS. HEINRICH replied that the bill  begins with a list of how the                                                               
profits would be  broken down and $25,000 is  considered as being                                                               
a high  profit business.  She  stated that $25,000 at  the end of                                                               
the year is not a high-profit business.                                                                                         
CHAIR KITO pointed  out that the aforementioned table  is for oil                                                               
and gas  taxes that are separate  from what would be  a corporate                                                               
tax.   He explained  that corporate  tax begins  in Section  4 on                                                               
page 3 [of Version E] and would  begin at $250,000 subject to a 5                                                               
percent tax.                                                                                                                    
REPRESENTATIVE WOOL  confirmed that for  a small non-oil  and gas                                                               
business it would be $250,000, not $25,000.                                                                                     
MS. HEINRICH responded that a  business would still be looking at                                                               
paying  almost a  second  percentage because  the  bill looks  at                                                               
paying 9.4 percent.  She calculated  that a couple owning a small                                                               
business  would  pay almost  $19,000  more  under this  than  two                                                               
people would pay separately.                                                                                                    
3:53:43 PM                                                                                                                    
SILVIA   VILLAMIDEN,  Executive   Director,  Alaska   Hospitality                                                               
Retailers, testified  in opposition to  SSHB 36 as written.   She                                                               
said  she opposes  the  bill for  many  reasons, including  those                                                               
stated by  Ms. Heinrich.  She  opined that the bill,  as written,                                                               
will hurt  communities as far as  jobs and the economy,  and will                                                               
hurt small  business owners with  yet another expense.   She said                                                               
her  association has  over 350  individual  units of  membership,                                                               
which  represent over  6,000 employees  in the  state.   Alaska's                                                               
economy is  hurting and ultimately  consumers will begin  to feel                                                               
the impact  of the higher cost  of goods.  Alaskans  and tourists                                                               
alike will have few places to dine or shop.                                                                                     
MS. VILLAMIDEN  predicted that  Alaska's high  unemployment would                                                               
only get worse.  Businesses  are already struggling to keep their                                                               
doors open,  she related,  and adding more  taxes will  become an                                                               
economic disaster.   Businesses  will have to  cut down  labor by                                                               
laying people off  and/or by cutting hours, she  said, which will                                                               
not help Alaska's workforce.                                                                                                    
MS. VILLAMIDEN  pointed out  that merchants  have the  expense of                                                               
freight, a cost that many people  forget about.  She advised that                                                               
freight can  run a  business's expenses very  high and  that some                                                               
businesses in  Anchorage have already  closed because  they could                                                               
no  longer afford  to pay  the  freight cost  for bringing  their                                                               
merchandise to  Alaska.   She further  pointed out  that worker's                                                               
compensation  insurance,  general  and liability  insurance,  and                                                               
health insurance  are also  extremely high and  make it  hard for                                                               
any business to stay open.  The  proposed tax of 5 to 9.4 percent                                                               
is another increase that could hurt a lot, she said.                                                                            
MS. VILLAMIDEN  urged committee members  to take time,  listen to                                                               
the business owners in their  own communities, and do homework to                                                               
learn more before considering any  more taxes and before any more                                                               
businesses are driven out of Alaska.                                                                                            
3:57:12 PM                                                                                                                    
CAROLINA STACEY, Owner, Kindred  Spirits, testified in opposition                                                               
to SSHB 36.  She said  she and her husband own several businesses                                                               
and are  active members  in their community.   She  expressed her                                                               
hope for having  a good future in Alaska for  herself and her two                                                               
children.   She  stated  she  is wary  about  SSHB  36 and  noted                                                               
Alaska's  current  economic  atmosphere  is  not  optimal.    Her                                                               
businesses are seeing a big reduction  in sales, up to 20 percent                                                               
from last  year, she related.   Her vendors and  other businesses                                                               
have  also been  concerned because  they too  are seeing  reduced                                                               
sales.  Alaska is experiencing an economic downturn, she said.                                                                  
MS. STACEY said  SSHB 36 would affect every  business making over                                                               
$200,000 in  profits per year and  has major flaws.   Called "The                                                               
Fair Contributions for High Profit  Business Act", the bill would                                                               
automatically consider  any business  with profits  over $200,000                                                               
to  be a  highly profitable  business, regardless  of its  annual                                                               
sales.    The  bill  groups all  businesses  together  under  one                                                               
criterion regardless  of size, number of  employees, or industry,                                                               
she continued.   The bill is aiming to tax  only individuals that                                                               
are  business owners  instead of  taxing all  citizens, basically                                                               
creating a legal  form of double taxation.   All individuals need                                                               
to  be  invested  in  their communities,  she  stated,  not  just                                                               
business owners.                                                                                                                
MS. STACEY said  she listened to the  presentation that explained                                                               
the bill.   The presentation  used businesses making  $10 million                                                               
as examples and said that  businesses needed to contribute to the                                                               
community and the  state.  However, she pointed  out, the reality                                                               
is that all businesses are  being grouped as highly profitable if                                                               
they earn  $200,000, whether they  are lawyers, doctors,  a small                                                               
coffee shop,  or a grocery store.   Small businesses are  not the                                                               
same as  large ones, she said.   Comparing a mom-and-pop  shop to                                                               
big corporations like Coca-Cola and Wal-Mart is unfair.                                                                         
MS.  STACEY  explained  how  SSHB   36  would  affect  her  small                                                               
business.  As a hands-on owner,  she said, her hours are 24 hours                                                               
a  day, 7  days a  week ("24/7").   When  somebody calls  in, she                                                               
covers shifts  even if she already  worked hers.  Plus,  she must                                                               
do ordering  and shopping and  must keep her business  running no                                                               
matter what.   She  must manage her  personnel and  do scheduling                                                               
and hiring.   If something breaks, she must fix  it no matter how                                                               
inconvenient or costly.  These  are the responsibilities of being                                                               
an owner, she continued, but they  are also the joys of being her                                                               
own boss.                                                                                                                       
MS. STACEY  said she  pays most  of her  employees more  than she                                                               
pays herself.  Her employees  receive a guaranteed paycheck, they                                                               
get paid before  she does, and they get paid  more than she does.                                                               
This is because her income  is tied to her business profitability                                                               
regardless  of   how  many  hours   she  works,   she  explained.                                                               
Sometimes she must work 60-80  hours to accomplish everything and                                                               
keep her business running, but her  employees do not, they get to                                                               
go home.   Grouping her  small business with businesses  that are                                                               
earning $10 million in profits is  unfair and cannot be done, she                                                               
argued.  At  the end of the  day when her shop has  profits it is                                                               
the sum  of her  family's hard  labor to  make their  business as                                                               
profitable  as  possible.   She  said  SSHB  36 is  asking  small                                                               
business owners to pay themselves less at the end of the year.                                                                  
4:01:36 PM                                                                                                                    
MS.  STACY added  that  SSHB 36  is suggesting  a  legal form  of                                                               
double  taxation.   She stated  that small  businesses like  hers                                                               
will end up  paying taxes on their profits and  then the business                                                               
owners will  also have to pay  taxes again on that  income as the                                                               
profits flow to  owners.  The income transfer  from businesses to                                                               
owners is not exempt from taxes  again, she pointed out.  Page 3,                                                               
line 23,  [of Version E]  clearly says that business  owners will                                                               
be able to deduct paid taxes  from their personal income tax, and                                                               
not  apply payment  to their  tax bill.   "In  other words,"  she                                                               
continued, "we  will be taxed  at a  higher bracket based  on the                                                               
fact  that we  choose to  work for  ourselves versus  working for                                                               
someone else."                                                                                                                  
MS. STACEY  asked why  only business owners  are being  taxed and                                                               
not every citizen.   Businesses are being singled  out, she said,                                                               
rather than  asking everybody to  invest in their  communities. A                                                               
sales tax  would make everyone take  a bite of the  pie, not just                                                               
business owners.  Business owners  are hardworking people who are                                                               
offering  and providing  employment  to communities  and are  the                                                               
driving  force that  promotes a  healthy economic  environment in                                                               
Alaska, she continued.   A friendly environment  must be provided                                                               
if businesses  are to  grow and  flourish in  Alaska.   She urged                                                               
committee   members  to   realize  that   all  the   governmental                                                               
regulations  coming out  are creating  a hostile  environment for                                                               
doing business.   She further urged members to  take her concerns                                                               
to heart  and re-evaluate SSHB  36 because  it will not  work for                                                               
people like her.                                                                                                                
4:03:30 PM                                                                                                                    
REPRESENTATIVE BIRCH stated  he shares Ms. Stacy's  concerns.  He                                                               
said  [Version  E]  has  two  components  as  he  interprets  it.                                                               
Section 2  applies to  persons engaged in  oil or  gas production                                                               
and that tax  would top out at 9.4 percent  [on taxable income of                                                               
$222,000 or  more].  [Section  4] applies to business  income and                                                               
would have  a zero  percent tax  rate on  taxable income  of less                                                               
than $200,000 and a  top rate of 9.4 percent on  net income of $1                                                               
million  or more.    He offered  his  understanding that  taxable                                                               
income is the gross less all  expenses.  He inquired whether this                                                               
is Ms. Stacy's interpretation of the bill as well.                                                                              
MS. STACY replied  yes.  She related that  [a neighboring couple]                                                               
works jobs  and does not work  nearly as many hours  as she does.                                                               
If  these  neighbors make  $220,000  in  salaries, their  taxable                                                               
amount is  going to be less  than hers because she  is a business                                                               
owner.   If she  and her  husband make  more than  $220,000, they                                                               
will be taxed  first on their business and then  on their income,                                                               
which  is not  fair.   Her  neighbors use  the  roads and  school                                                               
district just  as she and  her husband  do, she pointed  out, but                                                               
because  she chooses  to run  a  business and  employ people  and                                                               
provide a service  to her community, she is going  to have to pay                                                               
more than will her neighbors.                                                                                                   
4:05:45 PM                                                                                                                    
LORI BREWER, Owner, Caff? D'arte  Alaska, testified in opposition                                                               
to  SSHB 36.   She  stated that  she and  her husband  have owned                                                               
their business for over 25  years and currently employ 56 people.                                                               
Like most  small business owners,  she noted, they have  had many                                                               
months where they work 10-12 hours a  day, 6-7 days a week.  They                                                               
are on call 24 hours a day, 365  days a year.  They started their                                                               
business in  a small  shack in  the Mountain  View area  in 1992.                                                               
Owning a  small business  gives opportunity  for people  who work                                                               
hard  to  accomplish  big  goals  with  little  money  or  little                                                               
education, and  over time they  can accomplish  a lot.   She said                                                               
her  company has  helped to  open hundreds  of businesses  in the                                                               
community and  works side-by-side  with small business  owners as                                                               
they start from  scratch.  Her company  employs students, parents                                                               
returning to the  job force, and second-chance  employees who are                                                               
transitioning from  incarceration to become  contributing members                                                               
of society.                                                                                                                     
MS. BREWER  said her  biggest opposition  to SSHB  36 is  that it                                                               
would double  tax small  business owners.   The  way the  bill is                                                               
written, if she and her  husband were partners and together, they                                                               
make  $222,000 they  would pay  a business  income tax  of almost                                                               
$21,000.  After  that is deducted, she and her  husband would pay                                                               
an additional  $19,000 on over  $200,000.   It would be  a double                                                               
tax, she  stated, because  it is a  deduction from  their income,                                                               
not  applied  to  their  taxes.    She  further  noted  that  her                                                               
neighbors aren't being taxed like that.                                                                                         
MS.  BREWER  recalled  that  in  previous  testimony,  her  small                                                               
business was  compared to Coca-Cola,  not to just  regular people                                                               
working in Alaska.   She further recalled it being  said that her                                                               
small business is  a drain on the economy.   She pointed out that                                                               
her company  employs many people  and pays more in  payroll taxes                                                               
than she and  her husband pay themselves in income.   She and her                                                               
husband pay  property taxes,  pay for permits,  and pay  taxes on                                                               
everything they  purchase.  She  and her husband support  and are                                                               
involved  in their  community, she  continued, and  give to  many                                                               
non-profits,  such as  the downtown  soup kitchen,  the March  of                                                               
Dimes, and  the Fur Rendezvous,  to name a  few in just  the last                                                               
couple of months.                                                                                                               
MS.  BREWER added  that the  $222,000  is quite  often the  total                                                               
income of a partnership of three  or four people in the business.                                                               
She  emphasized that  the economy  is tough  right now  and sales                                                               
have decreased in retail and the  food industry.  In the last few                                                               
weeks, she related,  three coffee shops have come  to her wanting                                                               
to put their  shops up for sale, and one  has actually closed its                                                               
doors.   As a wholesaler she  sees 20-40 coffee shop  owners each                                                               
week and  many are  very nervous  about what is  going on  in the                                                               
economy and are talking about putting up their houses for sale.                                                                 
MS. BREWER said SSHB 36 would  take away the motivation for being                                                               
a  small  business  [owner]  in  Alaska.    She  urged  that  the                                                               
legislature  help  businesses  build  a  climate  of  growth  and                                                               
reinvestment in the state, rather than plans for downsizing.                                                                    
4:10:17 PM                                                                                                                    
MATTHEW  GARDNER,  Senior  Fellow,   Institute  on  Taxation  and                                                               
Economic Policy,  reiterated some  of the points  he made  in his                                                               
invited testimony on SSHB 36 on  4/1/17.  Fairness is certainly a                                                               
concern here, he said.   From a multi-state perspective, the main                                                               
inequity  seen  in  looking  at  Alaska's  current  treatment  of                                                               
business income is that Alaska  has a corporate tax with marginal                                                               
rates up to  9.4 percent on traditional C corporations  and a tax                                                               
rate of  zero on businesses  that choose to incorporate  in other                                                               
ways.   The main concern, he  continued, is that that  can create                                                               
harmful incentives for  businesses to shift their  form of entity                                                               
away from C corporations and toward these alternative forms.                                                                    
MR. GARDNER  recalled that several witnesses  asked the question,                                                               
 Why tax business  income on the person's side and  not tax other                                                               
forms  of personal  income?    He noted  that 42  states and  the                                                               
District  of  Columbia  currently  levy  a  broad-based  personal                                                               
income tax  on all forms of  income and advised that  it is worth                                                               
considering whether that  might be a more equitable  way of going                                                               
forward.   From  a business  tax perspective,  he added,  SSHB 36                                                               
takes  an  important  step  towards   remedying  a  pretty  clear                                                               
inequity  in how  different types  of businesses  are created  in                                                               
4:12:03 PM                                                                                                                    
REPRESENTATIVE WOOL  addressed Mr. Gardner's statement  that if a                                                               
company was  a C corporation it  may want to re-define  itself as                                                               
another kind  of corporation to avoid  the taxes.  But,  he said,                                                               
that is the current situation and  has been going on for a while,                                                               
so someone would have done it already.                                                                                          
MR. GARDNER  replied yes, there  is some anecdotal  evidence that                                                               
that's been going on for a while.   He recalled that 20 years ago                                                               
a  former  Department of  Revenue  deputy  commissioner said,  in                                                               
effect, that a new business would be  nuts not to form as a pass-                                                               
through.  Equalizing  the tax treatment or taking  a step towards                                                               
equalizing the  tax treatment of C  corporations and pass-through                                                               
businesses could  take away  that incentive and  make it  so that                                                               
choice   of   entity   would  be   based   on   purely   economic                                                               
considerations    what  the market  tells people  to do  - rather                                                               
than what the  tax system tells people to do.   So, he continued,                                                               
SSHB  36  is  about  trying  to level  the  playing  field  going                                                               
forward.   He agreed  with Representative  Wool that  the choices                                                               
companies  have made  so far  have  probably in  some cases  been                                                               
contingent on  this tax differential  for decades.   The sensible                                                               
role,  he advised,  is to  try to  mitigate that  to reduce,  not                                                               
eliminate, that gap going forward.                                                                                              
4:13:34 PM                                                                                                                    
REPRESENTATIVE WOOL asked what Mr. Gardner would say to the mom-                                                                
and-pop  businesses  who  just testified  that  they  are  simply                                                               
regular  people doing  their  jobs  who happen  to  have a  small                                                               
business that  is categorized  as, say,  an S  corporation, while                                                               
their neighbors  who are  employees of a  company and  making the                                                               
same amount  of money would  not have to  pay the extra  tax that                                                               
the  people who  are  small  business owners  would  have to  pay                                                               
[under SSHB  36].   These small businesses  are not  Coca-Cola or                                                               
Exxon, he continued,  and they are asking why they  would have to                                                               
pay this tax while other people would not.                                                                                      
MR. GARDNER  responded that  that is  an excellent  question from                                                               
the testifiers.   He said the  first point he would  make is that                                                               
the net  income threshold of $250,000  for paying any tax  at all                                                               
for non-oil  and gas businesses would  go a long way  to making a                                                               
clear  distinction between  the  Coca-Colas  and the  mom-and-pop                                                               
businesses.   The $250,000 of  net income, which is  income after                                                               
all expenses, is  the point at which tax would  start to be paid.                                                               
A net income of $300,000, for  example, would pay a tax of $2,500                                                               
for an effective tax  rate on that net income of  0.8 percent.  A                                                               
net income of $500,000  would pay a tax rate of  2.5 percent.  He                                                               
said  that makes  a  clear distinction,  and  from a  multi-state                                                               
perspective  a   bigger  distinction,  between   more  profitable                                                               
businesses and  less profitable businesses than  exists in almost                                                               
any other state  with income taxes.  Most states  apply tax rates                                                               
at a much lower level than  $250,000.  So, he continued, there is                                                               
an effort,  more so than  in most  states, to try  to distinguish                                                               
between Exxon and Coca-Cola and the truly small business.                                                                       
MR.  GARDNER said  the second  point he  would make  is that  the                                                               
testifiers  are correct  that there  is an  inequity when  taxing                                                               
some forms of personal income but  not others.  The most sensible                                                               
long-term approach to  taxing personal income, he  advised, is to                                                               
tax all  types of  income the  same way.   Alaska had  a personal                                                               
income tax and repealed it 30  years ago.  The more comprehensive                                                               
and  sensible approach  in  the  long run  would  be  to apply  a                                                               
universal  tax  on  personal  income.    In  the  short  run,  he                                                               
continued,  there  is  an inequity  between  different  types  of                                                               
business incomes,  and [SSHB 36]  would try to level  the playing                                                               
field a  bit between  those different  business forms.   It  is a                                                               
good  first step  towards a  more across-the-board  level playing                                                               
field for income taxation.                                                                                                      
4:16:52 PM                                                                                                                    
REPRESENTATIVE  KNOPP, in  regard to  making it  a level  playing                                                               
field, observed  that Section 2 provides  graduated tax brackets.                                                               
He questioned how  that is equitable in that it  seems the harder                                                               
someone works,  the more the  person makes,  and so the  more the                                                               
person pays.   He asked why  the scale is graduated  in Section 2                                                               
rather than being a flat 5 or 10 percent.                                                                                       
REPRESENTATIVE  LES GARA,  Alaska State  Legislature, sponsor  of                                                               
SSHB 36, answered that it was a  policy choice.  A flat 5 percent                                                               
tax  could have  been chosen,  he said,  but that  would probably                                                               
have been  higher for  most businesses than  what is  proposed in                                                               
the bill,  which is  that the  first $200,000  of any  profits is                                                               
exempt  from any  tax  whatsoever.   It is  a  [policy] call  for                                                               
legislators  as  to  whether  that  is  the  right  amount.    He                                                               
explained the bill tries to  recognize that the lower the profit,                                                               
the  less tax  should be  paid.   Alaska's current  corporate tax                                                               
rate of  9.4 percent  kicks in  at $222,000.   The bill  does not                                                               
reach 9.4 percent  until $1 million [in profit].   The bill tries                                                               
to make the  tax much fairer to smaller businesses  by not having                                                               
any tax  for profit below  $200,000 and  it provides for  a lower                                                               
tax than the current corporate  tax.  Those are legitimate policy                                                               
calls for members of the legislature, he reiterated.                                                                            
4:19:02 PM                                                                                                                    
CHAIR KITO  noted the talk has  been about "net profits"  but the                                                               
bill talks  about "taxable  income."   He inquired  whether these                                                               
two terms are different or the same thing.                                                                                      
MR. GARDNER replied that, in  general from this perspective, "net                                                               
income"  and "taxable  profits" are  basically equivalent  terms.                                                               
They  are just  different ways  of describing  the same  concept,                                                               
which  is that  all the  expenses  incurred during  the year  are                                                               
subtracted from  all the  revenues that  are received  from sales                                                               
and service  during the year.   In  this bill, that  income after                                                               
expenses is called taxable income,  but a net profit is basically                                                               
the same concept.                                                                                                               
4:20:11 PM                                                                                                                    
REPRESENTATIVE WOOL drew  attention to language [on  page 1, line                                                               
12, through page 2, line 2, of Section 2, which read:                                                                           
          (e) There  is imposed  for each  taxable year  upon the                                                               
entire taxable income  of every corporation or  person engaged in                                                           
the production  of oil or  gas from a  lease or property  in this                                                           
state or engaged in the transportation  of oil or gas by pipeline                                                           
in  the  state  derived  from  sources within  the  state  a  tax                                                           
computed as follows:"                                                                                                           
REPRESENTATIVE WOOL further observed [that  the tax rate would be                                                               
zero  percent  for  taxable  income of  less  than  $25,000]  and                                                               
remarked that $25,000 is a low  number.  He inquired whether this                                                               
is  a certain  aspect of  the  oil and  gas industry  that he  is                                                               
unfamiliar with, given that $25,000  profit in the industry seems                                                               
REPRESENTATIVE GARA responded that the  lower tax rate is applied                                                               
to all non-C corporations.  Except,  he pointed out, Alaska has a                                                               
separate and  complex definition  of income for  oil and  gas and                                                               
pipeline  companies.   Under  this  definition, called  worldwide                                                               
accounting,  a  company's  barrels  from  around  the  world  are                                                               
divided  by  the  barrels  from  Alaska,  so  what  oil  and  gas                                                               
companies pay is  not truly Alaska income.  This  schedule is the                                                               
exact same schedule  paid by every oil and gas  company that pays                                                               
a corporate tax, he  said.  It is the exact  one that Exxon pays,                                                               
that BP pays, that every C  corporation that produces oil and gas                                                               
taxes  pays.   Under  the  bill, he  continued,  an  oil and  gas                                                               
company that  files as an  S corporation  would use the  same tax                                                               
schedule as an  oil company that files as a  C corporation   they                                                               
are both doing  the same exact activity.  The  bill uses the same                                                               
definition as is used under the  existing corporate tax, so it is                                                               
profits and profits as defined by the oil and gas corporate tax.                                                                
REPRESENTATIVE WOOL asked why the  sponsor chose to exempt Native                                                               
corporations  that  are not  C  corporations.   He  recalled  the                                                               
sponsor stating that most Native  corporations are C corporations                                                               
and that if they are C corporations the bill would not apply.                                                                   
REPRESENTATIVE GARA  answered that according to  information from                                                               
the Department  of Commerce, Community, and  Economic Development                                                               
(DCCED),  all  Native  and  village  corporations  currently  are                                                               
covered  by  the   C  corporation  tax  due  to   the  number  of                                                               
shareholders they  have.   However, he  explained, in  case there                                                               
are some  that are treated  differently, he didn't want  to enter                                                               
into  the  issue  of  the Alaska  Native  Claims  Settlement  Act                                                               
(ANCSA) and  so wanted  to leave all  ANCSA corporations  the way                                                               
they  currently  are.   If  there  are  any that  aren't  covered                                                               
because  they  don't have  enough  shareholders,  he added,  they                                                               
probably don't have  the income that would have them  pay any tax                                                               
under this bill anyway.                                                                                                         
4:24:13 PM                                                                                                                    
REPRESENTATIVE BIRCH  inquired whether fishermen are  included in                                                               
the bill.                                                                                                                       
REPRESENTATIVE GARA  responded that  SSHB 36  uses the  same rule                                                               
that is  used under  the corporate  tax, so  a fisher  or fishing                                                               
company, such as  a processor, that pays a fishing  tax would get                                                               
to deduct  that from the  corporate tax.   He explained  that any                                                               
company  that paid  the fishing  tax  would get  to deduct  those                                                               
payments  from its  income under  the [proposed]  new tax  if the                                                               
company  is  an S  corporation  or  a limited  liability  company                                                               
(LLC).   So,  they are  treated the  same as  C corporations  - C                                                               
corporations  that pay  a fishing  tax  get to  deduct their  tax                                                               
payment from their income before they pay the corporate tax.                                                                    
REPRESENTATIVE  BIRCH noted  there  are  two sponsor  statements.                                                               
One states  that SSHB 36 would  hit 9,000 S corporations  and the                                                               
other  states 6,000  S  corporations as  well  as other  business                                                               
types.  He asked which number is correct.                                                                                       
REPRESENTATIVE GARA  replied that there are  9,000 S corporations                                                               
that DCCED  knows about  in the  state.   However, it  is unknown                                                               
whether they  would be  touched by this  tax because  $200,000 in                                                               
profit must be made before this  tax would kick in, and a company                                                               
making under  $200,000 would not  pay any  tax.  So,  9,000 would                                                               
not  be hit  by  this tax,  but  the portion  of  them that  make                                                               
profits over $200,000 would be taxed.                                                                                           
REPRESENTATIVE  BIRCH again  noted that  one of  the two  sponsor                                                               
statements says an  estimated 6,000 S corporations  and the other                                                               
says 9,000.                                                                                                                     
LAURA  CHARTIER, Staff,  Representative  Les  Gara, Alaska  State                                                               
Legislature,  answered that  the bigger  number of  9,000 is  the                                                               
correct  number and  reflects better  information.   The  sponsor                                                               
received an updated  number from the Department  of Revenue (DOR)                                                               
and that number is reflected in the updated sponsor statement.                                                                  
REPRESENTATIVE BIRCH  observed the fiscal note  states there will                                                               
be a collection cost of $2.8  million.  He inquired as to whether                                                               
there is an estimate on how  much revenue would be generated from                                                               
the  9,000   S  corporations,   LLCs,  partnerships,   and  other                                                               
profitable businesses under the bill's definition.                                                                              
REPRESENTATIVE  GARA  advised  that  [Ken  Alper,  Director,  Tax                                                               
Division, Department  of Revenue,]  would be  the best  person to                                                               
answer this  question.  He  relayed that Director Alper  told him                                                               
the state  doesn't know what  any of these 9,000  S corporations,                                                               
LLCs, or  40,000 other businesses  earn because none of  them are                                                               
required to file  a tax return.  However,  he continued, Director                                                               
Alper's very  rough estimate  is $50 million.   This  estimate is                                                               
based on  what is known  about what fishing and  mining companies                                                               
make and on what Hilcorp, an oil  and gas producer, makes as an S                                                               
REPRESENTATIVE  BIRCH asked  whether the  administration supports                                                               
this proposal.                                                                                                                  
REPRESENTATIVE GARA  replied he has not  asked the administration                                                               
if  it supports  this  exact  proposal.   He  said  he knows  the                                                               
administration has  discussed possibly doing a  corporate tax and                                                               
when the administration  saw that a corporate tax  bill was filed                                                               
it may or may not  have impacted whether the administration filed                                                               
one.     He  added  that  he   is  unable  to  say   whether  the                                                               
administration was going to file in any case.                                                                                   
4:28:42 PM                                                                                                                    
CHAIR KITO  observed Section 2  of Version E states  the "person"                                                               
engaged in  the production of oil  and gas.  He  posed a scenario                                                               
in which Company A has 20  shareholders and each shareholder is a                                                               
person; the  company is not  a person.   He recalled  the sponsor                                                               
stating that the tax would be  on the overall company and said he                                                               
therefore doesn't  understand whether  the bill is  considering a                                                               
company  to be  a  person.   He  asked  whether those  individual                                                               
persons  each 20  would have  to engage  for the  company if  the                                                               
company made more than $250,000 in profit.                                                                                      
REPRESENTATIVE GARA  responded that the statutes  define "person"                                                               
to mean  person, business, or  corporation.  He said  a statutory                                                               
definition of "person" is at  the beginning of Alaska's statutory                                                               
code  and  it includes  a  corporation.    The  way the  bill  is                                                               
written, the tax would go on  the entity so that 500 shareholders                                                               
would not  each have to do  their own separate tax  return   only                                                               
the business would  do the tax return and would  apportion to the                                                               
shareholders so that they would know their portion.                                                                             
4:30:10 PM                                                                                                                    
CHAIR KITO  offered his  understanding that  a "person"  could be                                                               
defined as  a corporation  as well  as an  individual.   He asked                                                               
whether there  is something in  the bill that designates  for the                                                               
oil  and gas  tax where  person  is identified  that those  don't                                                               
imply to individual shareholders.                                                                                               
REPRESENTATIVE GARA  answered that  Section 4 puts  the tax  on a                                                               
qualified  entity.   He  drew attention  to page  3,  line 8,  of                                                               
Version E,  which states,  "For each  calendar year,  a qualified                                                               
entity shall  pay a tax".   He explained that  "qualified entity"                                                               
is defined as the various business  forms that are defined in the                                                               
bill, which is anything from a  non-corporate business up to an S                                                               
corporation;  the whole  class of  49,000  businesses that  DCCED                                                               
4:31:07 PM                                                                                                                    
CHAIR  KITO  clarified  the  definition  explains  the  qualified                                                               
entity for tax  on $200,000 and above.  However,  he said, he was                                                               
referring to  Section 2 which talks  about tax on an  oil and gas                                                               
pipeline  or oil  and gas  entity  and provides  a tax  schedule.                                                               
Section 2  only mentions  person  and  doesn't mention  qualified                                                               
REPRESENTATIVE GARA replied that,  according to Legislative Legal                                                               
Services, the language in Section 2  is the same language that is                                                               
used in the current  oil and gas corporate tax.   The tax goes on                                                               
the business.   He offered  his belief  that "person" is  used in                                                               
the existing  oil and gas  corporate tax and that  "person" means                                                               
business.   He  suggested this  question be  asked of  the bill's                                                               
drafter at the bill's next hearing.                                                                                             
CHAIR  KITO said  he would  like to  have this  question answered                                                               
given  there  is a  distinct  difference  between Section  2  and                                                               
Section 4.                                                                                                                      
4:32:19 PM                                                                                                                    
CHAIR KITO recalled the earlier  public comment about there being                                                               
no distinction between a company  with gross earnings of $500,000                                                               
and profits of  $200,000 and a company with gross  earnings of $1                                                               
million and a  profit of $200,000   they are  two different types                                                               
of companies,  yet they  would be  taxed the  same.   He inquired                                                               
whether  the  type  of  company   activity  was  considered  when                                                               
identifying the amount of profit for taxes.                                                                                     
REPRESENTATIVE  GARA responded  that whether  a company  has high                                                               
overhead  with a  gross  income of  $1 million  and  a profit  of                                                               
$200,000 or  low overhead with a  gross income of $300,000  and a                                                               
profit of  $200,000    the company's  profit is  its profit.   He                                                               
said he  didn't want  to go  to the point  of taxing  a company's                                                               
gross  income because  gross income  has no  relevance to  actual                                                               
profits.  He agreed the  testifiers are right that both companies                                                               
would pay  the same tax if  they have the same  amount of profit.                                                               
The bill, he  explained, follows the current  corporate tax rule,                                                               
the C  corporation tax rule, which  is that no matter  how much a                                                               
company's gross income it is the profit that matters.                                                                           
CHAIR  KITO said  he is  trying to  imagine the  way corporations                                                               
might be set  up.  For example, a larger  corporation with higher                                                               
gross [income] and higher expenses  might have a larger number of                                                               
shareholders, which means that that  $200,000 would be spread out                                                               
among individuals  so that  each individual  is not  making much.                                                               
He recalled an  earlier comment about a limitation  on the number                                                               
of shareholders  for eligibility  or requirements  to become  a C                                                               
corporation.   He asked how  many shareholders or  partners there                                                               
could be in a partnership before  it would be required to file as                                                               
a C corporation regardless.                                                                                                     
REPRESENTATIVE GARA  answered that  two individuals setting  up a                                                               
very small  business could  decide to become  a C  corporation on                                                               
their  own, but  right now  they wouldn't  because they  would be                                                               
subject to the C corporation tax.   He said he used to think that                                                               
to  be a  C corporation,  a company  had to  be publicly  traded;                                                               
however, he  offered his  belief that  someone could  set up  a C                                                               
corporation with one shareholder.                                                                                               
CHAIR  KITO clarified  that  that  was not  the  question he  was                                                               
asking.  He  said he understands that a C  corporation can have a                                                               
single  shareholder.   Rather, he  said,  he is  asking what  the                                                               
limit is  before a  company must  file as a  C corporation.   For                                                               
example, whether a company with  20 shareholders would have to be                                                               
a  C corporation,  or  whether a  company  with 100  shareholders                                                               
would have  to be a  C corporation,  or whether an  S corporation                                                               
could have 1,000 shareholders.                                                                                                  
REPRESENTATIVE  GARA replied  there  is a  limitation, a  certain                                                               
number of shareholders where a company  would have to file as a C                                                               
corporation.   He  offered his  belief  that this  is why  Alaska                                                               
Native corporations  file as  C corporations.   It  is permissive                                                               
for anybody  to file as a  C corporation, he continued,  but at a                                                               
certain  number  of  shareholders  it must  be  a  C  corporation                                                               
although he doesn't know what that number is.                                                                                   
MS.  CHARTIER stated  her  belief that  100  shareholders is  the                                                               
cutoff  point  between S  corporation  and  C corporation.    She                                                               
suggested the bill's  drafter, Emily Nauman, be  asked to provide                                                               
a definite answer at a future hearing.                                                                                          
CHAIR KITO calculated  that if $200,000 [in  profit] were divided                                                               
between 100  shareholders each  shareholder would  receive $2,000                                                               
that would be subject to tax.                                                                                                   
4:37:28 PM                                                                                                                    
REPRESENTATIVE  WOOL  suggested  that  maybe the  origin  of  the                                                               
$25,000 increments in  Section 2 is because the net  profit for a                                                               
corporation  is divided  among the  shareholders, given  that the                                                               
language says  "person" and the  increments go up  every $25,000,                                                               
which seems small for an oil and gas company.                                                                                   
REPRESENTATIVE GARA  responded that  the $25,000 for  the current                                                               
corporate  tax for  C corporations  is for  the business  itself.                                                               
Under  current law,  he  continued, if  a  corporation had  1,000                                                               
shareholders  and   only  $25,000   of  profits,   no  individual                                                               
shareholder would get  much of a share and would  not pay much of                                                               
a tax.   He said  he is confident  that even though  the language                                                               
states "person" the  $25,000 is for the business and  that is why                                                               
it is a much lower tax.                                                                                                         
4:38:23 PM                                                                                                                    
CHAIR KITO announced that SSHB 36 was held over.                                                                                

Document Name Date/Time Subjects
HB036 Supporting Documents-Letters of Opposition 4.3.17.pdf HL&C 4/3/2017 3:15:00 PM
HB 36
HB036 Supporting Documents-Letters of Support 4.3.17.pdf HL&C 4/3/2017 3:15:00 PM
HB 36
HB036 Supporting Documents-Federal Tax Brackets 2016 4.1.17.pdf HL&C 4/3/2017 3:15:00 PM
HB 36
HB036 Supporting Documents-ITEP Written Testimony 4.1.17.pdf HL&C 4/3/2017 3:15:00 PM
HB 36
HB036 Supporting Documents Index 4.3.17.pdf HL&C 4/3/2017 3:15:00 PM
HB 36