Legislature(2001 - 2002)
02/23/2002 10:05 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 35-DISTRIBUTION OF PERMANENT FUND INCOME [Contains discussion of SSHB 199] Number 0185 REPRESENTATIVE BILL HUDSON, Alaska State Legislature, sponsor of HB 35, thanked the committee for the opportunity to present "a series of options." He noted that he was bringing before the committee the second half of what he'd presented the previous week in the form of SSHB 199. He reminded the committee that his efforts have been to try to bridge, or fill, the impending fiscal gap of $850 [million] to $1.1 billion. Number 0331 REPRESENTATIVE WILSON moved to adopt the proposed committee substitute (CS), version 22-LS0289\L, Cook, 2/6/02, as a work draft. There being no objection, Version L was adopted. Number 0429 REPRESENTATIVE HUDSON explained that [Version L] incorporates the permanent fund board of trustees' recommendation to change the method used to calculate the annual dividend distribution to the method used by most large, managed funds. He continued: By distributing a percentage of the market value of the funds averaged over five years - as opposed to an average of the earnings of the permanent fund over five years - we believe ... we can balance out and smooth out the distribution, ... with an expected average rate of return on the permanent fund's investment of 8.25 percent. And we heard from the permanent fund board of trustees and the experts that were hired by the board that 8.25 was the anticipated annual earnings. Paying out 5 percent ensures an annual inflation- proofing factor of around 3 percent. So, the first thing the bill tries to do is to adopt a method or measure in distributing income from this ... multibillion-dollar ... permanent fund. Number 0558 The board of trustees recommended the 5-percent payout limit. HB 35 statutorily fixes a distribution stream for that 5-percent payout. And then it goes further in order to try to both maintain the permanent fund dividend over long periods of time, and also to provide for some makeup of the deficit that is currently between our recurring spending and our annual revenues. We have a 50-percent contribution to the general fund. So, we take and automatically inflation-proof the fund by limiting the payout, and then we split the payout 50-50: 50 percent into the dividends and 50 percent into the general fund. This will pay for approximately one-half of the $1 billion budget deficit each year, while allowing for the continuation of the permanent fund dividend. Number 0648 The permanent fund dividends would be reduced initially, but would continue to grow with the infusion of inflation-proofing dollars. This is not capping the dividend. This is, essentially, statutorily constraining the amount of money that goes into the dividend - 50 percent of the earnings - and how much can go in to make up the deficit loss that we have on an annual basis. We believe that HB 35 will give the permanent fund strength, security, and stability far into the future. It will ensure the commitment to pay dividends to Alaska, while also [ensuring that the] infrastructure of the state will not fall into further neglect. Number 0735 And I point out that some of you have served on that special committee that went around the state of Alaska to find out what the condition of our schools and all other governmental assets were. And an excess of a billion dollars was determined to be in deferred maintenance. And so, this would allow the continuation to that. REPRESENTATIVE HUDSON remarked that Representative Fate had spoken eloquently regarding the need to "grow the State of Alaska" to provide new opportunities, for example. Representative Hudson offered his belief that maintaining the Constitutional Budget Reserve (CBR) and substituting "the essence of HB 35" would provide [the state] with a "pretty good guarantee" of over $1 billion for at least the next seven to ten years. [That money] would be available for the following: catastrophic emergencies; growth, development, and taking advantage of new opportunities; deferred maintenance; and giving the next governor the opportunity and time to attempt to find new income. REPRESENTATIVE HUDSON summarized the combination he'd put before the committee as follows: $285 million from the ... minimal income ... tax stream - which is 2.25 percent of the adjusted gross earnings, [a] flat tax [that] hits everybody, essentially, the same way - coupled with HB 35, taking 50 percent of a 5-percent payout and distributing it to dividends, and 50 percent to the state. Number 0916 REPRESENTATIVE HUDSON referred to charts provided by the Department of Revenue. He said although the "split" proposed is 50-50, anyone in the House or Senate could [change that ratio]; it would depend on the goal. He explained that his goal has been to attempt to fill a major portion of the fiscal gap. Number 1022 REPRESENTATIVE HUDSON referenced a past remark of former Governor Hammond that if income is going to be used from the permanent fund, it shouldn't be the first source. He noted that the first thing he'd presented to the committee was an income tax, which he believes fits with Governor Hammond's ideas. He also noted that Governor Hammond had said if income of the permanent fund is to be used, it ought to be specified in law "so that any future legislators would not be able to just willy- nilly modify that thing and cause disrepair to the dividend program." He mentioned Governor Hammond's strong commitment and concern regarding the growth and sustaining of the permanent fund dividend (PFD). REPRESENTATIVE HUDSON mentioned that the "50-50" [split] is "because of today's conditions." He indicated losses in the permanent fund and the [subsequent] reduction in the amount of money the permanent fund has available for distribution, between $1.2 billion to $1.4 billion "at the 5-percent payout." He said that has been testified about by the permanent fund [trustees]. He remarked, "So, we've essentially developed the proposal that the permanent fund trustees desire to do constitutionally, and that may go forward - there's a separate bill to do that." He opined that "this bill absolutely fits ... hand in glove into that concept." He continued: We have not modified anything or put anything into this bill that will alter or negatively affect the board of trustees' efforts to try to constitutionally fix the inflation-proofing. That's their goal, ... to guarantee that the permanent fund continue on and continue to grow. ... They say nothing about the distribution, because that's not their ... business. That's our business; that's what we do. Number 1145 CHAIR COGHILL recalled that the constitutional amendment came through the House State Affairs Standing Committee the previous year and is in the House Judiciary Standing Committee. He indicated part of the policy call was in regard to the constitutionality of the issue. Number 1227 REPRESENTATIVE HUDSON said he'd supported that measure's coming forward for public hearings, and he emphasized the need to have it be a major policy consideration. Whether or not that happens, he said, [HB 35] can stand on its own; it provides the permanent fund trustees what they want, but not in the constitution. He explained that it defers to future legislatures the option of modification regarding [the percentage]. He reiterated that "all we're talking about here" [in regard to HB 35] is the 5-percent payout split between the dividend and the government. REPRESENTATIVE HUDSON acknowledged that this legislation wouldn't fill the entire $1 billion gap. Even if the income tax and the distribution of 50 percent of the earnings of the [permanent fund] are adopted, it's still only about $825 million of a billion-dollar gap. He posited that the current legislature and those to follow would be required to cut almost all of the inflation out of government for the next five to ten years, or until a major income stream is discovered, such as [through opening to oil and gas exploration the Arctic National Wildlife Refuge (ANWR)]. Number 1393 CHAIR COGHILL referred to a comparison in members' packets of the three [proposed plans entitled "CBRF Balances FY2002- FY2010," with Representative Hudson's plan "A" and the Department of Revenue's plans "B" and "C"]. He asked Representative Hudson to review the comparison for the committee. REPRESENTATIVE HUDSON requested that his staff and Mr. Persily, who had prepared the graphs, join him at the witness table. He referred to the "A" plan, the first page of graphs, labeled "POMV 5% (50% to dividend program / 50% to state government): approximately $630 million starting FY 2003." He noted that he'd asked Mr. Persily to provide two other plans whereby the [legislature] chooses to make a split of 60 percent to the dividend and 40 percent to government, or 70 percent to the dividend and 30 percent to government - plans "B" and "C," respectively. He said, "The arcing line is the Constitutional Budget Reserve." REPRESENTATIVE HUDSON reminded members that he is attempting to eliminate [the current legislative practice] of balancing the budget through use of the CBR, and [to prevent] elimination of the CBR. He noted that former Governor Hammond's sentiment is that if the legislature continues to balance the budget through use of the CBR and it is consumed by 2004, the only funding source will be the earnings reserve of the permanent fund; when that occurs, the PFD will suddenly be at risk, and will very likely be the next thing to be consumed. Representative Hudson explained that there are probably not enough people in Alaska to pay enough taxes to fill this gap. Number 1644 REPRESENTATIVE HUDSON noted that the "A" plan shows the CBR fund at just under $2.5 billion, dropping by the year 2007. Also shown as an element in the graph is a $25-per-passenger cruise ship fee, which wasn't part of his own bill but was put in by the governor. He indicated the [proposed] 10-cents-per-drink alcohol tax would bring in $30 million and would be implemented for three quarters of fiscal year 2003, if adopted. Mentioning the effects of HB 35, he pointed to the bottom-line amount of $1 billion and told the committee that was his target. He noted that his plan ["A"] "does not succeed when it gets out ... a little past [the year] 2009." REPRESENTATIVE HUDSON called attention to the "B" plan, which gives 60 percent to the dividend. The graph shows that the dividend would be $1,237 in 2002 and would grow to $1,334 by 2010. He said the 40 percent [in this plan] "reflects less money to make up that cap." He said one of former Governor Hammond's concerns was not wanting the PFD to be capped, but Representative Hudson indicated that would require using up the CBR sooner. He noted that under all three plans, there is time for the future legislature and the next governor to act and "still have a billion dollars out there." Number 1924 REPRESENTATIVE JAMES asked what the Department [of Revenue's] calculation was that resulted in the numbers shown. Number 1990 LARRY PERSILY, Deputy Commissioner, Office of the Commissioner, Department of Revenue, answered that [the graph before the committee] assumed none of the following: population growth, inflation, or additional economic activity other than oil fields that are known to be coming online in the next few years. REPRESENTATIVE JAMES remarked, "Representative Coghill was so great to ask Scott Goldsmith for some information about the job loss on the various different options." She asked Representative Hudson if he had considered that at all. REPRESENTATIVE HUDSON said a 1-percent growth had been left "down there." He indicated the inflation is about 2.25 percent to 2.5 percent currently. He remarked, "We believe, as the chairman has stated a number of times, that government is going to have to suck it up, so to speak, here." He noted that just the day before he'd seen the aforementioned paper of Mr. Goldsmith, which indicates the number of jobs that would be lost by cutting the budget, [adding] an income tax, and reducing the CBR. Representative Hudson said he had taken all of that information into consideration. He again cautioned against balancing the budget from the CBR for two more years, at which time there would be steep decline and then "the terrible decline in the economy and the number of jobs that are lost." Number 2200 REPRESENTATIVE JAMES indicated agreement that nothing much really happens if the CBR is used to fill the fiscal gap for the next two years, after which the "real mess hits the fan." A great hole will be created if no action is taken now, she opined. Representative James stated concern that income tax or sales tax won't solve the billion-dollar problem. She said no matter where "you take that from" out of the economy, there will be some immediate job loss. She indicated some people may leave to look for better opportunities. Number 2309 REPRESENTATIVE HUDSON indicated open-town meetings had been held throughout the summer, the last of which was in Anchorage; 25 people met, including Democrats, Republicans, Senators, and Representatives. He mentioned people from the oil industry and facilitators who "really come from business." The essential [message], he said, was that if nothing is done, the PFD likely will be lost by 2007 or 2008. He said, "We think it's a whole lot better to have a small income tax, use some of the earnings of the permanent fund, [and] still have that $600-$700 million annual infusion of dividends hitting the street out there." REPRESENTATIVE HUDSON mentioned letters on record from corporations, from Alaskans United, and from "the 20-20 people," for example. He reemphasized former Governor Hammond's message not to use the dividends first or the earnings of the permanent fund, without specified limits. He indicated it would be difficult for future legislators to automatically take the PFD away, if it were put into law. Number 2259 REPRESENTATIVE JAMES remarked that she didn't necessarily have the same confidence in former Governor Hammond. She added, "But what I don't like to see is this sort of thing going out to the public, because it shows a real disaster, no matter what we do, when we get down there." She mentioned the need to factor in population growth and questioned the ability to hold the budget flat or at 1 percent. She also indicated the need to assist industry. Number 2647 REPRESENTATIVE HUDSON acknowledged that this isn't a pleasant thing to recommend to Alaskans, but said it is "extremely responsible." He pointed out that [the possibilities of] increased oil revenues, a gas line, and [opening] ANWR, for example, were not included. He said, "You have to almost depend upon the next administration to come in and figure out how they're going to fit the bodies that they will inherit to the money that they will have available to them - providing we make it available to them." REPRESENTATIVE HUDSON mentioned potential problems with the pipeline, earthquakes, or natural disasters that must be responded to, should they occur. He cautioned about the need to have the CBR and permanent fund available. Given that oil reserves are finite, he said the level of spending has grown beyond the state's ability to sustain it over the long term. Number 3000 MR. PERSILY referred to the discussion by Representative James and mentioned the $285 million in fiscal year 2004 and the same amount in 2010. He said [the department] had spent considerable time attempting to figure out if there is some way to show how much income tax might be taken in during fiscal year 2010. However, [the department] had concluded that it is nearly impossible to know what the economy will look like in 2010; it would depend on many factors, including the price of oil, [oil and gas] production, [whether there is drilling in] ANWR, the National Petroleum Reserve - Alaska (NPR-A), and [the potential] gas line. MR. PERSILY offered that the economy and the revenues would "closely track." If new development occurred and there were an increase in population - and therefore a greater need for public services such as "school, reimbursement, and the rest" - expenses would increase. With a broad-based tax, however - in this case, an income tax - because of that activity the income tax revenue and some other revenue would increase as well. He said "income and the need for that income" would run parallel, and "for the sake of models, we'd just leave it flat, because what we're trying to show here is the balance in the CBR." He said Representative James was correct that "we could end up with more revenue out here than we show." Number 3207 CHAIR COGHILL concurred [with Representative James], adding that if [the legislature] had the ability to "get our hands around something that we knew was coming, we could factor it in," but that there were many unknowns regarding forestry, oil, and mining, for example. He remarked, "In fact, some of the state growth has been in direct relation to our inability to produce on our public lands." Number 3255 REPRESENTATIVE WILSON pointed out that there are more expenses than shown in the equation. For example, there is more than $1 billion in deferred maintenance, including harbors that are deteriorating and buildings that have recently caved in. CHAIR COGHILL offered his belief that it is part of "the other $200 million," as Representative Hudson had previously mentioned, which is going to be "squeezed into some kind of action," for example, reducing government services or even selling assets. He said, "We'll have this discussion when we have all three of them on the table." CHAIR COGHILL said the policy call would be the 5 percent, which mirrors the constitutional amendment proposed by the permanent fund board, and the 50-50 payout of that 5 percent, which will go half to the state general fund and half to dividends, "having already settled the inflation-proofing question." He asked if he was correct in the "mechanism of that." Number 3440 REPRESENTATIVE HUDSON told Chair Coghill he was correct. He indicated a recent hearing during which the permanent fund trustees discussed the 5-percent payout and the automatic inflation-proofing, versus the present system, which is the average of the [most recent] five years' earnings. He noted that recently there had been 14-15 percent in earnings [during times of high economic growth nationwide], which dropped by 3.5 percent. The amount of the PFD therefore has varied. The same would happen to the income stream if the decision were made to use some of the earnings of the permanent fund on a percentage basis, unless the 5-percent payout is adopted. He suggested it would create an almost impossible task for future legislators, because "how in the world are they going to know what programs to put into effect this year, that goes for the next three." Number 3607 REPRESENTATIVE STEVENS stated his appreciation of the visual aids supplied by Representative Hudson. He surmised that Representative Hudson hadn't chosen to put more [money] into state government and reduce the dividend because of wanting to maintain approximately $1,000 a year into the foreseeable future [for PFDs]. REPRESENTATIVE HUDSON concurred that that was his goal. In response to a question by Representative Wilson, he said the income tax incorporated [would be] at 2.25 percent. Number 3700 CHAIR COGHILL said that is in keeping with SSHB 199. He stated his intention that if there were sufficient time at the present hearing, he would entertain a motion to "adopt an amendment into it that we can discuss on Tuesday." REPRESENTATIVE HUDSON said he would like to speak to the amendment on SSHB 199 whenever it is ready. [HB 35 was held over.] HB 304-PERMANENT FUND INCOME [Contains discussion of SSHB 199] CHAIR COGHILL announced the next order of business, HOUSE BILL NO. 304, "An Act relating to disposition of income of the permanent fund; and providing for an effective date." He noted that Representatives Berkowitz and Lancaster were present. Number 3819 REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, sponsor of HB 304, presented the bill. He referenced Representative Hudson's earlier allusion to the significant fiscal problem before [the legislature]. He offered that four options exist: cost control; broad-based taxes; utilization of some earnings of the permanent fund; and most important, economic growth. He concluded that all four options must be used to ensure a successful result. Number 3904 REPRESENTATIVE WHITAKER gave a PowerPoint presentation. He noted the importance of understanding Alaska's finances - how the general fund works in relationship to the Constitutional Budget Reserve (CBR) and how the permanent fund works in relationship to the earnings reserve account (ERA). The general fund receives revenues from oil royalties, severance tax, property tax related to the oil industry, corporate income tax, a number of fees, and miscellaneous sources. Because these aren't sufficient to pay the state's bills in times of deficit, however, the CBR is used as a shock absorber; for example, in the current fiscal year $865 million of drawdown must be absorbed. He continued: The permanent fund has a corpus of $21 billion, and the fund principal is protected. So what can come out of the principal? The answer is a resounding "Nothing." It cannot be used. ... What's the relationship with the earnings reserve account which ... at the end of this fiscal year will have $2.8 billion in it? It, too, acts as a ... shock absorber for the permanent fund. Debits and credits to the permanent fund are realized by the earnings reserve account; that is, earnings, losses, and dividends all relate to draws or deposits to the earnings reserve account. If the permanent fund corpus realizes a loss, it is not the corpus that absorbs that loss; it is the earnings reserve account. That's an important point to remember - the corpus never loses; it comes out of the earnings reserve account. Number 4119 REPRESENTATIVE WHITAKER mentioned the ongoing budget deficit and emphasized that the funds are related. At the current spending rate, the CBR will be gone in 2004. Therefore, the ERA will become the shock absorber for both the general fund and the permanent fund; that is not sustainable. If the ERA functions as a shock absorber for both funds, it likely will be effectively drained by the end of the decade, and the dividend program will therefore cease. He remarked, "At that point, there is only one way to fund government, and that is directly with the earnings of the permanent fund ... to the general fund." CHAIR COGHILL asked if this was discounting any tax [that might be instituted]. Number 4312 REPRESENTATIVE WHITAKER answered in the affirmative. He said: If we do nothing, that's what will happen by the end of the decade. ... Those who stand if front of us and say "by doing nothing, we are saving the permanent fund dividend" are simply wrong. If we do nothing, the dividend is gone by the end of the decade. And the only hope that we have to save that segment of the Alaskan economy is by doing something now. So, as you can see, then, there were two - and those two are the permanent fund and its earnings going directly to the general fund. ... If nothing is done by the end of the decade, the dividend program is gone, government spending will be significantly reduced by necessity, and our economy will shrink. Now what does a shrinking economy mean? It means less prosperity; it means less opportunity; and I really don't want to go there, and I think it would be terribly irresponsible of us to let us go there. Having said [that], what can we do? ... That takes us back to the point at hand. Number 4414 REPRESENTATIVE WHITAKER offered that the state first needs to control costs, and some form of broad-based taxation is necessary. He commented: I'm a conservative Republican, and it is a painful experience for me to have to say that the way that we must go in the state of Alaska is to tax ourselves. But I'm also a responsible Republican. And if I'm responsible, I have to stand up and say this is what we must do. REPRESENTATIVE WHITAKER emphasized that economic growth has to be a significant part of any plan put forward. He noted that HB 304 utilizes $200 million of the earnings of the ERA, which is transferred to the general fund. That is all the bill does, he concluded. CHAIR COGHILL asked whether the $200-million transfer is sustainable. REPRESENTATIVE WHITAKER expressed that this was his understanding based on information received from the [Alaska] Permanent Fund Corporation. He added that his own analysis draws the same conclusion. CHAIR COGHILL asked, "And that would be under the existing formula as we stand right now?" Number 4632 REPRESENTATIVE FATE inquired what - according to permanent fund personnel - is the maximum, sustainable amount that could be taken from the ERA. TAPE 02-16, SIDE B Number 4625 REPRESENTATIVE WHITAKER offered that the [Alaska] Permanent Fund Corporation has indicated the state can utilize $1.25 billion; currently, over $1 billion is being used for the dividend program. Therefore, a $200-million level is sustainable. Number 4553 REPRESENTATIVE FATE asked if other scenarios that include varied amounts from $150 million to $300 million have been tried. He asked whether the 200 [million dollars] seems to Representative Whitaker to be the optimal amount to take out of the ERA. REPRESENTATIVE WHITAKER replied yes. Number 4525 CHAIR COGHILL offered that using $200 million [from the ERA] leaves at least a $660-million question. He surmised that it is a part of the solution, according to Representative Whitaker. REPRESENTATIVE WHITAKER answered in the affirmative. CHAIR COGHILL stated that Representative Whitaker's point was well taken regarding [the state's] spending above what it is able. He speculated that the [decline] in oil [revenue] has precipitated this. He expressed his opinion that [the legislature] has to lead with a good-faith effort of reducing government. These questions become significant, he said, because [government spending cannot be reduced by $1 billion]. This would offer a $200 million fix. He offered that he thinks this is a legitimate discussion. Number 4414 REPRESENTATIVE JAMES asked Representative Whitaker whether it is his assumption, with this legislation, that changing the calculation of the dividend isn't on the table. REPRESENTATIVE WHITAKER replied: This is an idea in search of a better idea. If there's a better way to approach it, then we should. And certainly reformulation of the distribution of permanent fund earnings is something that should be on the table. It is not inclusive to this bill. No. REPRESENTATIVE JAMES asked if this is or can be made available to the public. CHAIR COGHILL said it could be made available. He noted that he has testimony from Mr. Goldsmith regarding what would happen under the various scenarios with regard to job opportunities and the economic impact in Alaska. He offered to make that available as well. REPRESENTATIVE JAMES expressed concern that taking a billion dollars from the economy will have a disastrous impact. Therefore, there has been the suggestion to [withdraw it] over time, which has been done with the [legislative majority's previous] five-year plan that she believes has left the state better off. REPRESENTATIVE JAMES noted that [the materials] indicate there would be 2,600 jobs lost with the income tax proposed by Representative Hudson [SSHB 199], while sales tax would reduce 3,200 jobs, as would the dividend cut. A cut in operation would reduce jobs by 6,500. She expressed concern that these projections are based on what is known today, rather than projections of what will happen tomorrow. The state needs more business. She said she believes the state is going to be totally dependent upon oil and gas production in order to pull out of this [economic situation]. However, there is the belief that the state existed before oil and gas, and thus other applications such as mining, fishing, and timber could be utilized in order to have a better economy. She asked if [those other applications] have been considered for the projections. Number 4035 REPRESENTATIVE WHITAKER noted that he, too, is concerned with Alaska's economy and the fact that Alaska's gross state product, the true measure of prosperity, has grown very slowly. In some measures, the gross state product has even shrunk over the last decade. In reviewing ways that the aforementioned trend could turn, Representative Whitaker felt that there were some choices. He mentioned that the tourism industry should never be forgotten as a growth opportunity. Furthermore, basic transportation infrastructure ensures that Alaska will have significant opportunities that it doesn't today. Moreover, Alaska's economy is directly tied to the oil and gas industry for which production has declined for a significant period, although it is currently somewhat stable. If Alaska is to grow the oil and gas sector of the economy, there must be a competitive environment on the North Slope. Additionally, there must be a [natural] gas line. He continued: If, indeed, we are to solve our economic problem, we need to quit looking at things like this and saying that is the future - and [instead] say a gas line is our future, increased production on the North Slope is our future, increased size of a tourism sector of our economy is our future, a railroad is our future. The basic stuff economies are built on is our future. Number 3816 CHAIR COGHILL remarked that the drop in oil prices has forced this discussion. "The pressure that is bringing it to bear is, can we afford the type of government we have," he said. He related his belief that [Alaska] has fallen into an entitlement world, often federally driven, that has grown since the 1960s. That model isn't based on what America is based on, which is the part of the discussion Chair Coghill said he is attempting to force. He related his view that the entitlement world and the production world have to at least grow together, if they're going to grow. In regard to HB 304, Chair Coghill asked why the bill [uses] the ERA rather than the CBR. REPRESENTATIVE WHITAKER answered that using the ERA is driven by necessity. Regarding the state's options, some earnings of the permanent fund must be utilized in order to balance the state budget, which was the intention of the permanent fund when it was established. CHAIR COGHILL clarified that the policy call is whether to use the ERA as put forth in [Representative Whitaker's legislation] or use other mechanisms utilizing the CBR. Chair Coghill noted that this is a dynamic discussion because other proposed legislation may change the CBR or the way the permanent fund payout is figured. Number 3600 REPRESENTATIVE JAMES turned to the state's demographics regarding 18- to 44-year-olds. She questioned who is going to do the work if all these jobs come to pass. Furthermore, there is much anecdotal information that for the years in which there has been a permanent fund and maximized use of federal funds, there is a large, growing poor sector who are unable to work. Although Representative James wanted to take of Alaskans who are needy, she said she didn't want them to come from other states because Alaska is more generous than other states. Number 3511 REPRESENTATIVE BILL HUDSON, Alaska State Legislature, agreed with Representative Whitaker that the state has to look forward. He explained that one reason he has put forth his bills has been his belief in the need to preserve and, if possible, grow the CBR. He recalled being in the legislature when the CBR was created as a rainy-day fund and a growth and opportunity fund. If the income of a billion dollars or so of the CBR isn't available, there will be no major opportunities for new kinds of economic development in the state. "If you come up with a plan ... that preserves as much of that as possible, has the income available from it to provide for the maintenance of our infrastructure, and the growth and opportunities to the future of the State of Alaska, I think we will have done a very good piece of work," he concluded. CHAIR COGHILL commended those who'd established the CBR and the permanent fund. REPRESENTATIVE KEN LANCASTER, Alaska State Legislature, mentioned the importance of realizing that prior legislatures put in almost half of what is in the permanent fund corpus today. Without the corpus, the earnings of the CBR or the ERA wouldn't exist. CHAIR COGHILL indicated he would hold the public testimony. [HB 304 was held over.] HB 199-INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES [Contains discussion relating to HB 413] CHAIR COGHILL brought attention to the final order of business, SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 199, "An Act relating to taxation, including taxation of income of individuals, estates, and trusts." Number 3730 REPRESENTATIVE BILL HUDSON, Alaska State Legislature, sponsor of SSHB 199, specified that the amendment in packets is labeled 22- LS0753\J.1, Kurtz, 2/18/02. It read: Page 1, line 12: Delete "(1)" Page 1, line 13: Delete ";" Insert "." Page 1, line 14, through page 2, line 1: Delete all material and insert: "As soon as practicable after September 30 of each year, the department shall publish the applicable tax rate under this subsection for the following calendar year. The applicable tax rate for a resident individual is (1) two and one-fourth percent of the individual's taxable income if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was equal to or less than $2,000,000,000; (2) one percent of the individual's taxable income if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was more than $2,000,000,000 but less than $2,500,000,000; or (3) zero if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was $2,500,000,000 or more." Page 2, line 3: Delete "(1)" Page 2, line 6: Delete ";" Insert "." Page 2, lines 7 - 10: Delete all material and insert: "As soon as practicable after September 30 of each year, the department shall publish the applicable tax rate under this subsection for the following calendar year. The applicable tax rate for a nonresident or part-year resident individual, or for an estate interest is (1) two and one-fourth percent of the individual's, estate's, or trust's taxable income, multiplied by a fraction, the numerator of which is taxable income from sources in the state and the denominator of which is taxable income from all sources, if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was equal to or less than $2,000,000,000; (2) one percent of the individual's, estate's, or trust's taxable income, multiplied by a fraction, the numerator of which is taxable income from sources in the state and the denominator of which is taxable income from all sources, if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was more than $2,000,000,000 but less than $2,500,000,000; or (3) zero if the unaudited balance in the budget reserve fund created by art. IX, sec. 17, Constitution of the State of Alaska, on September 30, was $2,500,000,000 or more." REPRESENTATIVE HUDSON explained that the amendment proposes a trigger mechanism on SSHB 199, the flat-tax proposal. It would establish three different levels of the constitutional budget reserve (CBR) and trigger the tax, depending upon the level. If there is more than $2 billion in the CBR but less than $2.5 billion, [the flat tax] would be 1 percent. However, if the CBR is in excess of $2.5 billion, the [flat tax] would be zero. Therefore, the tax would be related to the need. Representative Hudson pointed out that [the amendment] language is included in the governor's legislation [HB 413]. Even with this amendment, there will be no bearing on the ultimate production of SSHB 199 because it will still draw in $285 million to help fill the fiscal gap. REPRESENTATIVE JAMES asked if this the only amendment that Representative Hudson would entertain. REPRESENTATIVE HUDSON answered that he was open to other constructive suggestions. CHAIR COGHILL noted that he had specifically asked for this amendment. However, it doesn't eliminate the ability to place other amendments before the committee. He said he'd wanted the committee to see the amendment before the next hearing. Number 4130 REPRESENTATIVE JAMES related her belief that more than one trigger is necessary, as is the other side of the issue. She said she isn't necessarily against the amendment, but there is the need to see the net result first. There needs to be a leveling [mechanism] on both sides. CHAIR COGHILL clarified that there was [no intention] to take anything off the table. Therefore, he indicated the need to look at [all the bills relating to generating more state income] in order to avoid passing out contradictory pieces of legislation. Number 4258 REPRESENTATIVE HUDSON said he appreciated the need to ensure that government is lean. However, he pointed out that the budget process happens outside of this committee; thus he urged the chair not to hold up any essential elements. He related his belief that there will be strong support for significant "holding the line" [for state spending]. However, there has to be a combination of "holding the line" and filling the gap - with [some from taxes], some coming from the CBR, some from the earnings reserve [account] (ERA) of the permanent fund. All of those elements have to meld together at the same time. If that is the goal, Representative Hudson said he is supportive of it. CHAIR COGHILL acknowledged the purview of the [House] Finance Committee. However, he also recognized that as chair of this committee, he has this opportunity to have a say on the issue. Number 4521 REPRESENTATIVE JAMES remarked that some reductions in spending will require statutory change. Therefore, a bill will be the mechanism, rather than merely addressing the budget. [SSHB 199 was held over.]
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