Legislature(2001 - 2002)

02/19/2002 08:05 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 413-INCOME TAX: INDIVIDUAL/TRUST/ESTATE/CORP                                                                               
                                                                                                                                
[Contains discussion of SSHB 199 and HB 10]                                                                                     
                                                                                                                                
CHAIR COGHILL  announced that the  first order of  business would                                                               
be HOUSE BILL  NO. 413, "An Act relating to  the imposition of an                                                               
income tax on  individuals, estates, and trusts;  relating to the                                                               
administration  of  revenue  laws;  relating to  the  Alaska  Net                                                               
Income Tax Act; and providing for an effective date."                                                                           
                                                                                                                                
Number 0220                                                                                                                     
                                                                                                                                
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of Revenue,  explained that HB 413 uses as  a tax base                                                               
[an  individual's] federal  tax liability,  rather than  gross or                                                               
taxable  income.   It assigns  a flat  tax of  20 percent.   This                                                               
legislation  allows Alaskans  to take  all credits  allowed under                                                               
federal law -  such as child care credits,  business credits, and                                                               
so forth -  before calculating their Alaska income tax.   This is                                                               
a  flat  tax.   Because  it's  a  percentage of  an  individual's                                                               
federal  tax  liability,  however,  "it picks  up  the  graduated                                                               
federal tax  rates."  The  more one makes, therefore,  the higher                                                               
percentage that individual pays to the state.                                                                                   
                                                                                                                                
MR. PERSILY  pointed out that  HB 413  has a trigger  designed to                                                               
prevent the  [state] government from accumulating  more cash than                                                               
it needs  in the Constitutional  Budget Reserve (CBR).   If there                                                               
is  new  development  in  Alaska,   increased  tax  revenues,  or                                                               
spending reductions,  and if  the CBR grows  to $2  billion, then                                                               
the effective tax  rate would drop from 20 percent  to 10 percent                                                               
for the next  calendar year only.  Then the  CBR balance would be                                                               
reviewed again.   If  the CBR balance  reaches $2.5  billion, the                                                               
tax rate would be 5 percent for the next calendar year.                                                                         
                                                                                                                                
MR. PERSILY  pointed out that HB  413 also provides a  $25 rebate                                                               
for  electronic filing.   He  noted that  there is  a comparative                                                               
analysis with hypothetical tax returns under each proposal.                                                                     
                                                                                                                                
Number 0614                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES inquired as to  the total amount [the state]                                                               
owes the CBR now.                                                                                                               
                                                                                                                                
MR.  PERSILY answered  that approximately  $4.3 billion  has been                                                               
borrowed from  the CBR, although  he noted that  he may be  off a                                                               
hundred million dollars one way or  the other.  He specified that                                                               
[HB 413] doesn't address that issue.                                                                                            
                                                                                                                                
REPRESENTATIVE  JAMES  related her  belief  that  either the  CBR                                                               
should be eliminated  and a new method of saving  money should be                                                               
developed, or the CBR should be filled before "we stop."                                                                        
                                                                                                                                
CHAIR  COGHILL  highlighted  that  this is  the  only  bill  that                                                               
addresses [returning money  to the CBR].   Therefore, a mechanism                                                               
of doing so may be worthy of consideration.                                                                                     
                                                                                                                                
MR.  PERSILY acknowledged  that a  trigger could  be incorporated                                                               
into any  of the  income tax bills.   That way,  if the  state is                                                               
more economically healthy, the tax rate could be lowered.                                                                       
                                                                                                                                
CHAIR  COGHILL  asked  how  [HB   413]  taxes  earned  income  on                                                               
residents  versus  nonresidents.     He  specified  that  he  was                                                               
interested in what "part-time residents"  have to [report] to the                                                               
state.                                                                                                                          
                                                                                                                                
Number 0827                                                                                                                     
                                                                                                                                
CHUCK HARLAMERT,  Juneau Section Chief, Tax  Division, Department                                                               
of Revenue,  answered that  in that regard,  all three  bills [HB
413, SSHB  199, and HB 10]  are essentially the same.   In almost                                                               
every individual  income tax bill  he was aware of,  residents of                                                               
the state are taxed on their  worldwide income, which is the same                                                               
as  the federal  tax liability.   If  a resident  has a  business                                                               
operation or income from another  state and the income is taxable                                                               
in that  state, then  a credit  is allowed  based upon  the taxes                                                               
paid to  the other  state.   That provision is  found in  all the                                                               
[individual income tax] bills.                                                                                                  
                                                                                                                                
MR.  HARLAMERT   reported  that  nonresidents  [in   Alaska],  by                                                               
contrast, report  all their  worldwide income  to their  state of                                                               
residency and claim a credit for  taxes paid to Alaska.  Under HB
413, a  nonresident calculates  his/her tax  in Alaska  by taking                                                               
the  entire taxable  income and  then apportioning  it to  Alaska                                                               
based   on  the   individual's  business   activity  in   Alaska.                                                               
Basically,  HB 413  takes the  income on  lines 7-20  of the  tax                                                               
return  -  total  income  -  and  applies  the  ratio  of  income                                                               
generated  in Alaska  to income  generated  everywhere, and  then                                                               
multiples it  times the tax  base in order to  determine Alaska's                                                               
tax.  Essentially, a nonresident's  tax would be calculated as if                                                               
he/she were a  resident; the person would then  apply a numerator                                                               
-  the income  earned  in Alaska  - over  the  denominator -  the                                                               
income earned  everywhere.  Thus  the amount  of the tax  paid to                                                               
Alaska is determined.                                                                                                           
                                                                                                                                
MR.  HARLAMERT   pointed  out  that   HB  413   avoids  including                                                               
modifications   from  total   income.      Items  excluded   from                                                               
determining that  ratio are alimony,  living expenses,  and other                                                               
nonbusiness  items that  don't really  reflect where  individuals                                                               
made their money.                                                                                                               
                                                                                                                                
Number 1084                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES  asked whether part-time  residents' [income                                                               
for tax purposes] would be based on the time spent in Alaska.                                                                   
                                                                                                                                
MR. HARLAMERT answered that part-time  residents would be treated                                                               
as nonresidents under [HB 413].                                                                                                 
                                                                                                                                
REPRESENTATIVE  JAMES asked  how  [part-time residents]  allocate                                                               
their  personal exemptions  and/or itemized  deductions if  part-                                                               
time  residents  and nonresidents  are  treated  the same.    The                                                               
nonresident's [tax] is  based on the amount of  money earned, she                                                               
said, while  the part-time resident's  [tax] is usually  based on                                                               
the amount of time in the state.                                                                                                
                                                                                                                                
MR. HARLAMERT clarified that the  difference is only in the ratio                                                               
applied.  He  pointed out that this [discussion] is  in regard to                                                               
the calculation  of the fraction  of the taxpayer's  total income                                                               
assigned to  Alaska.   The modifications  to income  and itemized                                                               
deductions  are  all  in  the background.    Although  those  are                                                               
allocated,  those   items  aren't  included  in   the  allocation                                                               
formula.   Therefore, whether someone  pays mortgage  interest in                                                               
his/her former  residence state or Alaska  doesn't matter because                                                               
it's allocated in the same way.                                                                                                 
                                                                                                                                
REPRESENTATIVE JAMES posed an example  of an individual who moved                                                               
to  Alaska  in  July  and  established  residency  after  working                                                               
elsewhere  for the  first  half  of the  year.   This  individual                                                               
didn't  work until  November or  December, and  therefore his/her                                                               
small amount  of income  wouldn't be  representative of  the time                                                               
they spent in Alaska in relation to the services being received.                                                                
                                                                                                                                
MR. HARLAMERT agreed, but pointed out  that [HB 413] is an income                                                               
tax bill.  Income  earned is taxed; it isn't a  tax based on time                                                               
spent in the  state.  The purpose of the  formula is to determine                                                               
how much  of the person's  income was earned  in the state.   Mr.                                                               
Harlamert also  pointed out  that the  factor takes  into account                                                               
differences in income.  He cited  as an example someone who moves                                                               
to Alaska and  receives a raise; that increase in  wages would be                                                               
in the  numerator and  denominator, and  thus would  increase the                                                               
factor.   If  someone  moves to  Alaska and  doesn't  take a  job                                                               
immediately,  however,  that   individual  isn't  earning  income                                                               
subject to tax, and the factor would appropriately reflect that.                                                                
                                                                                                                                
CHAIR COGHILL said  that is the policy call  the legislature will                                                               
make.                                                                                                                           
                                                                                                                                
Number 1391                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  inquired as to  the rationale for  using the                                                               
computations in HB 413 versus others that are available.                                                                        
                                                                                                                                
MR. PERSILY explained that the process  is to tax only the income                                                               
earned in Alaska.   Therefore, if half of  an individual's income                                                               
is earned  in Alaska,  then that individual  will pay  the Alaska                                                               
tax on 50 percent of that individual's federal tax liability.                                                                   
                                                                                                                                
REPRESENTATIVE   FATE   related   his  understanding   from   Mr.                                                               
Harlamert's testimony that  [HB 413] is based upon  not just what                                                               
the individual is  paying on the tax, but upon  a ratio measuring                                                               
it against the income "of the average tax in the Lower 48."                                                                     
                                                                                                                                
MR. PERSILY said that isn't correct.                                                                                            
                                                                                                                                
Number 1520                                                                                                                     
                                                                                                                                
MR.  HARLAMERT explained  that the  purpose  of the  ratio is  to                                                               
determine how much  of a taxpayer's total income for  the year is                                                               
properly taxable  by the state.   "We cannot tax  nonresidents or                                                               
part-year residents  on a 100  percent of their  worldwide income                                                               
because they didn't earn it here,"  he said.  "We just don't have                                                               
the right to do that under the  constitution."  There has to be a                                                               
method  of  attributing  to Alaska  the  appropriate  portion  of                                                               
whatever tax  base is used.   Therefore,  the method used  by all                                                               
the proposals  before the  committee is  to take  a ratio  of the                                                               
income  earned in  Alaska over  income earned  everywhere.   That                                                               
ratio is then applied to the tax base.                                                                                          
                                                                                                                                
CHAIR  COGHILL   identified  the  difference,  saying   [HB  413]                                                               
utilizes a place  on the federal tax form that  provides for some                                                               
exemptions.   He related his  understanding that the  formula [HB
413]  uses  is  "to  give  the federal  tax  liability  the  best                                                               
flexibility in the state."                                                                                                      
                                                                                                                                
REPRESENTATIVE FATE  asked if [the administration]  believes this                                                               
is  a fair  tax for  everyone and  believes this  tax provides  a                                                               
little more  favoritism to those who  can't pay taxes.   He again                                                               
asked for the rationale.                                                                                                        
                                                                                                                                
MR. PERSILY  related his  understanding that  Representative Fate                                                               
wasn't  questioning the  computation  of how  much a  nonresident                                                               
pays, but  rather the proposal  to tax on federal  tax liability,                                                               
which is a graduated tax.                                                                                                       
                                                                                                                                
REPRESENTATIVE  FATE restated  his  question, "Why  this type  of                                                               
computation?  What's  the advantage of this to you?   Why has the                                                               
administration done  this kind of  computation rather  than other                                                               
kind of computations?"                                                                                                          
                                                                                                                                
Number 1719                                                                                                                     
                                                                                                                                
MR. PERSILY related the administration's  belief that the federal                                                               
tax system is good in that  the graduated rate of the federal tax                                                               
system has been  accepted by most - that is,  the more income one                                                               
has,  the better  position the  individual  is to  pay a  greater                                                               
portion in  taxes because, in  theory, that individual  can enjoy                                                               
the benefits  of society more and  pay more than others  who earn                                                               
less.                                                                                                                           
                                                                                                                                
MR.  PERSILY recognized  that an  individual with  a high  income                                                               
would  view a  graduated tax  as  unfair, but  countered that  in                                                               
fixing  the   state's  fiscal  problems,  a   tax  is  necessary.                                                               
Furthermore, Mr.  Persily said  it would be  safe to  assume some                                                               
form of  permanent fund earnings would  be used to help  with the                                                               
state's fiscal problem,  which would likely result  in an across-                                                               
the-board reduction in dividends that  some would argue is unfair                                                               
to  those  with low  income  or  fixed  income.   Therefore,  two                                                               
[arguments] of unfairness cancel each other.                                                                                    
                                                                                                                                
Number 1865                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES remarked that she  still wasn't clear on the                                                               
intent with  a resident  versus a nonresident.   She  related her                                                               
understanding of the public's general  belief that those who come                                                               
to  Alaska  to work  and  take  their  money  home ought  to  pay                                                               
something to help  the state balance the  budget.  Representative                                                               
James posed a situation in which  a resident would be expected to                                                               
pay tax  on his/her worldwide income  - or will the  residents be                                                               
prorated  if  they're  making  money  outside  the  state?    She                                                               
recalled  testimony  regarding  a  credit  for  money  earned  in                                                               
another  state on  which there  is a  tax, which  she said  makes                                                               
sense.   She related her  understanding that there would  only be                                                               
two types of  individuals:  a resident and a  nonresident.  There                                                               
would be no part-time resident.                                                                                                 
                                                                                                                                
MR. HARLAMERT replied yes.                                                                                                      
                                                                                                                                
REPRESENTATIVE JAMES  expressed concern with that  because of the                                                               
existence of  the permanent fund  dividend (PFD).  She  asked, if                                                               
someone  moves to  Alaska  in January  and  files for  residency,                                                               
whether that individual would pay  a [state income] tax just like                                                               
all other residents.                                                                                                            
                                                                                                                                
MR.  HARLAMERT replied  yes.   He specified  that the  income tax                                                               
doesn't follow the  residency definition under the PFD.   One can                                                               
become an Alaska  resident by declaration, simply  by moving here                                                               
and obtaining  a driver's  license.   In the  first full  year of                                                               
residency, the  individual will pay  tax as a  resident taxpayer.                                                               
In  the  first year,  the  individual  will  pay as  a  part-year                                                               
resident.                                                                                                                       
                                                                                                                                
MR.  PERSILY posed  an  example  in which  someone  lives out  of                                                               
state, works in  Alaska's oil fields as a  nonresident, and earns                                                               
no income in the other state.   Such individuals would pay income                                                               
tax  on 100  percent of  their  earnings because  100 percent  of                                                               
their earnings were taken in  Alaska.  However, an individual who                                                               
fished in Alaska and earned  $50,000 [in the summertime], and who                                                               
worked in Oregon in the  off-season and earned $25,000, would pay                                                               
tax  on half,  because  of  the proportion  [of  wages earned  in                                                               
Alaska].                                                                                                                        
                                                                                                                                
Number 2139                                                                                                                     
                                                                                                                                
REPRESENTATIVE WILSON asked on which  line of the [IRS] Form 1040                                                               
this would begin.                                                                                                               
                                                                                                                                
MR. HARLAMERT answered that with HB  413, it starts with line 52.                                                               
If the taxpayer  qualifies, federal credits would  be deducted as                                                               
shown on lines 61A and 63 [of Form 1040].                                                                                       
                                                                                                                                
REPRESENTATIVE  HAYES   asked  whether  the   administration  has                                                               
reviewed an  education credit for  areas that pay  property taxes                                                               
for K-12  [education].   If not,  Representative Hayes  asked why                                                               
that wasn't  reviewed as  a state  credit.   He indicated  he was                                                               
referring to something similar to HB 10.                                                                                        
                                                                                                                                
MR. PERSILY responded, "I guess we  looked at it and felt that as                                                               
a policy  call, it  would be  better not to  give a  property tax                                                               
credit."     He  said  one   could  argue  that  such   a  credit                                                               
discriminates against  those who  don't own  a home  because they                                                               
will end  up paying the bulk  of the taxes.   Mr. Persily pointed                                                               
out  that  property  taxes  are deductible  on  the  federal  tax                                                               
return; thus  a portion would  be returned through a  lower state                                                               
tax return, as opposed to a direct credit.                                                                                      
                                                                                                                                
REPRESENTATIVE  HAYES restated  that he  was curious  whether any                                                               
consideration has  been given  to an  education credit  for those                                                               
who pay into  the community for K-12 education.   He acknowledged                                                               
that it is mostly property tax.                                                                                                 
                                                                                                                                
CHAIR COGHILL remarked that perhaps  there should be an education                                                               
tax first, for which there is credit on the [state] income tax.                                                                 
                                                                                                                                
REPRESENTATIVE WILSON noted that  in some municipalities, renters                                                               
pay  a sales  tax on  what  is paid  in  rent.   She related  her                                                               
understanding that  such a  provision wouldn't  fit under  HB 413                                                               
because  it doesn't  have anything  to do  with the  individual's                                                               
earnings.                                                                                                                       
                                                                                                                                
Number 2379                                                                                                                     
                                                                                                                                
SCOTT  GOLDSMITH, Professor  of Economics,  University of  Alaska                                                               
Anchorage, testified via teleconference.   Mr. Goldsmith began by                                                               
stating  that  if [the  legislature]  doesn't  do something  this                                                               
legislative  session  to  deal  with   the  fiscal  gap,  in  all                                                               
likelihood the economy will fall  into a recession.  A $1-billion                                                               
bite out  of an economy Alaska's  size is too large  to digest in                                                               
one  year.   Furthermore, the  size of  the fiscal  gap is  large                                                               
enough that  a combination of  tools will be required  to address                                                               
it, including some  sort of income tax, a  broad-based sales tax,                                                               
and a reduction  in the PFD.  Consequently,  the question becomes                                                               
when  the [state]  income tax  would  be instituted  and what  it                                                               
would look  like.  In  comparing an income  tax with a  sales tax                                                               
and a dividend,  there is much interest in the  split between the                                                               
proportions that  residents and  nonresidents pay.   In  terms of                                                               
that  criteria, an  income  tax looks  more  attractive than  the                                                               
other two options.                                                                                                              
                                                                                                                                
MR.  GOLDSMITH  said  based  on  some  basic  calculations,  he'd                                                               
calculated  that  for every  $1  collected  from an  income  tax,                                                               
Alaska  residents  would  pay  about $.75  and  someone  else,  a                                                               
nonresident  or the  federal government,  would  pay about  $.25.                                                               
However,  a reduction  in the  size of  the PFD  would result  in                                                               
Alaskans'  [paying] about  $.84 per  $1; the  remainder would  be                                                               
shifted  to the  federal  government and  nonresidents.   With  a                                                               
broad-based  sales  tax, about  $.93  per  $1  would be  paid  by                                                               
Alaskan  residents,  with  the remainder  paid  by  nonresidents.                                                               
Therefore, an  income tax  seems to be  most attractive  on those                                                               
grounds.  Although an income  tax would create disincentives just                                                               
as any  tax would,  he argued that  those disincentives  would be                                                               
relatively modest.   Under HB  413, the 20  percent on top  of an                                                               
individual's federal  rate sounds  horrendous.  However,  it only                                                               
amounts to  approximately a 3  percent increase in  tax liability                                                               
for an individual paying 15 percent in federal taxes.                                                                           
                                                                                                                                
MR. GOLDSMITH remarked  that an income tax is  a progressive tax,                                                               
which means that people with  higher incomes pay a larger percent                                                               
of their  income in  taxes than  those with  lower incomes.   The                                                               
decision regarding  how progressive to  make the tax system  is a                                                               
philosophical decision  for which  an economist can't  provide an                                                               
answer.   However, Mr.  Goldsmith pointed  out that  Alaska, with                                                               
the PFD, has the most progressive tax structure in the nation.                                                                  
                                                                                                                                
MR. GOLDSMITH reported that in  regard to overall state and local                                                               
taxes, low-income Alaskans receive  money from the government, in                                                               
net terms, while high-income Alaskans  pay primarily via property                                                               
taxes.  Imposing  an income tax such as proposed  in HB 413 would                                                               
add some  progressiveness to the  system because it  would impact                                                               
higher-income Alaskans more than it would lower-income Alaskans.                                                                
                                                                                                                                
MR. GOLDSMITH echoed Mr. Persily's  earlier testimony that in the                                                               
long run it's  likely the PFD would be reduced,  which would have                                                               
the  opposite effect.   Therefore,  considering  the overall  tax                                                               
structure  of the  state in  terms of  a progressive  income tax,                                                               
with a  reduction in the PFD,  could result in the  same relative                                                               
position in terms of the current progressiveness.                                                                               
                                                                                                                                
Number 2666                                                                                                                     
                                                                                                                                
MR.  GOLDSMITH  pointed  out  that   when  thinking  of  the  tax                                                               
structure, one has to be  careful about comparing Alaskans across                                                               
all  strategies -  that is,  in  regard to  the full-time  versus                                                               
part-time resident,  the rich versus  the poor, the  urban versus                                                               
rural individual, and the young versus the old individual.                                                                      
                                                                                                                                
MR.  GOLDSMITH identified  one attractive  feature of  a personal                                                               
income tax:   it solves  the problem of the  "Alaska disconnect."                                                               
He explained  that the  "Alaska disconnect"  is the  problem that                                                               
economic  growth and  development -  which would  help solve  any                                                               
financial  problems  in most  states  -  doesn't work  in  Alaska                                                               
because Alaska doesn't have a  broad-based tax to capture some of                                                               
the profits  generated by new  economic activity in order  to pay                                                               
for the  public costs that  arise.  Therefore, a  personal income                                                               
tax would be a method by  which to capture some of those profits,                                                               
which would be positive both  fiscally for the state [government]                                                               
and for Alaska economically.                                                                                                    
                                                                                                                                
Number 2746                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  recalled Mr.  Goldsmith's mention of  the 15                                                               
percent average of federal tax in the state.                                                                                    
                                                                                                                                
MR. GOLDSMITH  clarified that an  individual's lower tax  rate on                                                               
the federal income  is 15 percent, the rate at  which he believes                                                               
the majority of Alaskan households  pay.  However, that isn't the                                                               
average  for  all  Alaskans  because  a  significant  portion  of                                                               
Alaskans pay at  a higher rate, 28-30 percent  on their "marginal                                                               
income."                                                                                                                        
                                                                                                                                
REPRESENTATIVE FATE inquired as to the average in the state.                                                                    
                                                                                                                                
MR.  GOLDSMITH  estimated that  the  average  federal tax  on  an                                                               
individual's taxable income is about 20 percent.                                                                                
                                                                                                                                
CHAIR COGHILL mentioned  that one of the points  of discussion is                                                               
regarding  whether  to  use  the adjusted  gross  income  or  the                                                               
federal tax liability.   He requested that  Mr. Goldsmith provide                                                               
his opinion of those options.                                                                                                   
                                                                                                                                
MR.  GOLDSMITH  opined  that starting  with  the  adjusted  gross                                                               
income provides  a bit more  flexibility in regard  to [allowing]                                                               
credits or  exemptions.   On the other  hand, by  making Alaska's                                                               
tax a percentage  of the federal tax, [the state]  is beholden to                                                               
the  federal  tax  law.    However, [tying  to  the  federal  tax                                                               
liability]  is  a bit  more  progressive  due to  the  netted-out                                                               
exemptions, which  tend to favor  those at  the lower end  of the                                                               
income distribution.                                                                                                            
                                                                                                                                
Number 2857                                                                                                                     
                                                                                                                                
REPRESENTATIVE  JAMES related  her  conclusion  that a  three-way                                                               
fix, including  some earnings  from the  permanent fund,  a sales                                                               
tax,  and a  moderate income  tax,  is necessary.   However,  the                                                               
dilemma is  that an income tax  has about double the  impact of a                                                               
[sales]  tax, while  use of  the permanent  fund earnings  has no                                                               
cost at  all.  Therefore, Representative  James expressed concern                                                               
as to the  components.  She asked Mr. Goldsmith  to speak to what                                                               
he saw as the best advantage.                                                                                                   
                                                                                                                                
MR. GOLDSMITH  responded that the  [state] has about  three years                                                               
to phase in  a set of policies  to address the fiscal  gap.  Each                                                               
year  there should  be about  a $350-million  bite, the  first of                                                               
which should be through the income  tax.  Although it will have a                                                               
negative impact  on the economy, it  won't be as great  as from a                                                               
sales  tax  generating  the  same amount  of  money  because  the                                                               
federal government would "pick up part of the tab."                                                                             
                                                                                                                                
TAPE 02-12, SIDE B                                                                                                              
Number 2987                                                                                                                     
                                                                                                                                
MR. GOLDSMITH  related his belief  that the economy  could absorb                                                               
[the negative impact created by  an income tax] without crashing.                                                               
For  the next  year,  Mr. Goldsmith  suggested  that perhaps  the                                                               
earnings over  and above  the PFD  and inflation-proofing  of the                                                               
permanent  fund should  be  used.   If  necessary, Mr.  Goldsmith                                                               
suggested that  the third  year would  look at a  sales tax.   He                                                               
reiterated  the need  to take  a phased-in  approach in  order to                                                               
avoid hitting the economy all at once.                                                                                          
                                                                                                                                
Number 2909                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES agreed with  a phased-in approach.  However,                                                               
if  $350 million  were taken  from  the earnings  reserve of  the                                                               
permanent fund,  it wouldn't  impact the  economy at  all because                                                               
that is excess.  She suggested  that the income tax would follow.                                                               
She noted that  the effective date [of the  implementation of the                                                               
income tax]  could be extended in  order to provide more  time to                                                               
prepare.   She  agreed with  looking at  a sales  tax last.   She                                                               
inquired as to why such a scenario would be wrong.                                                                              
                                                                                                                                
MR. GOLDSMITH answered that largely  it's a political choice.  If                                                               
the excess  earnings of  the permanent fund  are used  first, the                                                               
annual  amount  that  could  be  drawn  in  subsequent  years  is                                                               
[decreased].  "Because  we know the economy is going  to be doing                                                               
okay this year, we can afford to  take a little bit of a hit," he                                                               
pointed out.   "The future is  uncertain."  He explained  that if                                                               
the economy  softens, the [state]  wouldn't want to be  forced to                                                               
impose an income  tax on an economy that's already  in a weakened                                                               
condition.                                                                                                                      
                                                                                                                                
Number 2802                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE asked Mr. Goldsmith  why he felt that a sales                                                               
tax would have more of a  negative effect on the state than would                                                               
an income tax.                                                                                                                  
                                                                                                                                
MR. GOLDSMITH  clarified that he  was primarily referring  to the                                                               
proportion of each  tax that would be paid by  nonresidents.  The                                                               
larger the  share being paid  by nonresidents, the  less negative                                                               
the impact on Alaska's economy  because purchasing power would be                                                               
drawn  out of  the Alaskan  economy [otherwise].   Mr.  Goldsmith                                                               
informed the  committee that about  7 percent of sales  in Alaska                                                               
are  made to  nonresidents,  and therefore  93  percent of  sales                                                               
would fall  on the  shoulders of Alaskan  residents if  the sales                                                               
tax were  used.  With  an income tax,  however, the tax  would be                                                               
shared  by  nonresident workers  and  the  income they  generate,                                                               
approximately 10  percent of  total wages paid  in the  state, as                                                               
well as  the federal  government, because  for many  Alaskans the                                                               
state income taxes would be  deductible from their federal income                                                               
tax.   Therefore, the federal  liability for some  Alaskans would                                                               
decrease.   In  that  sense,  an income  tax  would  have a  less                                                               
detrimental effect on the overall economy.                                                                                      
                                                                                                                                
REPRESENTATIVE FATE noted his intention to pursue this further.                                                                 
                                                                                                                                
Number 2670                                                                                                                     
                                                                                                                                
BOB   STILES,  President,   DRven   Corporation,  testified   via                                                               
teleconference in  favor of reenacting  a personal income  tax as                                                               
outlined in HB 413.   He emphasized that he is  in favor of doing                                                               
it now.  Mr. Stiles  remarked that there is a "counter-incentive"                                                               
to job  creation in the state.   If jobs are  created that result                                                               
in people  moving into  the state,  the burden  on the  state has                                                               
been increased and everyone's prorated  share of the PFD has been                                                               
decreased.   The  imposition of  a  personal income  tax has  the                                                               
possibility to enhance the development of job creation.                                                                         
                                                                                                                                
MR. STILES related  his [support] of tying it to  the federal tax                                                               
because  that  is  the  simplest   and  easiest  way  to  do  so.                                                               
Tailoring a  tax to an  adjusted gross income versus  the federal                                                               
tax  liability  creates  additional  bureaucracy  and  laws,  all                                                               
requiring  additional  [employees].   In  the  end, less  overall                                                               
income  from the  tax is  seen than  may have  otherwise occurred                                                               
with a simple [strategy].   Furthermore, the income tax should be                                                               
done first because it has the  longest lead time in regard to the                                                               
state's seeing  any revenues from  the tax.   For instance,  if a                                                               
tax  were instituted  during this  session, the  future liability                                                               
wouldn't begin  to accrue until  2003 and the state  wouldn't see                                                               
any income until 2004.  The  other mechanisms, a sales tax or use                                                               
of the  permanent fund earnings  reserve, can be  implemented and                                                               
produce revenue  more quickly  than the  income tax.   Therefore,                                                               
Mr. Goldsmith  said he believes  that the  approach in HB  413 is                                                               
preferable.                                                                                                                     
                                                                                                                                
Number 2501                                                                                                                     
                                                                                                                                
ERIC  BRITTEN,  Anchorage  Chamber  of  Commerce,  testified  via                                                               
teleconference.   Mr.  Britten informed  the  committee that  the                                                               
Anchorage Chamber of Commerce has  passed a resolution suggesting                                                               
that an appropriate level of  state services be established prior                                                               
to the  institution of  any new  revenue sources.   Additionally,                                                               
the  chamber  hasn't  supported  any spending  caps.    Once  the                                                               
appropriate  level of  state services  has been  established, the                                                               
first  recommendation  is  to  use   a  portion  of  the  current                                                               
permanent fund earnings.   The next step would be  to maintain an                                                               
appropriate  balance in  the CBR,  using it  as a  shock absorber                                                               
against oil-price fluctuations.   The third step would  be to use                                                               
debt,  as  appropriate,  to finance  the  state's  infrastructure                                                               
needs on a long-term, systematic basis.                                                                                         
                                                                                                                                
MR. BRITTEN  pointed out that  the Anchorage Chamber  of Commerce                                                               
has passed resolutions in support  of general obligation (GO) and                                                               
GARVEE [Grant Anticipation Revenue  Vehicles] bonding.  The final                                                               
step would be  the implementation of broad-based  taxes and/or an                                                               
increase of  consumption taxes  that are  fair and  equitable and                                                               
encourage economic development.                                                                                                 
                                                                                                                                
MR. BRITTEN  remarked that any  type of tax  discourages economic                                                               
development to some  extent.  Obviously, a gross  receipts tax is                                                               
more discouraging to  economic development than any  of the taxes                                                               
being  discussed  now.   Targeted  business  taxes and  corporate                                                               
taxes  also  discourage  economic  development.    In  supporting                                                               
broad-based taxes, he  said, the chamber agrees that  [HB 413] or                                                               
the income  tax proposition, as well  as a sales tax,  fit within                                                               
that purview.                                                                                                                   
                                                                                                                                
MR. BITTEN noted his personal  observation, from discussions with                                                               
those  in the  Anchorage  Chamber of  Commerce,  that there  does                                                               
appear to  be more support  for an income  tax than a  sales tax.                                                               
The reasons for  that support relate to the ability  for [a state                                                               
income  tax]  to  be  deducted   from  the  federal  income  tax.                                                               
Furthermore,  [a state  income tax]  fits within  a "broad-based"                                                               
classification.    Moreover, there  is  sort  of a  property  tax                                                               
deduction  in that  [HB  413  is linked  to]  the adjusted  gross                                                               
income on the  federal income tax, which allows  the property tax                                                               
to  be  deducted   on  the  federal  income  tax.     Mr.  Bitten                                                               
highlighted  the support  and passion  for the  development of  a                                                               
complete plan.  He mentioned  that a phased-in approach does make                                                               
sense, as does having triggers.                                                                                                 
                                                                                                                                
Number 2266                                                                                                                     
                                                                                                                                
CHAIR  COGHILL  asked if  a  sales  tax  would be  deductible  on                                                               
Schedule A [of the federal tax forms].                                                                                          
                                                                                                                                
MR.  PERSILY specified  that a  sales  tax is  not deductible  on                                                               
federal income tax returns.                                                                                                     
                                                                                                                                
CHAIR COGHILL  announced that this  discussion would  continue on                                                               
Saturday.   He  also announced  that all  three of  the proposals                                                               
will be before  the committee.  Chair Coghill  announced that the                                                               
hearing on HB 413 would be suspended.                                                                                           

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