Legislature(2001 - 2002)

02/26/2002 08:10 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 199-INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES                                                                                 
[Contains discussion of HB 413, HB 35, and HB 303]                                                                              
CHAIR COGHILL  announced that the  first order of  business would                                                               
be SPONSOR  SUBSTITUTE FOR HOUSE  BILL NO. 199, "An  Act relating                                                               
to  taxation,  including  taxation   of  income  of  individuals,                                                               
estates, and trusts."                                                                                                           
CHAIR  COGHILL reminded  committee members  that on  February 23,                                                               
2002, Representative  Hudson had  provided the committee  with an                                                               
amendment [22-LS0753\J.1, Kurtz, 2/18/02] to consider.                                                                          
Number 0440                                                                                                                     
REPRESENTATIVE BILL  HUDSON, Alaska State  Legislature, testified                                                               
as the sponsor  of SSHB 199.   He began by saying SSHB  199 is an                                                               
attempt to fill a portion of  the broad and difficult fiscal gap.                                                               
This bill simply reimposes an income  tax, as a percentage of the                                                               
federal adjusted gross  income.  It uses a flat  tax of 1 percent                                                               
of the adjusted gross income  for the first year, which increases                                                               
to 2.25 percent of the adjusted  gross income and continues on at                                                               
that rate.                                                                                                                      
REPRESENTATIVE HUDSON  pointed out  that the revised  fiscal note                                                               
specifies that  in the first year  - because half of  the year is                                                               
at 1  percent and  half is  at 2.25 percent  - the  total revenue                                                               
will  be  $258 million.    That  revenue  will increase  to  $283                                                               
million [in  the next  year].   He added that  this tax  would be                                                               
less than one-half of the taxes  paid by Alaskans when Alaska had                                                               
an income tax.                                                                                                                  
REPRESENTATIVE HUDSON related his belief  that on average the tax                                                               
would be  less than  the permanent fund  dividend (PFD),  even at                                                               
the reduced  rate.  However, the  more money one earns,  the more                                                               
taxes one pays.  If imposed,  this tax could be deducted from the                                                               
federal  income  tax.    According to  a  statement  by  Governor                                                               
Knowles  regarding  his  [proposed]  tax,  Representative  Hudson                                                               
reported that  perhaps as much  as $50  million that now  goes to                                                               
the   federal  government   could   be   retained  by   Alaskans.                                                               
Representative  Hudson  remarked  that  he'd  written  this  bill                                                               
aiming  for an  equal  contribution from  the  people of  Alaska,                                                               
which  is  why  he  believes  a flat  tax  is  appropriate.    He                                                               
mentioned that  the fiscal note  would probably be  challenged in                                                               
the House Finance Committee because  the administrative costs are                                                               
higher than originally submitted on the last governor's bill.                                                                   
Number 0879                                                                                                                     
REPRESENTATIVE  HUDSON turned  to the  amendment he'd  offered at                                                               
the last committee hearing.   He recalled that when the committee                                                               
had reviewed  the three  tax measures  [SSHB 199,  HB 10,  and HB
413]  members were  enamored with  the trigger  mechanism in  the                                                               
governor's  bill  [HB 413],  which  he  said  he likes  as  well.                                                               
Therefore, the  amendment labeled 22-LS0753\J.1,  Kurtz, 2/18/02,                                                               
was developed, which read as follows:                                                                                           
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               "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)  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."                                                                                               
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               "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  ties  an                                                               
individual's taxable income and  the income taxes and percentages                                                               
to  the unaudited  balance in  the Constitutional  Budget Reserve                                                               
(CBR).   The amendment specifies  that if  there is less  than $2                                                               
billion  in that  reserve,  the  tax is  2.25  percent.   If  the                                                               
reserve has more than $2 billion  but less than $2.5 billion, the                                                               
tax is 1  percent.  If there  is more than $2.5  billion, the tax                                                               
is 0 percent.  Therefore, there  is an incentive for the state to                                                               
do  things such  as  oil exploration  and  development that  will                                                               
enrich and enhance the CBR.                                                                                                     
REPRESENTATIVE HUDSON highlighted that  whether [the proposal] is                                                               
an income  tax or using the  earnings of the permanent  fund, the                                                               
idea  is to  preserve a  large  value in  the CBR,  which is  the                                                               
rainy-day  fund,  emergency and  disaster  fund,  and growth  and                                                               
opportunity fund.  Continuing to  consume the CBR would leave the                                                               
state with no "enterprise funds."                                                                                               
REPRESENTATIVE  HUDSON specified  that his  proposal attempts  to                                                               
preserve at  least $1.5  billion in  the CBR.   If  a significant                                                               
portion  of the  CBR can  be  maintained, oil  revenues could  be                                                               
bolstered by  the earnings of  the CBR when  necessary.  At  a 5-                                                               
percent  payout, the  [reserve  in  the] CBR  will  bring in  $50                                                               
million.   Furthermore, $1.5 billion  will bring in  $75 million,                                                               
which  is  significant.   In  conclusion,  Representative  Hudson                                                               
offered the amendment and requested that the committee adopt it.                                                                
Number 1175                                                                                                                     
REPRESENTATIVE   FATE  moved   that  the   committee  adopt   the                                                               
aforementioned amendment [Amendment 1].                                                                                         
REPRESENTATIVE  JAMES objected.    She explained  that she  isn't                                                               
enamored  with the  CBR [because  it] requires  repayment of  any                                                               
money taken out, which she  views as problematic.  Representative                                                               
James  specified that  either the  CBR  should be  filled up,  as                                                               
[state   statute]  specifies,   or  it   should  be   eliminated.                                                               
Furthermore, she  felt that the  three-quarters vote  required to                                                               
access   the  CBR   is  problematic   because  it   empowers  the                                                               
[legislative] minority to ignore  the intentions of the majority.                                                               
However,  in   our  system  the   majority  rules.     Therefore,                                                               
Representative James  said she would  be more comfortable  if the                                                               
CBR were  changed to the  earnings reserve account (ERA)  [of the                                                               
permanent fund], where she felt  the money would best be managed.                                                               
Although she  believes it laudable  to have a  trigger mechanism,                                                               
she said she isn't sure this is the appropriate trigger.                                                                        
Number 1360                                                                                                                     
REPRESENTATIVE FATE recalled that  Representative Hudson had said                                                               
this  bill   would  be  a   stimulus  for  oil   exploration  and                                                               
development, which  bothered Representative  Fate.   He suggested                                                               
that usually  a tax is  a disincentive for  economic development.                                                               
Furthermore,  the trigger  mechanism doesn't  seem to  allow room                                                               
for capital  growth.  He  stressed that part of  Alaska's problem                                                               
is that  there is  no economy  beyond the oil  fields.   "It just                                                               
seems to me  that ... this still keeps the  capital growth of the                                                               
state in check," he said.   He noted his confusion with regard to                                                               
how  [SSHB 199]  could be  used  and still  maintain the  capital                                                               
growth that is necessary.                                                                                                       
REPRESENTATIVE  HUDSON answered  that he  believes [Amendment  1]                                                               
encourages the state, now and in  the future, to place more money                                                               
into the  CBR, [in order]  to do  more oil exploration  and other                                                               
things that can direct money into  the CBR and thus reduce taxes.                                                               
The  reduction in  taxes would  be the  stimulus to  increase the                                                               
money  in  the  reserves,  which  could  be  made  available  for                                                               
economic development.   Admittedly,  making this  money available                                                               
would  require a  [three-quarters] vote.   Representative  Hudson                                                               
recalled  that  the goal  of  the  [three-quarters] vote  was  to                                                               
restrain  the  growth of  government  by  placing a  higher  vote                                                               
requirement  to  access  the money.    Therefore,  Representative                                                               
Hudson said  he believes that  the maintenance,  development, and                                                               
growth of the CBR is one  of the only opportunities to have money                                                               
available to  do economic development  and expansion, as  well as                                                               
to provide for emergency services.                                                                                              
CHAIR  COGHILL   reminded  everyone  that  if   [SSHB  199]  were                                                               
implemented with the  trigger mechanism, it wouldn't  be the only                                                               
income that would be coming into the state.                                                                                     
REPRESENTATIVE FATE  acknowledged that  may be true,  but pointed                                                               
out that  [SSHB 199] is what  the committee is dealing  with now.                                                               
He  said  taking money  from  the  CBR,  regardless of  the  vote                                                               
required,  politicizes it.   He  suggested that  by taking  money                                                               
from  the CBR  for capital  growth,  therefore, there  will be  a                                                               
political  fight,   which  may  misdirect  the   capital  growth.                                                               
Representative Fate  emphasized that he has  concerns with regard                                                               
to what "we" expect Alaska to be in the future.                                                                                 
Number 1613                                                                                                                     
REPRESENTATIVE JAMES acknowledged that  there will be other bills                                                               
[related  to the  filling the  fiscal gap]  and thus  one has  to                                                               
think  in terms  of this  bill's  fitting in  with other  issues.                                                               
Representative James identified  one purposes of a  tax as trying                                                               
to fill  [the fiscal gap];  therefore, it's difficult  to discuss                                                               
[SSHB 199], which doesn't fill the  gap.  Furthermore, there is a                                                               
[proposed]   constitutional  amendment   that  would   require  a                                                               
spending cap, which could be  increased with more than a majority                                                               
REPRESENTATIVE  JAMES said  it  seems that  at  the spending  cap                                                               
would  be where  the excess  money would  materialize, which  she                                                               
estimated to be "down the road  a ways."  Therefore, she said she                                                               
wouldn't be bothered by stopping  the income tax when it appeared                                                               
that more money would be taken  in than necessary for the budget;                                                               
that would seem to be a  valid trigger.  However, the [trigger in                                                               
Amendment 1]  seems to be a  pacifier for people to  believe that                                                               
the  tax won't  be present  forever.   Representative James  said                                                               
during this  period in  Alaska's history when  there has  been no                                                               
personal  [state]  income tax,  an  unhealthy  attitude has  been                                                               
created.    A 1-percent  tax  on  the  adjusted gross  income  is                                                               
miniscule in  relation to  the services  provided to  citizens of                                                               
the state.                                                                                                                      
REPRESENTATIVE HUDSON noted his agreement.   He explained that he                                                               
wasn't certain  the trigger  [in Amendment  1] could  be reached.                                                               
Furthermore, once a  flat tax is started, perhaps no  less than 1                                                               
percent  should be  charged because  there  is the  need for  the                                                               
mechanism  to be  available.   Representative Hudson  pointed out                                                               
that [Amendment  1] was offered  at Chair Coghill's  request, and                                                               
that its fate is the committee's prerogative.                                                                                   
CHAIR  COGHILL  related his  understanding  that  once a  tax  is                                                               
implemented, it  would endure.   He characterized  the [previous]                                                               
repeal  of Alaska's  personal income  tax as  an anomaly.   Chair                                                               
Coghill  expressed  his desire  to  discuss  how to  trigger  tax                                                               
relief at the point when there's enough.                                                                                        
Number 1905                                                                                                                     
REPRESENTATIVE  WILSON related  her belief  that some  trigger is                                                               
necessary because  it would reassure  the public.   However, this                                                               
trigger is  nothing more  than smoke  and mirrors.   It  would be                                                               
some time before it would  kick in.  Instead, triggers reflecting                                                               
reality should  be in  place.   Representative Wilson  stated her                                                               
dislike of  [Amendment 1] and  her agreement  with Representative                                                               
James that this trigger should relate to [the ERA].                                                                             
Number 2010                                                                                                                     
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of Revenue,  explained that the trigger  was placed in                                                               
the governor's bill [HB 413] because  he felt it was necessary to                                                               
provide the public with hope that  the tax rate would decrease if                                                               
times  got much  better.   Mr.  Persily offered  his belief  that                                                               
government shouldn't collect  more than it needs.   Therefore, $2                                                               
billion to $2.5 billion would be  more than necessary for a shock                                                               
absorber, and thus the amount coming in should be reduced.                                                                      
REPRESENTATIVE FATE highlighted the  fact that some capital needs                                                               
haven't been met.  He expressed  concern that the CBR would never                                                               
be replenished, although there would be  a scramble to do so with                                                               
money   that   should  be   going   into   the  capital   sector.                                                               
Furthermore, the public's  expectation to raise the  level of the                                                               
CBR such that  taxes can be reduced would remain.   Therefore, on                                                               
one hand there is the attempt  to develop the state, while on the                                                               
other hand  there is the  task of  building the CBR,  which takes                                                               
money from  that.  Again,  the public would have  the expectation                                                               
[that the tax rate would decrease during good times].                                                                           
MR.  PERSILY  informed  the  committee  that  the  Department  of                                                               
Revenue has a  few increment requests for the  2003 budget, which                                                               
will help  raise more  revenue.   Therefore, if  those come  to a                                                               
vote, he  hoped that  he could count  on Representative  Fate for                                                               
support for those increment requests.                                                                                           
MR.  PERSILY  turned  to  Representative   Fate's  concern.    He                                                               
explained  that the  legislature  would be  replenishing the  CBR                                                               
because  [the  tax  would be  generating]  more  than  necessary.                                                               
However, if the legislature - before  the money gets to the CBR -                                                               
says with a simple majority vote  that it wants to spend money on                                                               
a   railroad  or   road  development,   for  example,   then  the                                                               
legislature can  spend it.  Then  there wouldn't be a  surplus to                                                               
return to the CBR.   "Until it gets to the CBR,  it's a simple 21                                                               
and 11 [vote] to  spend it," he explained.  "So  if the needs are                                                               
there, you'd have the freedom to meet those needs."                                                                             
REPRESENTATIVE  FATE commented  that  it's never  a simple  21-11                                                               
vote.  He reiterated that [the CBR] will politicize it.                                                                         
MR. PERSILY  agreed that  spending limits,  putting money  in the                                                               
CBR to  cut the budget,  and spending it for  infrastructure will                                                               
all be political.                                                                                                               
Number 2235                                                                                                                     
CHAIR COGHILL recalled Representative  James's comments in regard                                                               
to the replenishment  of the CBR under  the legislature's current                                                               
mandate.  He inquired as to Mr. Persily's view of that.                                                                         
MR. PERSILY  explained that a  constitutional amendment  says the                                                               
accounts are to be "swept" at the  end of fiscal year June 30 and                                                               
that money is  to be put back in [the  CBR].  Since establishment                                                               
of  the CBR  in 1991,  that has  happened twice,  and about  $100                                                               
million has  been repaid.   He estimated  that the  state general                                                               
fund (GF) owes the CBR $4.2  billion to $4.3 billion as of today.                                                               
He highlighted  the advantage of the  state GF, which is  that it                                                               
has no  interest, forever.   Mr. Persily related his  belief that                                                               
no  one believes  the  state  will ever  be  able  to repay  $4.3                                                               
Number 2293                                                                                                                     
REPRESENTATIVE JAMES expressed the  need to discuss whether there                                                               
should  even  be  a  CBR,  which she  doesn't  believe  serves  a                                                               
purpose.   Representative  James  pointed out  that  there is  no                                                               
interest accruing on the CBR to  begin with.  She reiterated that                                                               
the CBR  should either be repealed  or refilled.  She  noted that                                                               
the  other  piece  is  the spending  limit,  which  she  believes                                                               
illustrates  that the  government won't  run amok.   Furthermore,                                                               
there is  a statutory  budget reserve, which  has been  empty for                                                               
quite some  time.   With the statutory  budget reserve,  if there                                                               
were   more  money   than  actually   spent,  that   money  would                                                               
automatically be placed in the statutory budget reserve.                                                                        
MR. PERSILY replied that he wasn't familiar with that account.                                                                  
REPRESENTATIVE HUDSON  explained that  the [excess] money  has to                                                               
be appropriated  into the account; it  isn't automatically placed                                                               
into the statutory budget reserve.                                                                                              
REPRESENTATIVE   JAMES  related   her   understanding  that   the                                                               
statutory budget  reserve account  existed before  the CBR.   She                                                               
inquired as to how the statutory budget reserve account worked.                                                                 
REPRESENTATIVE  HUDSON  recalled  that   it  worked  as  a  shock                                                               
absorber  that was  available with  21 votes.   He  also recalled                                                               
that it came  into existence in 1980 or 1982  when there was some                                                               
[extra]  money  due   to  high  oil  revenues   and  heavy  [oil]                                                               
REPRESENTATIVE JAMES  reiterated her suggestion that  perhaps any                                                               
extra money  should be placed  in the earnings  reserve [account]                                                               
(ERA)  of  the  permanent  fund  -  which  would  have  political                                                               
consequences - if the intent  is to create an incentive regarding                                                               
keeping a  handle on spending.   Representative  James emphasized                                                               
that   spending  requests   come   from  the   public,  not   the                                                               
legislature.  Therefore, if the money  is in the ERA - from where                                                               
the money is  taken - it seems  that it would be  an incentive to                                                               
keep the legislature  in line because it would  impact the amount                                                               
of the PFD,  provided the dividend program is kept  over the long                                                               
Number 2499                                                                                                                     
MR. PERSILY posed a situation in  which the CBR is abolished, the                                                               
money is  placed in the ERA,  and the percentage of  market value                                                               
is  adopted,   which  would  limit  the   distribution  from  the                                                               
permanent fund to 5  percent per SSHB 199.  The  ERA is [part of]                                                               
the  permanent fund,  and no  more than  5 percent  of the  total                                                               
market value of the fund can be  taken.  If there were a bad year                                                               
for  oil prices  and  dividends had  to paid,  there  could be  a                                                               
problem with that 5 percent.                                                                                                    
REPRESENTATIVE  JAMES pointed  out that  the 5  percent has  been                                                               
discussed  as a  statutory requirement,  not as  a constitutional                                                               
requirement.  She announced that she  wasn't willing to go with a                                                               
constitutional  amendment on  that because  she wasn't  convinced                                                               
that some inflation-proofing might have  to be reduced.  However,                                                               
she said she  felt that a spending limit was  reasonable based on                                                               
the  money   being  spent.     With  regard   to  infrastructure,                                                               
Representative  James mentioned  that she  had constituents  from                                                               
Arctic Village and  the Circle school showing her  photos of what                                                               
their schools look like.   She remarked that it's almost criminal                                                               
that there  are children  trying to obtain  an education  in such                                                               
conditions.   "We just haven't  been spending the  correct amount                                                               
while we've been not paying any  taxes," she said.  She concluded                                                               
by reiterating her opposition to [Amendment 1].                                                                                 
CHAIR  COGHILL  remarked that  anytime  the  word "permanent"  is                                                               
attached to any "shock absorber"  fund, there will be a political                                                               
problem.   He said  that's why  he favors using  the CBR.   Chair                                                               
Coghill asked Mr.  Goldsmith to comment on  the trigger mechanism                                                               
incorporated in [Amendment 1].                                                                                                  
Number 2670                                                                                                                     
SCOTT  GOLDSMITH,  Director,  Institute of  Social  and  Economic                                                               
Research,  University of  Alaska Anchorage,  said he  hasn't seen                                                               
[Amendment 1].  In general  terms, Mr. Goldsmith said he believes                                                               
trigger mechanisms are  a good idea.  In regard  to SSHB 199, Mr.                                                               
Goldsmith  expressed  the  need  to  think  carefully  about  the                                                               
structure  of it.    In  some instances,  Alaskans  might end  up                                                               
paying  income  tax   to  the  state  while   having  no  federal                                                               
liability, because  in calculating the federal  liability, people                                                               
are  able  to  take  exemptions   from  the  standard  deduction.                                                               
Therefore, those  with lower  incomes could end  up not  paying a                                                               
federal tax while  still having a state liability.   Perhaps some                                                               
thought should be given with regard to the implications of that.                                                                
Number 2731                                                                                                                     
REPRESENTATIVE HAYES  referred to  a document from  Mr. Goldsmith                                                               
regarding the  impact on the  economy in relation to  the measure                                                               
that is chosen.   He said there was no such  impact as relates to                                                               
SSHB 199.  He asked if the  impact to the economy [from] SSHB 199                                                               
would be  the same  as from  the governor's  income tax  bill [HB
MR. GOLDSMITH  explained that he  hadn't reviewed the  income tax                                                               
measures specifically, but  had reviewed the impact  of an income                                                               
tax  that  raised   $350  million.    Although   there  would  be                                                               
differences in  whom the money  would be extracted from  and what                                                               
the  economic  incentives  would  be,   he  felt  those  were  of                                                               
secondary  importance   in  relation  to  the   amount  of  money                                                               
extracted from  the private sector, which  reduces the purchasing                                                               
power in the private sector.                                                                                                    
Number 2787                                                                                                                     
CHAIR  COGHILL   returned  to  [Amendment  1]   and  its  trigger                                                               
mechanism.   He  explained that  he  likes two  things about  it.                                                               
First,  there has  to be  some  end in  sight for  those who  pay                                                               
taxes.  The idea that the  tax could diminish has to be forwarded                                                               
in order to  illustrate that the government doesn't  need to take                                                               
all it  can get  all the  time.   Second, the  political pressure                                                               
with regard  to keeping  the CBR whole  creates another  layer of                                                               
political pressure.   In regard to  how the CBR could  be repaid,                                                               
Chair   Coghill   [indicated   agreement]  with   Mr.   Persily's                                                               
assessment  that  perhaps there  is  no  intention to  repay  it.                                                               
There is no incentive to repay  the CBR.  Chair Coghill specified                                                               
that  one  of the  reasons  he  likes  the trigger  mechanism  is                                                               
because of the incentive that the  tax could diminish.  He didn't                                                               
feel that  taxes would provide  a connection [between  the people                                                               
and the government] in regard to how the money is spent.                                                                        
Number 2909                                                                                                                     
REPRESENTATIVE CRAWFORD  related his belief that  [SSHB 199] must                                                               
be  considered  in  the  context  of  the  entire  package  being                                                               
considered.   One  component  that has  been  discussed the  most                                                               
lately is taxing 50 percent of  the dividend, which is a flat tax                                                               
that  is bottom-loaded  and  thus takes  a  larger percentage  of                                                               
income  from those  at the  bottom.   [Another component]  is the                                                               
statewide sales  tax, which  also takes a  larger percent  of the                                                               
income from those at the bottom.                                                                                                
TAPE 02-18, SIDE B                                                                                                              
Number 2970                                                                                                                     
REPRESENTATIVE  CRAWFORD pointed  out that  when [revenue]  is in                                                               
excess  of  $2   billion,  the  amount  of  tax   would  only  be                                                               
[decreased]  from the  income tax,  rather than  from [the  other                                                               
options such  as the sales tax].   There has been  testimony that                                                               
the  income tax  is  trying to  balance,  with its  "progressive"                                                               
side, the  nonprogressive side  of the flat  tax on  the dividend                                                               
and the  sales tax.   Therefore,  it seems  if there  is to  be a                                                               
trigger  on the  income  tax, then  there should  be  one on  the                                                               
dividend  tax and  the sales  tax, and  perhaps even  the alcohol                                                               
tax.  Representative Crawford requested  that this fairness issue                                                               
be discussed.                                                                                                                   
REPRESENTATIVE  HUDSON replied  that although  he has  introduced                                                               
legislation that  would tax the  dividend, he hasn't  requested a                                                               
hearing because  he isn't convinced  that is the path  to follow.                                                               
Therefore,  there is  no active  legislation that  would tax  the                                                               
dividend.  He  explained that HB 35 isn't a  tax on the dividend,                                                               
but is  a distribution  method that  takes 50  percent of  the 5-                                                               
percent payout and gives half to  the dividend and the other half                                                               
to the GF.  Representative Hudson  explained that SSHB 199 is the                                                               
reimposition of  an income tax at  an extremely low level.   This                                                               
legislation would bring in $285 million.                                                                                        
REPRESENTATIVE HUDSON  remarked that the committee  would need to                                                               
determine  whether it  believes there  should be  a trigger,  and                                                               
this is the  place to do so.   If the committee  doesn't like the                                                               
CBR as the trigger, then it  could find something else.  However,                                                               
the important  thing is to not  get weighted down with  regard to                                                               
whether there  should be a trigger  or not.  He  pointed out that                                                               
the legislature  can always refund taxes.   Representative Hudson                                                               
offered that the committee could  amend [Amendment 1] by deleting                                                               
[both occurrences of] paragraph  (3) [in Amendment 1]; therefore,                                                               
the  tax would  never fall  below 1  percent or  rise above  2.25                                                               
percent.   Furthermore, it would tied  to the amount of  money in                                                               
the CBR.                                                                                                                        
REPRESENTATIVE HUDSON said he doesn't  personally believe the CBR                                                               
will be  eliminated until Alaskans are  convinced to do so.   The                                                               
[three-quarters] vote provides the  public some satisfaction that                                                               
a simple  majority [vote by legislators  couldn't] make decisions                                                               
that  use   the  money   to  expand   the  size   of  government.                                                               
Representative Hudson specified, "We're  here to serve the people                                                               
of Alaska,  not some particular party."   He opined that  the CBR                                                               
has  worked, although  he  expressed the  need  to eliminate  the                                                               
"sweep  provision."    He  said he  didn't  foresee  the  state's                                                               
ability to  repay the  $4.4 billion that  has been  borrowed from                                                               
the CBR.                                                                                                                        
Number 2685                                                                                                                     
REPRESENTATIVE  JAMES   moved  that   the  committee   adopt  the                                                               
following conceptual  amendment to [Amendment 1].   She explained                                                               
that  [first]   the  conceptual  amendment  would   delete  [both                                                               
occurrences of] paragraph (3), which read as follows:                                                                           
     "(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 JAMES  referred to paragraph  (2) on page  1, line                                                               
16, of Amendment 1, which read:                                                                                                 
     "(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"                                                                           
REPRESENTATIVE  JAMES  specified  that  [second]  the  conceptual                                                               
amendment to  Amendment 1 would  change paragraph (2) to  read as                                                               
     "(2)   one percent  of the individual's  taxable income                                                                    
     if  the unaudited  balance in  the budget  reserve fund                                                                    
     created   by  art.   IX,   sec.   17,  was   completely                                                                    
     replenished as required by law"                                                                                            
REPRESENTATIVE JAMES  clarified that the change  to paragraph (2)                                                               
would also be necessary on the second page of Amendment 1.                                                                      
Number 2580                                                                                                                     
CHAIR COGHILL objected for discussion  purposes.  He remarked, "I                                                               
think that takes the smoke and mirrors to a higher level."                                                                      
REPRESENTATIVE JAMES disagreed.                                                                                                 
CHAIR COGHILL reiterated his like of the trigger mechanism.                                                                     
REPRESENTATIVE JAMES said  this state could have  a huge economy,                                                               
which could replenish  the CBR over time.  She  stressed that the                                                               
purpose for  [the amendment  to Amendment 1]  is because  the law                                                               
specifies that the CBR be replenished.                                                                                          
CHAIR COGHILL  asked if  the language  proposed by  the amendment                                                               
[to the Amendment 1] would work.                                                                                                
Number 2521                                                                                                                     
KATHRYN KURTZ,  Attorney, Legislative Legal  Counsel, Legislative                                                               
Legal   and  Research   Services,  Legislative   Affairs  Agency,                                                               
speaking  as  the drafter,  answered  that  she didn't  view  the                                                               
amendment to  Amendment 1  as changing a  lot or  as problematic,                                                               
CHAIR COGHILL  removed his objection.   Therefore,  the amendment                                                               
to Amendment  was adopted and  Amendment 1 as amended  was before                                                               
the committee.                                                                                                                  
Number 2459                                                                                                                     
REPRESENTATIVE WILSON  commented that the amendment  to Amendment                                                               
1  is an  improvement,  especially regarding  the elimination  of                                                               
paragraph (3).                                                                                                                  
REPRESENTATIVE FATE  highlighted the need  to be aware  that what                                                               
[the legislature]  does now will impact  Alaska's future economic                                                               
development.   He noted  that he didn't  want to  discourage [the                                                               
state's] progress  [with economic development] because  the state                                                               
needs more  than just the oil  and gas industry.   He highlighted                                                               
that  the  gas industry  will  not  take  the  place of  the  oil                                                               
industry   as  far   as  dollars   into  the   state  government.                                                               
Therefore, broad-based  economic progress needs to  occur in this                                                               
state.  He  expressed the need to keep that  thought in mind with                                                               
every decision.                                                                                                                 
Number 2351                                                                                                                     
REPRESENTATIVE HAYES  moved that the committee  adopt Amendment 1                                                               
[as  amended].    There  being  no  objection,  Amendment  1  [as                                                               
amended] was adopted.                                                                                                           
Number 2320                                                                                                                     
CHAIR  COGHILL  announced  that  he   had  an  amendment  to  the                                                               
effective  date that  he  wanted  the committee  to  review.   He                                                               
surmised that the policy call is  with regard to whether there is                                                               
a desire to have [SSHB 199] be retroactive.                                                                                     
Number 2298                                                                                                                     
REPRESENTATIVE  JAMES  began  discussion  of  what  would  become                                                               
conceptual Amendment 2.   She said she didn't want  [SSHB 199] to                                                               
be retroactive because  she viewed that as a slap  in the face of                                                               
the  public.     Furthermore,   [such  retroactivity]   makes  it                                                               
difficult  to administer.   Therefore,  she suggested  [SSHB 199]                                                               
should be effective January 1, 2003.                                                                                            
REPRESENTATIVE   JAMES  offered   the  foregoing   as  conceptual                                                               
[Amendment 2].                                                                                                                  
CHAIR COGHILL referred to page  4, Section 6, subsection (a), and                                                               
asked if  the December 31, 2002,  date would have to  be moved up                                                               
one year as well.                                                                                                               
REPRESENTATIVE JAMES replied  no.  She pointed  out that December                                                               
31,  2002, is  the  day  before [the  tax  withholding on  wages]                                                               
starts.    Representative James  clarified  that  the bill  would                                                               
merely have an effective date of January 1, 2003.                                                                               
CHAIR COGHILL announced  that he would request  that a conceptual                                                               
amendment for  an effective date  of January 1, 2003,  be drafted                                                               
[in a committee substitute].                                                                                                    
CHAIR  COGHILL, after  determining that  there was  no objection,                                                               
indicated conceptual Amendment 2 was adopted.                                                                                   
Number 2165                                                                                                                     
REPRESENTATIVE JAMES  turned to the  issue of  a flat tax  on the                                                               
adjusted gross  income.  She  said she  agreed with not  going to                                                               
the itemized deductions and credits  - the parts that the federal                                                               
government  manipulates  in order  to  determine  the tax.    She                                                               
suggested  perhaps there  should be  a floor  with regard  to the                                                               
number  of exemptions  [an  individual can  claim].   Perhaps  it                                                               
would  be best,  she said,  to specify  an amount  per exemption.                                                               
However, she  didn't want  to tie  it to the  federal tax.   Once                                                               
it's established,  the [exemption] could increase  in relation to                                                               
the  cost  of living;  perhaps  between  $3,000-$5,000 would  [be                                                               
appropriate for  this exemption].  Therefore,  the decision would                                                               
be whether to tax the first dollar an individual earns.                                                                         
REPRESENTATIVE HUDSON noted that  he'd spoken with Representative                                                               
James, and  although he hadn't  developed a proposal,  he thought                                                               
it might be  of value.  He pointed out  that such a determination                                                               
would be  left to the federal  government.  Therefore, it  has to                                                               
be a  reasonable modification to  the adjusted gross income  in a                                                               
way that  best serves  Alaskans.   Representative Hudson  said he                                                               
didn't know how to rewrite  this [to do what Representative James                                                               
is suggesting].   He expressed  the need  to forward a  letter to                                                               
the House Finance Committee regarding this possible exemption.                                                                  
REPRESENTATIVE JAMES  explained her view that  [the proposed tax]                                                               
would eliminate  the potential  for an  individual to  "play with                                                               
this."   Representative  James said  she really  likes this  flat                                                               
tax, which  she views  as fair  and simple.   She  predicted that                                                               
there would be  less auditing by the department,  which she views                                                               
as  important.   Representative James  offered  to do  this in  a                                                               
letter to  the next  committee of referral.   However,  she said,                                                               
she would feel more comfortable  having the language incorporated                                                               
into the legislation before the bill is forwarded.                                                                              
CHAIR COGHILL pointed out that  the definition of "poverty level"                                                               
is  really  composed  of several  different  levels  for  various                                                               
things.  Therefore, he suggested that a number be specified.                                                                    
REPRESENTATIVE HUDSON highlighted that  the money [the tax] would                                                               
collect is  to sustain programs  that, for the most  part, impact                                                               
those  at  the lower  end  of  the  economic scale.    Therefore,                                                               
everyone  would  contribute, while  the  money  would be  largely                                                               
funneled  to  the lower  end  of  the  economic  scale.   If  the                                                               
collections at the  lower end of the economic scale  are going to                                                               
be modified,  then one must  seriously consider the  amount taken                                                               
from everyone else.  He said he  likes the idea that those at the                                                               
lower end of the economic scale will have to pay something.                                                                     
Number 1695                                                                                                                     
REPRESENTATIVE STEVENS expressed  appreciation for Representative                                                               
Hudson's approach  of keeping this  tax simple in order  to avoid                                                               
more  expenses   related  to  the  collection   of  these  taxes.                                                               
Representative  Stevens offered  his belief  that adjusted  gross                                                               
income  would   include  the  federal   cost-of-living  allowance                                                               
(COLA).   He asked whether  Representative Hudson  had considered                                                               
providing credit for property taxes.                                                                                            
REPRESENTATIVE  HUDSON confirmed  that  COLA is  included in  the                                                               
adjusted gross  income.  However,  [SSHB 199] doesn't  taken into                                                               
consideration   exemptions  for   a   property   tax  or   senior                                                               
exemptions.   He related the  difficulty in choosing a  base, but                                                               
the  thought was  that the  adjusted  gross income  was the  most                                                               
equitable way in which to acquire an equitable contribution.                                                                    
REPRESENTATIVE STEVENS agreed with the need to be simple.                                                                       
Number 1549                                                                                                                     
REPRESENTATIVE JAMES recalled  that nearly 30 years  ago when she                                                               
was  involved  with the  Head  Start  program, she  would  advise                                                               
parents  that even  saving a  little  is important.   Although  1                                                               
percent  is small,  if everyone  pays  a little,  then it's  more                                                               
fair.   She  emphasized  that  many of  the  people  that are  of                                                               
concern don't have an adjusted  gross income.  Therefore, even if                                                               
the adjusted gross income is  used, Representative James said she                                                               
didn't  feel anyone  would be  destroyed  with a  1 percent  tax.                                                               
However, there  is the perception  that those with  more children                                                               
need extra money - but to have those children was their choice.                                                                 
CHAIR  COGHILL commented  that "we"  aren't  trying to  institute                                                               
something that resembles  the federal income tax.   Chair Coghill                                                               
turned to the issue of the  trust industry and related his belief                                                               
that it  will have to deal  with this tax.   Furthermore, he said                                                               
he understood that the trust  industry already has a premium tax.                                                               
He asked  if Representative Hudson  had considered any  change in                                                               
regard to the trust industry.                                                                                                   
REPRESENTATIVE HUDSON  recalled that  when the  trust legislation                                                               
was  passed, the  idea was  to provide  economics in  Alaska such                                                               
that  those  who wish  could  bring  their  money to  Alaska  for                                                               
management and  that Alaska  would receive  a percentage  for its                                                               
management.   He said he  was amenable  to modifying the  bill to                                                               
address the trust  industry in order that it  continue.  However,                                                               
he wasn't sure  how to make the modification and  thus he'd asked                                                               
Representative Murkowski to assist with that.                                                                                   
CHAIR COGHILL  noted that addressing  the trust industry  in SSHB
199 would play into his consideration of forwarding the bill.                                                                   
REPRESENTATIVE HUDSON said it is [the  same] for him as well.  He                                                               
reassured  Chair Coghill  that he  would work  on a  modification                                                               
that would address the trust industry.                                                                                          
Number 1261                                                                                                                     
CHAIR  COGHILL explained  to the  committee  that he'd  requested                                                               
that the  sales tax legislation  [HB 303] be heard  first because                                                               
it included [conditional-effect language]  that he had considered                                                               
inserting in  [SSHB 199].  The  amendment he referred to  read as                                                               
     Page 6, line 4:                                                                                                            
     Insert new Section 10:                                                                                                     
     Section 10. The  uncodified law of the  State of Alaska                                                                  
     is amended by adding a new Section to read:                                                                                
     CONDITIONAL EFFECT.  This Act takes effect only if                                                                         
          (1) the Twenty-Second Alaska State Legislature                                                                        
               (A) a version of Senate Joint Resolution 23,                                                                     
     proposing amendments  to the Constitution of  the State                                                                    
     of  Alaska relating  to an  appropriation  limit and  a                                                                    
     spending limit,                                                                                                            
               (B) a version of House Joint Resolution 36,                                                                      
     proposing  an  amendment  to the  Constitution  of  the                                                                    
     State of  Alaska limiting the rate  of state individual                                                                    
     income taxes and sales taxes; and                                                                                          
          (2) at least one of the propositions for the                                                                          
     amendments in the resolutions described  in (1) of this                                                                    
     section is approved  by the voters at  the 2002 general                                                                    
     *Sec.[10] 11                                                                                                         
CHAIR  COGHILL further  explained  that he  was  trying to  offer                                                               
language such  that whatever is  done with regard to  taxation is                                                               
equal to what is done to reduce government.                                                                                     
Number 1107                                                                                                                     
MS.  KURTZ  informed the  committee  that  there is  a  potential                                                               
constitutional problem if  the effectiveness of a  bill passed by                                                               
the  legislature  is  contingent  on a  resolution  amending  the                                                               
constitution passed by  the legislature and then  approved by the                                                               
people.   She explained that, in  effect, the [conditional-effect                                                               
language] makes the underlying bill  contingent upon the approval                                                               
of the voters.  The  conditional effectiveness sort of blends the                                                               
two  distinct and  parallel processes  by which  the constitution                                                               
[allows] for  making law -  that is, through the  legislature and                                                               
by  initiative.   Although  this  question  hasn't directly  been                                                               
decided  by the  courts in  Alaska, the  majority of  states have                                                               
decided   that    such   [conditional-effect    language]   isn't                                                               
MS. KURTZ,  in response to  Chair Coghill, said she  didn't think                                                               
making [the bill effective] contingent  on its passage out of the                                                               
legislature   poses  the   same   issues.     Still,  there   are                                                               
difficulties  when passage  of  one bill  in  the legislature  is                                                               
contingent upon the  passage of another bill  in the legislature.                                                               
Therefore, she  expressed the  need to be  sure that  the single-                                                               
subject requirement is adhered to in both pieces of legislation.                                                                
CHAIR  COGHILL  specified  that  he   was  trying  to  avoid  any                                                               
"trouble" while providing a balance  between the passage of a tax                                                               
and  the pressure  [to decrease]  government.   He  asked if  the                                                               
aforementioned  amendment without  references to  the resolutions                                                               
would be as powerful as intent language.                                                                                        
MS. KURTZ  noted that intent  language is different  [because] it                                                               
wouldn't  be  codified.    Removal   of  the  references  to  the                                                               
resolutions  would be  helpful in  addressing the  single-subject                                                               
REPRESENTATIVE HUDSON inquired as to  the effect on the effective                                                               
date  of the  SSHB  199.   How  would  one  determine the  actual                                                               
effective  date  of  the  bill   and  the  subsequent  increases?                                                               
Representative  Hudson  related   his  understanding  that  Chair                                                               
Coghill is  interested in  finding a  nexus between  developing a                                                               
tax-collection mechanism with the approach  to reduce or hold the                                                               
line with expenditures.  Representative  Hudson said he could see                                                               
how  such intent  language could  be used  without upsetting  the                                                               
intent of the  bill.  However, he agreed with  Ms. Kurtz that the                                                               
language  in the  aforementioned amendment,  including references                                                               
to the resolutions,  would be tantamount to  [requiring] a public                                                               
vote on something for which the legislature is responsible.                                                                     
CHAIR COGHILL said  that, too, was his concern.   Furthermore, he                                                               
expressed concern that  such a change would make  a majority vote                                                               
issue  [on legislation]  contingent upon  a super-majority  [two-                                                               
thirds]  vote.   He  specified that  that  wasn't his  intention,                                                               
although  he understood  that even  still, the  problem with  the                                                               
two-thirds vote would surface.                                                                                                  
MS. KURTZ  agreed and  pointed out that  it would  be problematic                                                               
even when the legislation is  contingent on the legislature via a                                                               
CHAIR COGHILL  surmised that if  [passage of SSHB 199]  were made                                                               
contingent  upon a  vote  of  the people,  it  wouldn't pass  the                                                               
constitutional  test.   Contingency  based  on  passage from  the                                                               
legislature would probably be safer ground.                                                                                     
MS. KURTZ specified, "It's an  undecided question whether hanging                                                               
it on a  vote of the people  would be a problem in  Alaska."  The                                                               
bulk  of the  decisions  elsewhere don't  seem  to be  favorable.                                                               
Although  conditional-effect language  relating  to passage  from                                                               
the  legislature would  move  away from  that  concern, it  would                                                               
still be  problematic in  relation to the  majority vote  [on the                                                               
average tax bill].                                                                                                              
CHAIR COGHILL said he is looking for a self-leveling mechanism.                                                                 
Number 0533                                                                                                                     
REPRESENTATIVE HUDSON  related his perception that  a majority of                                                               
[legislators] are willing to consider a responsible spending-                                                                   
limit  opportunity on  which the  people can  vote.   Although he                                                               
indicated agreement  with the  need for a  nexus, he  agreed that                                                               
tying  passage  of   this  to  the  passage   of  other  specific                                                               
legislation would be constitutionally problematic.                                                                              
CHAIR COGHILL concluded  by pointing out that  the tax [proposal]                                                               
that is forwarded from this  committee will likely be an enduring                                                               
[tax].   Therefore, he [expressed  the need] to balance  that tax                                                               
with some  downward pressure  in order  to provide  some enduring                                                               
effect.   In  the  past,  the legislature  has  done  a good  job                                                               
holding  the  line and  placing  money  into  the corpus  of  the                                                               
permanent fund.   Chair Coghill  announced that he would  order a                                                               
committee substitute.  [SSHB 199 was held over.]                                                                                

Document Name Date/Time Subjects