Legislature(2003 - 2004)
04/16/2003 07:00 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 236-EMPLOYMENT TAX FOR EDUCATION [Contains discussion pertaining to SB 137, the companion bill.] CO-CHAIR WHITAKER announced that the first order of business would be HOUSE BILL NO. 236, "An Act imposing a tax on employment; and providing for an effective date." Number 0120 REPRESENTATIVE WILSON, sponsor of HB 236, told members she'd brought the bill forward because of the state's current fiscal situation. There are no stable sources of revenue in the state; the Constitutional Budget Reserve (CBR) is almost depleted; the state's fixed expenses such as insurance, fuel costs, Medicare, Medicaid, and so forth keep increasing; and the population is growing rapidly. When the economy is down, there is an increased need for services. She said this leaves two practical answers: cut more from the budget or find a stable source of revenue. Thus HB 236 establishes an employment tax for education; its companion bill in the Senate is SB 137. REPRESENTATIVE WILSON, calling this a work in progress, noted that she'd requested a legal opinion from Legislative Legal and Research Services as to whether the proceeds could be dedicated based on precedent. She reported that there was a school tax prior to statehood, but it was repealed in 1980; in 1962 the proceeds were paid into the general fund. She said Legislative Legal and Research Services told her that the new school tax could not go into a dedicated fund, but the legislature could create a special account within the general fund to receive the proceeds and would then be able to appropriate the proceeds to education and better keep track of the amount collected. Noting that the Department of Revenue had many questions about how the money would be collected and so forth, she offered to go through the bill section by section. Number 0417 CO-CHAIR HAWKER moved to adopt the proposed committee substitute (CS), Version 23-LS0921\H, Kurtz, 4/14/03, as a work draft. There being no objection, Version H was before the committee. Number 0437 REPRESENTATIVE WILSON explained that Section 1 creates a new chapter in Title 43 that imposes an employment tax of $100 a year on each individual 19 years or older who receives compensation of at least $1,000. It requires employers to withhold the tax from the employee's paycheck; a return must be filed [by the employer], who sends the money to the Department of Revenue. A provision deals with whether the amount is deducted from two or more paychecks, which she said spreads the impact for low-income people and deals with paychecks that are less than $50. Section 1 also makes employers liable for the tax unless there is proof provided by the employer - in the form of a paycheck stub, for instance - that the tax already has been withheld. In order to include the self-employed, it requires individuals who are subject to the tax but haven't had taxes withheld by an employer to file a return. REPRESENTATIVE WILSON noted that Section 1 permits employees to claim a refund from the state if there was an overpayment because the employee was unable to prove to the employer that the money was withheld already; she said the department believes this is the most effective manner to deal with overpayments. This section also requires the money collected to be deposited into the general fund (GF) and accounted for separately. It permits the legislature to appropriate the proceeds for education, and defines the tax year as July 1 through June 30, the state's fiscal year. Number 0704 REPRESENTATIVE WILSON discussed Section 2, the transition provision. The initial tax is to be remitted and [a return filed] before the 15th day of the fourth month that the tax is in effect. This is so employers don't have to file every single time they [deduct money], she said, thus reducing the filing frequency for small employers. Furthermore, the timeframe gives the department and the taxpayers more time to prepare for the tax, simplifying filing, and improving customer service during the start-up phase. Section 3 provides for an effective date. Number 0900 REPRESENTATIVE WEYHRAUCH asked whether this tax would be owed by an individual who is self-employed, has a business license, has a simple LLC [limited liability company], has no employees, and earns a couple of thousand dollars a year. REPRESENTATIVE WILSON replied yes, under proposed Sec. 43.45.021 [page 2, lines 16-18, subsection (d)]. Number 1008 REPRESENTATIVE WEYHRAUCH asked whether it is a function of employment or compensation, and then surmised that a person who receives more than $1,000 and is over the age of 19 would pay. REPRESENTATIVE WILSON affirmed that. REPRESENTATIVE WEYHRAUCH asked whether the education tax is the way it was in the old statute, repealed in approximately 1981. REPRESENTATIVE WILSON said yes. REPRESENTATIVE WEYHRAUCH asked why, if the intent is to use the funds for education, the [bill's] title doesn't say so. He surmised that it is a "legislative sentiment." REPRESENTATIVE WILSON said she didn't know whether it should be in the title. Number 1145 CO-CHAIR HAWKER offered his experience that most payroll systems are designed on a calendar-year basis consistent with income tax reporting requirements of the Internal Revenue Service (IRS), whereas this bill uses [the state's] fiscal year. He asked whether Representative Wilson is comfortable that business, computer, accounting, and reporting systems can accommodate multiple tax years. He also asked whether the mechanism for refunds is consistent with the current mechanism for refunds of overpayments of ESC [Employment Security Contribution] taxes. REPRESENTATIVE WILSON said [the mechanism in the bill] was recommended by the Department of Revenue. She deferred to Mr. Persily for further response. Number 1348 LARRY PERSILY, Deputy Commissioner, Department of Revenue, indicated he would present his testimony first. Noting that the original bill version used the calendar year of January 1 through December 31, he pointed out that Version H is similar to the committee substitute for SB 137 in [the Senate], which uses July 1 [as the beginning of the year] and has an effective date of July 1, 2003. Mr. Persily told members that although this starting date doesn't give the department much time, the department believes this date can be met. MR. PERSILY offered to prepare a fiscal note [for Version H] either when the bill moves out of committee or while it is under consideration, and said the department would have to spend "a fair amount of money fairly quickly," depending on when this bill passes this session. He estimated a need for about $900,000 as a "supplemental" for fiscal year 2003 (FY 03), with a lapse date to carry into FY 04, and offered the expectation that a lot of the work would be contracted out to set up the program, a web site, interaction with employers, and outreach. He said employers will need withholding information by June in order to set this up for their first payroll in July. Other than that, the fiscal note would be fairly similar to the one for the original HB 236. He emphasized that with Version H, funds would be needed this year to get started so that the program runs well in FY 04 and there is a full realization of the estimated $39 million a year in revenue. Number 1623 CO-CHAIR HAWKER asked about the ability to accommodate multiple tax years and whether there has been any communication or concurrence with industry, employers, or vendors of accounting and payroll software in this regard. MR. PERSILY acknowledged that this is a little unusual, but offered his belief that it wouldn't be a problem to change the software settings to recognize July 1 as the [beginning of the] fiscal year, just as the state does. He suggested a bigger problem for employers might be getting into the habit of closing out the fiscal year for their employees on June 30; this might take a couple of years to get used to. CO-CHAIR HAWKER inquired about communications with vendors or people who write their own payroll packages or market them commercially. MR. PERSILY, in response to this and further questions, said there have been conversations with "a couple," and the first reaction was that July 1 was unusual, but could be accommodated. Existing systems can handle it, but a change would be necessary because most have January 1 as a default. "But the ones we have talked to didn't believe it would be an insurmountable problem to change that date," he added. "They would just like as much notice as possible." Number 1821 REPRESENTATIVE WILSON explained that many e-mails were received from people who didn't want the money taken out of their first two paychecks of the year, right after they'd spent all their money on Christmas. She said, however, that she was open to putting it back to January 1. Number 1943 REPRESENTATIVE SAMUELS asked whether someone who has two different seasonal jobs would have to go through the refund process [if too much money had been withheld] or could he/she stop the tax from being taken out [by the second employer]. MR. PERSILY highlighted the provision for showing the second employer that the tax has been paid, by showing a pay stub, for example. If it were taken out twice, the process would be similar to the way unemployment taxes are refunded; for those, a person fills out a form and sends it in to request a refund. If an employer or employee made a mistake and there was an overpayment, forms would be available [at the department's web site] and the person could file for and receive a timely refund. Number 2014 REPRESENTATIVE GRUENBERG asked about people who have substantial income from investments. REPRESENTATIVE WILSON answered that this is [a tax] on people who work, not on money earned from a portfolio. She suggested that people [with investment income] may be retired, for example. REPRESENTATIVE GRUENBERG asked whether it was Representative Wilson's specific intent not to include those people [with investment income], no matter how much money they make. [There was no audible response.] Number 2102 REPRESENTATIVE WEYHRAUCH asked whether there had been any brainstorming about whether the tax could be deducted from a permanent fund dividend (PFD) check. REPRESENTATIVE WILSON said it had come up. Reiterating that this is a work in progress, she said she is open to suggestions. Number 2139 REPRESENTATIVE GRUENBERG surmised that this would "catch" some people who earn money in the state but aren't eligible for the PFD. He asked whether that was the intent as well. REPRESENTATIVE WILSON answered in the affirmative. She said she wanted to be able to collect from people who come to Alaska to work and make a good income, perhaps during summer or on the North Slope, and then leave; these people wouldn't be included if this were just connected to PFD checks. She said 25 percent of the people who work in Alaska aren't residents. Number 2231 MR. PERSILY brought attention to a problem with withholding $100 from the PFD. If it is assumed that someone will receive a PFD and there is no withholding of wages, the person may later be deemed ineligible for a PDF because of residency, child support [owed], or prison time. Meanwhile, the opportunity may have been lost to withhold wages during the summer, for example, when people often are able to find jobs. Mr. Persily told members that the department has tried to keep the fiscal note for operations as small as possible. He suggested it makes sense to use payroll withholding as a mechanism or, for people who receive compensation but not wages, to have them "self-report and self-pay." Number 2341 CO-CHAIR WHITAKER assigned a subcommittee to meet and report back the next week with a proposed CS. He named Representatives Weyhrauch, Gruenberg, and Hawker as members, with Representative Hawker chairing; he asked that Representative Wilson participate. [HB 236 was held over.]
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