Legislature(2017 - 2018)BELTZ 105 (TSBldg)

04/27/2017 01:30 PM LABOR & COMMERCE

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Audio Topic
01:32:13 PM Start
01:34:00 PM HB115
02:55:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Presentation - Mercatus Center - "Recommendations TELECONFERENCED
for Stabilizing Alaska's Revenue"
- Alaska Trust Industry
+ Dept. of Revenue - Modeling HB 115 Impact on TELECONFERENCED
Alaska's Economy
+ Bills Previously Heard/Scheduled TELECONFERENCED
                          HB 115-INCOME TAX; PFD PAYMENT/CREDIT                                                             
CHAIR     COSTELLO        announced       the    consideration           of   HB    115.    She    asked                        
Mr.    Millsap       to   start      his    presentation          by    telling      the     committee                          
about the Mercatus Center.                                                                                                      
1:34:00 PM                                                                                                                    
ADAM     MILLSAP,         PhD,     Mercatus        Center,       George       Mason      University,                            
Arlington,          Virginia,         stated       that      the     Mercatus         Center       is     a                     
university-based             research       center      whose     mission       is   to    bridge      the                      
gap    between       academic       ideas      and    policy      by    sharing      research        with                       
policymakers.           He    said     he    couldn't        give      details       about      funding                         
because       the    research       center      is   entirely       separate,        but    the    donor                        
policy      is   on    the   website.        It   includes       contact       names     and    numbers                         
if anyone is interested in more information.                                                                                    
1:35:14 PM                                                                                                                    
MR. MILLSAP read the following testimony into the record:                                                                       
        Chairman           Costello,           Vice        Chairman          Hughes,          and                               
        distinguished           members      of   the    Senate      Labor     and    Commerce                                  
        Thank      you    for     accepting        my    testimony        on    creating        an                              
        alternative          source       of    revenue       in    Alaska       and    on    the                               
        features        of   economically          sound     tax    policy.       My   name     is                              
        Adam      Millsap,        and     I    am     a   research         fellow       at    the                               
        Mercatus        Center       at    George      Mason      University,          where      I                             
        study       state      and      local      public        policy.       As     Alaska's                                  
        legislature          considers        alternative          revenue      sources,        my                              
        message       today     is    that    tax    policy      that     is   economically                                     
        efficient          and      promotes          economic         growth        has      two                               
        important         features:        1)    low    rates      and    2)    a   broad     tax                               
        base with few exemptions or deductions.                                                                                 
        TAX REFORM IN ALASKA                                                                                                  
        The      most       common         sources        of      revenue         for      state                                
        governments          are     the     income       tax     and     the    sales       tax.                               
        Alaska      has    neither      of   these,      instead       relying      on   taxes,                                 
        rents,      and    royalties        tied    to   the    extraction        of    oil   and                               
        gas    for    much     of   its    revenue.       The    price      and    production                                   
        of     these      commodities           fluctuates          for     a    variety        of                              
        supply       and    demand       reasons,        and    Alaska's        reliance        on                              
        them     as    a   source      of    revenue       results      in    some     of    that                               
        volatility          being      transferred          to    the    state's        revenue                                 
        In     recent       years      Alaska       has     experienced          significant                                    
        budget      deficits,        which     has    generated        a  search      for    more                               
        stable      alternative          sources      of    revenue.       An    income      tax,                               
        a   sales     tax,    or   a   combination         of   the    two   is    capable      of                              
        providing         that      revenue.         However,        the      efficacy        and                               
        efficiency          of     any     tax     depends        on     the     way     it     is                              
        structured.         For    a   tax    to   generate       revenue      efficiently,                                     
        it should consist of low rates and a broad base.                                                                        
        In    combination,           these     features        reduce       the    number       of                              
        tax-related          distortions          to    the     economy       and     maximize                                  
        the      amount        of     resources          left       in     the      hands       of                              
        taxpayers,          while      still      raising       adequate        revenue       for                               
        government          functions.           They      also      reduce        compliance                                   
        costs,      which     are    the    costs     associated        with     obeying      the                               
        law.     Reducing       the    number       of   deductions         and    exemptions                                   
        saves time and effort required to ensure compliance.                                                                    
        A   simple      tax    code     also     means     less     effort      needs      to   be                              
        expended        monitoring         year-to-year           changes       in    brackets                                  
        and     allowable         deductions         and     exemptions.          Finally,        a                             
        broad      tax    base     is    generally        less     variable       over     time,                                
        which      makes      it     easier      for     policymakers           to    forecast                                  
        revenue during the budgeting process.                                                                                   
        STRUCTURE INCOME TAX TO AVOID DISTORTIONS                                                                             
        As    mentioned         previously,         two     common       state     taxes      are                               
        the    income      tax    and   the    sales     tax.     Income      taxes     distort                                 
        people's        choices       of   how    much     to    work    by    reducing       the                               
        benefits       of    work.     Low   marginal        income     tax    rates     reduce                                 
        this      distortion.          Limiting        deductions          and     exemptions                                   
        also     allows       rates     to    be    lower     by    broadening         the    tax                               
        Numerous        income      tax     brackets        increase       the     complexity                                   
        of    the    tax     code     and    deter      additional         work     near     each                               
        bracket        threshold,          since       any     additional          income       is                              
        subject       to   a  higher      tax    rate    than     previous       income.      The                               
        more      brackets         there       are,      the      more      often       workers                                 
        confront        changes       in    the     incentive        to    work.      Reducing                                  
        the    number      of   brackets       encourages         more    work     across     the                               
        income       distribution.            Some     progressivity            in    the     tax                               
        code     may    be   desirable,         but    it   should      be   achieved        with                               
        as few brackets as possible.                                                                                            
        States        have     implemented           income       taxes       at    different                                   
        times,       and    there      is    evidence        that     states       experience                                   
        slower      per    capita      income      growth     following        the    adoption                                  
        of     an    income        tax.This            is    consistent          with      other                                
        studies       that     find     that     states      with     higher      income      tax                               
        rates experience slower per capita income growth.                                                                       
        There     is    also    evidence       that     people     migrate       in   order     to                              
        reduce       their     tax     liability.Thus              the     creation       of    an                              
        income      tax     may    harm     Alaska's       economy       by    reducing       the                               
        incentive        to    work     and    by    inducing       people      to    emigrate                                  
        from the state.                                                                                                         
        However,        the    potential        costs      to    economic       growth       from                               
        the     implementation           of    an    income      tax     must     be    weighed                                 
        against        the     costs       of     chronic        budget       deficits        and                               
        spending        cuts.      For     example,        some      studies       find      that                               
        government         spending        on    education,         public      health,       and                               
        infrastructure           can    counteract         the    disincentive          effects                                 
        of     greater        taxation        and      actually        improve        economic                                  
        growth.And            since      people       and    businesses         are     forward                                 
        looking,       large      and   frequent        budget     deficits        will    cause                                
        them     to    expect       future      tax    increases         and    will     create                                 
        uncertainty           about      the      state's        economic        and     fiscal                                 
        The     net     effect       on    Alaska's        economy       will      ultimately                                   
        depend      on   the    structure        of   the    income     tax,     the    state's                                 
        spending         decisions,         and     whether        an    income       tax     can                               
        assure        residents,          investors,           and      firms       that      the                               
        state's finances are sound.                                                                                             
        Many      states       have      reformed         their      income        tax     codes                                
        recently,        and    these      reforms      provide       some     guidance       for                               
        Alaska.Reforms               in   Utah     and    North      Carolina       broadened                                   
        their     income      tax    bases     by    eliminating         various      credits,                                  
        exemptions,          and    deductions         and    replaced       their      systems                                 
        of    tax     brackets        with      one     flat     rate.       These      changes                                 
        eliminated         distortions          in    the     tax    code     and     improved                                  
        the    efficiency         of   each     state's       income      tax.    Alaska      can                               
        eliminate         the    need     for    future      reform       by   implementing                                     
        an income tax with similar features from the start.                                                                     
        STRUCTURE            SALES       TAX      TO     LIMIT        DISTORTIONS             AND                             
        In   addition       to    the   income      tax,    a   sales     tax    is   a  common                                 
        way    for    government         to   raise     revenue.       A   sales     tax    is    a                             
        tax    on    consumption,          so   it    discourages         consumption         and                               
        encourages         saving.       More     saving       means      more     investment                                   
        and     ultimately         more     economic        growth.       Conversely,         the                               
        income      tax's     main     flaw    is   that     it   discourages         work    and                               
        saving.         This       is      why      many       economists          prefer         a                             
        comprehensive           consumption         tax    over     an   income      tax    as    a                             
        means of generating revenue.                                                                                            
        However,        a   sales     tax    also     has     drawbacks,        the     primary                                 
        one    being     that     in   its   most     common      and   basic     form     it   is                              
        regressive.          Since      lower-income          people      spend      a   larger                                 
        portion       of    their      income      than     higher-income           people,       a                             
        sales      tax    imposes      a   relatively         larger      burden      on   those                                
        with     lower      incomes.        This     undesirable          feature       can     be                              
        mitigated         by   applying        the    sales      tax    to    a   broad      base                               
        that     includes       both    goods      and   services.        Taxing      services                                  
        is     also     important         since       unlike       in    the     past,       most                               
        consumer        spending        today       is    on    services        rather       than                               
        Applying        a   sales     tax    to    all    final     goods      and    services                                  
        allows      the    rate    to   be    lower     to   achieve      a   given     revenue                                 
        target,       which      reduces      the    burden       on   all    consumers.A                                       
        broad      base     can    also     reduce       the    tax's     regressiveness,                                       
        since      higher-income            people       spend      a   larger       share      of                              
        their      income     on    services       than     lower-income         people.        If                              
        only     goods      are     taxed,      a   sizeable        amount      of    consumer                                  
        spending,        especially         by    higher-income           people,      will     be                              
        unfairly exempt from taxation.                                                                                          
        Product-specific             sales     taxes,       commonly       referred       to    as                              
        "sin     taxes,"       are     especially        egregious         since     they     are                               
        routinely        applied       to   goods     disproportionately              consumed                                  
        by   lower-income          people.       The   limited       scope     of   sin    taxes                                
        creates       large     welfare       losses      as    consumers        expend      time                               
        and     effort       seeking       out     tax-free        alternatives.They                                            
        also     invite      lobbying       from     various       interests,         both    for                               
        and     against       the     taxes,      which      wastes       resources         in    a                             
        process         called        rent-seeking.Product-specific                             or                              
        industry-specific              sales      taxes      should       be    avoided       for                               
        these reasons.                                                                                                          
        MAKE THE TAX CODE MORE EQUITABLE                                                                                      
        Equity      is   another       important       feature       of   tax    policy      that                               
        could       be    improved        in     Alaska.       Horizontal          equity       is                              
        achieved        when    taxpayers        who    earn     the    same     income      face                               
        the    same     tax     burden.       In   Alaska,       revenue       is   primarily                                   
        raised       through       the     oil    and     gas     industry.        In    fiscal                                 
        year      2016,       oil     and     gas      revenue       accounted          for     72                              
        percent        of     the      state's        general        fund      unrestricted                                     
        Since      all    taxes      are    ultimately         paid     by   people,       taxes                                
        on     the      oil      and     gas      industry         are     paid       by     some                               
        combination           of    its     workers,        owners,        and     customers.                                   
        This     means     that    workers       and    investors       in    this    industry                                  
        bear     more    of   the    tax    burden     in    the   form     of   lower     wages                                
        and    dividends        than    similar       people      in   other     industries,                                    
        which violates the principle of horizontal equity.                                                                      
        Moreover,         the     benefit        principle         of    taxation        states                                 
        that     those     receiving        the     benefits       of   government         goods                                
        and     services         should       contribute         to    their       provision.                                   
        While       Alaska        does      levy      some      user      fees,       product-                                  
        specific         sales      taxes,       and     a    corporate         income       tax,                               
        these      taxes      generate        significantly          less      revenue       than                               
        the    taxes      on   the    oil     and    gas    industry.        To   the    extent                                 
        that     Alaska's       state      government        is    providing        goods     and                               
        services         that     benefit        each     resident,         each      resident                                  
        should      contribute         to   their      cost.     A   broad-based         income                                 
        or    sales      tax     would     be    more     equitable,          and    it    would                                
        better      satisfy       the    benefit       principle        of   taxation        than                               
        the      current        system,         since       it     would       more      evenly                                 
        distribute the cost of government.                                                                                      
        Efficient         and    effective        tax    policy       should      consist       of                              
        low    rates      that     are    applied       to    broad     bases.      Together,                                   
        low      rates       and      a    broad       base       reduce       distortions,                                     
        decrease         compliance         costs       and     ensure       that     the     tax                               
        burden is shared equitably by all taxpayers.                                                                            
        Finally,        it   is   important        to   note     that     the    creation       of                              
        an   income      tax,     sales     tax,    or   both     should     not    be   viewed                                 
        as    a    panacea.        Such      taxes      can     provide       a    relatively                                   
        stable       source      of    additional         revenue,        but    it    is    also                               
        important        for    state     governments         and    their     citizenry        to                              
        live     within      their     means.      Government        spending       in   Alaska                                 
        as    a  percentage         of   total     state      personal       income      was    31                              
        percent        in    2015,      nearly       two     and     a    half     times      the                               
        national        average       of    13    percent.Maintaining                   such      a                             
        high     level     of   spending       relative       to   income      would     likely                                 
        require       more     than      a   modest      tax     increase,        and    higher                                 
        tax     rates     increase        the     likelihood         that     an    income      or                              
        sales      tax    will    have     a  negative        net    effect      on   Alaska's                                  
        economy.        For    this    reason,       efforts       to   balance       Alaska's                                  
        budget        should       consider        both      revenue        increases         and                               
        spending cuts.                                                                                                          
        Thank      you     for     inviting        me    to    speak      with     you     today                                
        about       tax      policy        in     Alaska.        I    look       forward        to                              
        answering         any     questions         you    may     have      concerning         my                              
        1  Adam   Millsap  and   Olivia  Gonzalez,   "State   and  Local  Tax   Policy,"  Economic                              
        Perspectives, Mercatus Center at George Mason University, January 2016.                                                 
          Richard F. Dye and Therese J. McGuire, "Growth and Variability of State Individual Income                             
        and General Sales Taxes," National Tax Journal (1991): 55-66.                                                           
           Thomas R. Dye and Richard C. Feiock, "State Income Tax Adoption and Economic Growth,"                                
        Social Science Quarterly (1995):                                                                                        
          Barry W. Poulson and Jules Gordon Kaplan, "State Income Taxes and Economic Growth," Cato                              
        Journal 28, no. 1 (2008): 53.                                                                                           
        Randall  G. Holcombe and  Donald J. Lacombe,  "The Effect of  State Income Taxation  on Per                             
        Capita Income Growth," Public Finance Review 32, no. 3 (2004): 292-312.                                                 
          Ira S. Saltz, "State Income Tax Policy and Geographic Labour Force Mobility in the United                             
        States," Applied Economics Letters                                                                                      
        5, no. 10 (1998):  599-601. Martin Feldstein  and Marian Vaillant Wrobel,  "Can State Taxes                             
        Redistribute  Income?," Journal of Public Economics  68, no. 3 (1998):  369-96. Richard  J.                             
        Cebula  and Gigi  M. Alexander,  "Determinants  of Net Interstate  Migration,   2000-2004,"                             
        Journal of Regional Analysis and Policy 36, no. 2 (2006): 116-23.                                                       
   L. Jay Helms, "The Effect of State and Local Taxes on Economic Growth: A Time Series-                                        
        Cross  Section Approach,"  Review of  Economics  and Statistics  67, no. 4 (1985):  574-82.                             
        Alaeddin Mofidi and Joe A. Stone, "Do State and Local Taxes Affect                                                      
        Economic Growth?," Review of Economics and Statistics (1990): 686-91.                                                   
           George R. Crowley, "Case Studies in the Political Economy of Tax Reform" (Mercatus                                   
        Research, Mercatus Center at George Mason University, Arlington, VA, 2016                                               
          Thomas Stratmann, "More Sales Tax Exemptions, Higher Sales Tax Rates," Mercatus Center at                             
        George Mason University, September 17, 2014.                                                                            
           John J. Siegfried and Paul A. Smith, "The Distributional Effects of a Sales Tax on                                   
        Services," National Tax Journal 44, no. 1 (1991): 41-53.                                                                
            Adam J. Hoffer, William F. Shughart, and Michael D. Thomas, "Sin Taxes and Sindustry:                               
        Revenue, Paternalism,  and Political Interest," Independent Review 19, no. 1 (2014): 47-64.                             
            Richard Williams and Katelyn Christ, "Taxing Sin" (Mercatus on Policy, Mercatus                                     
        Center at George Mason University, Arlington, VA, July 2009).                                                           
            Alaska Department of Revenue, Tax Division, "Revenue Sources Book: Fall 2016," accessed                             
        April 26, 2017.                                                                                                         
        13  Eileen Norcross  and Olivia  Gonzalez, "Ranking  the States  by Fiscal  Condition: 2017                             
        Edition"  (Mercatus Research, Mercatus  Center at  George Mason  University, Arlington, VA,                             
1:44:34 PM                                                                                                                    
SENATOR STEVENS asked him to elaborate on the statement that sin                                                                
taxes apply disproportionately to lower-income people.                                                                          
MR.    MILLSAP       explained       that     sin    taxes     are    generally        applied       as   a                     
way    of   deterring        behavior,       not    as   a   means     of   generating        revenue.                          
They     apply      to   things       like     tobacco       products,        alcohol,        and    junk                       
food     and     a    higher      proportion         of     lower-income          people       tend     to                      
consume of these products.                                                                                                      
SENATOR       STEVENS       disagreed        with    the     premise      but     declined       to    ask                      
additional questions.                                                                                                           
SENATOR        GARDNER        commented          that      while       it's      true      that      some                       
segments        of    society       may    drink      a   lot     more     beer,      higher-income                             
people probably pay more for the alcohol they drink.                                                                            
She     referenced         the     statement         that     taxes      on    the     oil     and     gas                      
industry        are    paid     by    some     combination         of    the    workers,        owners,                         
and    customers.        In   Alaska,       taxes     on   the    oil   industry       comes     from     a                     
variety       of   sources,       including        severance        or    production        tax.     That                       
can     be    thought       of    as    the     sales      price      for    the     resource        that                       
Alaskans         own      in     common.         She     asked       if      that      changes         the                      
calculation of horizontal equity.                                                                                               
MR.    MILLSAP      replied       there     might     be   a  slight      difference,         but    it's                       
not     so    large      that      the     people       involved        in    the     industry         are                      
bearing a higher portion of the tax burden.                                                                                     
1:49:14 PM                                                                                                                    
SENATOR       MEYER     asked     if   it's     logical       to   think     that     initiating        an                      
income      tax   will     cause     people      to   move    where     the    cost    of    living     is                      
lower,      even    though      they     may    have    to   pay    income      tax    or   sales      tax                      
or both in that new location.                                                                                                   
MR.    MILLSAP       said     it's     perfectly         reasonable         to   think      that     some                       
people       may     be    living       in    Alaska       because        it    is     a   lower       tax                      
environment,          and    any    decision       the    legislature          makes     to   increase                          
revenue       is    going      to    change       that     calculus.        It    may     provide       an                      
additional reason to migrate to another state.                                                                                  
SENATOR       MEYER      referenced        the     statements         that     states      experience                           
slower      per    capita      growth       after     implementing          an    income      tax,     and                      
that people migrate to reduce their tax liability.                                                                              
MR. MILLSAP confirmed that was part of his testimony.                                                                           
1:52:36 PM                                                                                                                    
SENATOR        HUGHES       asked      if     the     introduction           of    an     income       tax                      
coupled       with     the     high     cost      of    living      in    Alaska       would      likely                        
result in higher outmigration compared to other states.                                                                         
MR.    MILLSAP       opined     that     the    introduction          of   an   income      tax    would                        
change      some      people's       decision        making,       but    whether        the    numbers                         
are    higher      or   lower     than     any    other     state     that     introduces        such     a                     
tax    would     depend,      in   part,     on   the    tax    rate.     The    magnitude       of    the                      
outmigration          is   an   empirical        question       that    can    only    be    evaluated                          
ex-post,       he    said,     but     putting      the     money     to    productive        services                          
such      as     improving         education,           public       health,        or     worthwhile                           
infrastructure that helps the economy could be an offset.                                                                       
SENATOR       HUGHES       referenced          his    testimony         that      2015     government                           
spending        in     Alaska       was     31    percent        of     total      state      personal                          
income,       and    the    suggestion         that     the    state     should      consider        both                       
revenue       increases        and    spending       cuts.      She    asked      if   other      states                        
had     faced       a    similar         situation         and     questioned          whether         any                      
reductions would be made if an income tax was introduced first.                                                                 
MR.     MILLSAP        said     he     would      advise       doing       them     simultaneously                              
because       the     additional         revenue       could     readily       be    spent      without                         
addressing          spending.         That     is     what     happened         when     Connecticut                            
implemented           an     individual          income       tax      in    the      early       1990s.                        
Spending       cuts     were     not    made     at    the    same     time    that     the    tax     was                      
implemented,           and     that      state      is     currently         dealing       with      both                       
budget and pension issues.                                                                                                      
SENATOR       HUGHES       asked      if    it    wouldn't         be    better      to    make      cuts                       
MR.    MILLSAP       said     he   assumes       the    budget      process       would     have     cuts                       
and    new     revenue       done     somewhat       in    tandem.       He    cautioned        against                         
raising revenue first and delaying spending cuts.                                                                               
1:59:13 PM                                                                                                                    
SENATOR       GARDNER       asked      him     to    compare       the    scenarios         of    taking                        
definitive         action     to    raise     revenue       through      new    taxes      versus      not                      
doing      so,    given     Alaska's        specific       situation.         That     includes:        an                      
operating         budget      that      has     been     cut     by    26    percent       in     recent                        
years;      a  credit      rating      that     is   dropping       and    at   risk     of   dropping                          
further;           a       well-demonstrated                 reluctance            of        industry,                          
individuals,          and    small      businesses        to    make     investments         due    to    a                     
lack       of     confidence           in     the      fiscal        future;         a     struggling                           
university;         no    community       college       system      in   a   society       where     more                       
and    more    people      need     to   have     more    than     a   high    school      education;                           
and    school       districts        that     are    laying       off    hundreds        of   teachers                          
and increasing class sizes.                                                                                                     
MR.    MILLSAP       said     it's     an    excellent        point      because       both     revenue                         
and     spending        needs      to    be   considered.          Cutting        core     government                           
services       that     people      have    come     to   expect      is   not    the    best    way    to                      
make     Alaska      a   good     place     to    live    and     do   business.        If    there     is                      
very    little      room     for   significant         cuts,      the   revenue       side    needs     to                      
be   shored      up.    He    said     this    is    ultimately        a   question        for    Alaska                        
taxpayers,        but    he   does     believe      that     running      huge     budget     deficits                          
is    a   concern.        People       who    are     considering          moving      to    or    doing                        
business in Alaska are going to take this into consideration.                                                                   
2:02:39 PM                                                                                                                    
CHAIR     COSTELLO       asked     how    the    introduction         of    an   income     tax    would                        
affect the unemployment rate and the cost of living in Alaska.                                                                  
MR.    MILLSAP       said     an    income      tax     will     certainly        reduce      people's                          
disposable         income.       However,       it's     a   valid     concern       that     the    most                       
recent      employment         figures      indicate        that    jobs     are    either      leaving                         
the    state     or   not    being      created      as   fast     as   they're       destroyed.        He                      
advised       that     most      states      that      implement        an    income       tax    do    so                      
during      an    economic       boom.     Alaska      would      be   somewhat        unique      if   it                      
were     to   implement        a   tax    when     the    economy      is    struggling.         If    the                      
decision          is     to      implement          an      income        tax,       he      suggested                          
policymakers          remain       flexible        and    willing       to    go    back     and     make                       
changes if necessary.                                                                                                           
CHAIR     COSTELLO       asked      if   it's    good     or   bad    timing      to   implement        an                      
income tax while the economy is in a recession.                                                                                 
MR.    MILLSAP       replied       the    timing      is   not    optimal       because       it   would                        
pull     money      out    of    the    economy.        Nevertheless,           Alaska      must     deal                       
with      the     budget       deficit        and     its     hand      might      be     forced.       He                      
reiterated his advice to policymakers to remain flexible.                                                                       
CHAIR       COSTELLO        asked       how     HB     115     would      affect        seniors        and                      
military families.                                                                                                              
MR.    MILLSAP       asked     if    she    is   asking      if    retirement         income      should                        
not be taxed.                                                                                                                   
CHAIR      COSTELLO        said     that's       correct.        The     bill     has     a   standard                          
deduction for each individual, but it has no other deductions.                                                                  
MR.    MILLSAP       said    that's       the    most    efficient        thing      to   do   from     an                      
economic        standpoint.         A   broader       base     keeps     the     rates     as    low    as                      
possible        and    is    the    least      distortive.          He    advised       to   keep      the                      
current       design      with    few    deductions         and    exemptions        and    apply      the                      
tax rate to all income earned in the state.                                                                                     
CHAIR     COSTELLO       asked     if   S   corporations          and   small      businesses        will                       
be impacted by the current tax proposal.                                                                                        
MR.    MILLSAP       said     they    should      be    affected       like     everyone       else.      A                     
small      business        owner      who    files      under      the    personal        income       tax                      
should pay the rate.                                                                                                            
CHAIR      COSTELLO       asked      if    other     states       that     are    struggling         with                       
budget deficits have savings like Alaska has.                                                                                   
MR.    MILLSAP       said     some    states      have     rainy-day        funds      and    he   isn't                        
opposed      to    using     them    to   help     with    budget      deficits,        but   Alaska's                          
budget      deficits       are     more    a   structural         problem       based     on   the     oil                      
market.       It's     reasonable         to    pull      money     from      savings       when     it's                       
needed,        but    in     Alaska's        case     that's       not     a    substitution           for                      
structural reform.                                                                                                              
2:10:00 PM                                                                                                                    
SENATOR       STEVENS       asked     for    an    explanation         of    the    statement        that                       
an   income      tax    may    harm     the   economy       by   reducing       the    incentive        to                      
work.      He   said     it    seems      that     an    income      tax    would      increase        the                      
incentive to work.                                                                                                              
MR.     MILLSAP       answered        with     an    explanation          of    the     substitution                            
effect.        In    the     context       of     an    income       tax,     it's      an    economic                          
understanding           that     an   individual         will     replace       working       a   little                        
more     with     taking      some     leisure       -   not    working.       There      is   also     an                      
income       effect.       In    the     context       of     an    income      tax,      that's       the                      
economic        understanding           that     the     tax     makes      an    individual         feel                       
poorer      and    it   induces       them     to   work     more.     The    question        is   which                        
effect       dominates.         When     economists         look      at    the    entire       economy                         
they     see     that     the     substitution           effect      tends       to    dominate        the                      
income      effect.       The    reason      at    the    macro      level     is    that     not    only                       
can    people      choose      to   work     a   little      bit    less,     but    they     can    also                       
choose      not     to   work     at    all.     For    example,        a   second      earner      in    a                     
home     may    choose      to   work     if   there     isn't      an   income      tax,     but    when                       
the income tax is implemented they may choose not to work.                                                                      
2:12:37 PM                                                                                                                    
SENATOR      HUGHES      asked     if   initiating         an   income      tax   right     now    might                        
deepen and prolong the recession.                                                                                               
MR.      MILLSAP         said       economists           don't       generally          think        that                       
initiating         an   income       tax    will     help     to   get    out     of   a   recession,                           
but    it    might     not     hurt     given     Alaska's        existing       deficit       and     the                      
potential        magnitude         of   spending        cuts     that     might      have     to   occur                        
without an additional revenue stream.                                                                                           
SENATOR       HUGHES     asked      if   he   had    reviewed       HB    115   and    his    thoughts                          
on the tax brackets that are proposed.                                                                                          
MR.     MILLSAP         said      he    reviewed         the      bill      and     believes         it's                       
inefficient to have five brackets in such a short range.                                                                        
2:15:48 PM                                                                                                                    
SENATOR       HUGHES     asked      if   a   sales     tax    would     be   less     regressive        if                      
groceries were excluded.                                                                                                        
MR. MILLSAP said yes.                                                                                                           
SENATOR       HUGHES      highlighted          the    unique      situation        in    many     Alaska                        
village where groceries are very expensive.                                                                                     
2:17:26 PM                                                                                                                    
SENATOR        GARDNER         asked       if     instituting            an     income        tax      and                      
initiating large budget cuts impact employment rates equally.                                                                   
MR.    MILLSAP      said     it's     hard    to   tell     which     would     be   worse,      but    it                      
comes     down     to   what     is   cut.     Massive      spending       cuts     that     eliminate                          
core    services        and   delay      infrastructure           maintenance         probably       have                       
a similar impact to implementing an income tax on employment.                                                                   
SENATOR       GARDNER      asked,      other     than     cutting       taxes,      what    the    state                        
could     do    to   stimulate        the     economy      in    the    current       recession        and                      
do away with uncertainty.                                                                                                       
MR.    MILLSAP       said    recessions         often     need     to   run    their     course,       but                      
it    might      help      if    the     state      could      lend     certainty         to    outside                         
investors        whether        that's      bondholders          or    people      thinking        about                        
moving      to   Alaska      or   businesses        thinking       about     opening       in   Alaska.                         
He    warned      that    trying       too    hard     to   pull     out    of    a  recession         can                      
make things worse down the road.                                                                                                
2:21:32 PM                                                                                                                    
SENATOR       GARDNER      asked      if   he's     aware     that     the    state     has    cut     its                      
operating         budget       by    26    percent        and     has     been     operating         with                       
essentially         no    capital       budget      for    the    last     several       years.      That                       
has impacted a lot of employees, particularly in the trades.                                                                    
She    asked     if   there      have    been     any    studies      about     how    people      weigh                        
the    non-financial          factors       when     they    determine        where      to   live.     An                      
income      tax   will     hurt,     but    Alaskans       place     a  lot    of   value     on   clean                        
air and water, hunting and fishing, and wide-open spaces.                                                                       
MR.     MILLSAP         agreed       that      some      people        will      stay      in     Alaska                        
regardless          of    an    income       tax.      It    has     things       they     can't       get                      
anywhere       else.      The    people      who    would     leave      are    those     who    are    on                      
the    margin.      They     moved     to   Alaska      for    a   reason      when    there     was    no                      
income       tax    and     instituting          one    changes        their      decision        making                        
enough      that    it   makes     sense      to   go   somewhere       else.      He   acknowledged                            
that     Alaska       could      be   unique,        and    a   tax     would      have     a   smaller                         
effect      on   the    decision        to   leave.      Nevertheless,          some     people      will                       
2:24:15 PM                                                                                                                    
CHAIR     COSTELLO        asked     him    to    comment       on   the    impact      of    President                          
Trump's      recent      tax    proposal       that     removes      the    deduction       for    state                        
MR.    MILLSAP       said     the    deduction        is   only     available        to    people      who                      
itemize,         and     he    didn't        know      how     many      Alaskans        that      might                        
include.        He    also     wondered        about      the     chance       of    that     proposal                          
getting through the process.                                                                                                    
2:26:03 PM                                                                                                                    
CHAIR COSTELLO thanked Mr. Millsap.                                                                                             
2:26:32 PM                                                                                                                    
At ease                                                                                                                         
2:30:23 PM                                                                                                                    
CHAIR        COSTELLO         reconvened           the      meeting         and      welcomed          Mr.                      
2:30:47 PM                                                                                                                    
MATT     BLATTMACHR,          Vice     President        and     Trust     Officer,        Peak     Trust                        
Company,       Anchorage,         said     he    is   "more      or   less"      representing          the                      
trust      and    estate      planning        industry        in   Alaska.       He    informed        the                      
committee        that     in   1997     the    legislature          passed      the    Alaska      Trust                        
Act.     This     made     Alaska      the     first     state      in    the    nation       to   allow                        
self-settled           trusts        and     perpetual          trusts.        Since       then,       the                      
legislature         has     passed      additional        laws     that     has    kept     Alaska      at                      
the     forefront          of     the     industry.         The      industry         has     been      so                      
successful        that     many    other     states      have     tried     to   compete      for    this                       
business.        The    state     has    benefited        greatly      over     the    years     and    it                      
generates        meaningful          tax    revenue.        The     insurance        tax     currently                          
brings over $7 million into the general fund each year.                                                                         
He   related      that     the    goal    of   the    presentation          is   to   highlight        the                      
benefits        of     the     trust      industry         to    the     state       and     to    offer                        
evidence        that     to   maintain        the    industry,         some     provisions         in   HB                      
115 need to be reexamined.                                                                                                      
MR.     BLATTMACHR          explained         that     trusts       are     generally          used     by                      
average      Alaskans        for   family      and    estate      planning.       He    advised      that                       
the    considerable          discussion         about     the    taxation       of    trusts      during                        
the    bill    hearings        is   just    a   minor     piece     in    the    overall      scope     of                      
trusts.       He    explained        that     trusts       are    usually       taxed      in    one    of                      
three     ways:     to    the    grantor,       to   the    beneficiary,          or   to   the    trust                        
itself.       The     grantor       (trust       creator)        is    taxed      if    they      retain                        
sufficient         interest.        Many     trusts      are    taxed     this     way    because       of                      
the      benefits          associated           with      grantor         trust        status.         The                      
beneficiary          is    taxed      to    the     extent       that     he    or     she    receives                          
distributions           of    income       from     the     trust.       The     trust      itself      is                      
taxed     if   income      is   retained       by   the    trust     and    it   is   not    a  grantor                         
2:35:48 PM                                                                                                                    
MR.    BLATTMACHR         said     there      are    many     different         types     of    trusts,                         
but    they     can    be    broadly      divided       into     revocable        and    irrevocable                            
trusts.       Revocable        trusts      are    essentially         a   will    substitute         that                       
has    no    tax     advantages         whatsoever.         The     income      is    taxed      to    the                      
individual         that      creates       the     trust.       Irrevocable          trusts       create                        
separate       and    distinct        entities.        Taxation       depends       on   whether       the                      
trust     has    grantor      status,       whether      there     have     been    distributions,                              
and     under      HB    115    whether        it    would      qualify       as    a   resident        or                      
nonresident trust for state income taxes.                                                                                       
2:36:41 PM                                                                                                                    
He    reiterated        that     a   trust      can    be   considered         a   grantor       if    the                      
person       who    created        the    trust      retains       certain        interests.         This                       
includes:         the     grantor        is    a    beneficiary,           their      spouse       is     a                     
beneficiary,            they       have       the      power        to     control         beneficial                           
enjoyment,         the    trust      has     reversionary          interests        that     can     come                       
back    to    the   grantor,       or   if   the    income      from    the    trust     can    be   used                       
for      the     benefit         of     the     grantor.         If     the      grantor        retains                         
sufficient control, he or she is taxed on the trust income.                                                                     
Irrevocable          trusts       can     be     grantor        or    non-grantor.           Both      are                      
broken      out    for    resident       and    nonresident         for    state      tax    purposes.                          
He     related        that      prior       discussions          on     HB     115     centered         on                      
irrevocable            trusts,        particularly             non-grantor           resident          and                      
nonresident         trusts      where      the    income      is   accumulated.          For    grantor                         
trusts,       income      is   taxed      to   the     grantor.       Non-grantor         trusts       are                      
those     where      the    trust     is    its    own    taxpaying        entity.       Income      will                       
be    taxed       to    the     beneficiary,           to    the     extent       that     income       is                      
distributed.          It    will     be   taxed      to   the    trust      when     the    income      is                      
retained.        If   the    income     is    split     between      the    beneficiary         and    the                      
trust,      each     pays     the    appropriate         share      of   the    tax.     He   reported                          
that    all    competitive         states      in   this     industry       try   to    tax   resident                          
trusts      if    there     is    a   state      income      tax.     Nonresident         trusts       are                      
not     taxed      because        doing      so     would      eliminate         any     nonresident                            
MR.    BLATTMACHR         reviewed        several      scenarios,         all    of    which      assume                        
no   Alaska       income.      The    first      scenario       is    an   Alaska      resident        who                      
creates        a    grantor        trust.       Whether        income       is     accumulated          or                      
distributed,          it    flows      through       to    the     grantor's        Form     1040.      If                      
there     is   a   state     income      tax,     the    state     would     always      collect       the                      
proper      tax   on    that    trust.      The   second      scenario       is   a   grantor      trust                        
created       by    a   nonresident.          Regardless         of    whether       the    income      is                      
accumulated         or    distributed,          it   is    taxed     to    the    nonresident.          He                      
advised        that     in    this      scenario        Alaska       should       not     attempt       to                      
collect        tax      on     the     income        from      the      trust.       Doing       so     is                      
potentially           unconstitutional,              especially          if    there       isn't       any                      
Alaska-source           income,       and     it   would      likely      kill      Alaska's       trust                        
Scenario       three      is   non-grantor         trust      created      by    nonresidents.          If                      
income      is   accumulated,          the    trust     would      pay   its    own    federal       tax.                       
If   the    income      is   distributed         to   an   Alaskan      beneficiary,          it   would                        
be    included       in    the    beneficiary's           taxable       income       and    the    state                        
would     collect      the    state     income      tax.     If   the   income      is   distributed                            
to    a  nonresident          beneficiary,          they     would     not    pay    Alaska       income                        
tax.     He    reiterated        that     this     assumes       that     there      is   no    Alaska-                         
source      income.      Scenario       four     is   a  non-grantor         trust     by   an    Alaska                        
resident.        Under      HB   115     resident       beneficiaries           would     be    subject                         
to    the      state      income       tax     if     there      was     a    distribution,            but                      
nonresidents would not.                                                                                                         
2:41:50 PM                                                                                                                    
MR.    BLATTMACHR        stated      that    that     if   HB   115    were    to   pass,     Alaskans                          
who    establish         non-grantor         trusts      with     resident        and    nonresident                            
beneficiaries           would     be   encouraged         to   do   their      trust     planning       in                      
another       state.      He   said     it's     a  policy      call     as   to    whether       Alaska                        
is open for trust business for just nonresidents.                                                                               
He    turned       to    the     federal        tax     rates      on    trusts       stating        that                       
federal         taxes        discourage           income        retention          and       encourage                          
distributions           from    the    trust.      Trusts      have     the    same    tax    brackets                          
as   individuals,          but    they're      compressed.         For    example,       individuals                            
reach       the     maximum        43.4      percent        tax     bracket,        including          the                      
Medicare       surtax,       at   $415,050       for    single      filers      and    $466,950        for                      
married       joint     filers.       A   trust     reaches       the    maximum       43.4     percent                         
tax    bracket       at   $12,400       of    income.       If   HB    115    were     to   pass,      the                      
state     would      collect       its    tax    on   income      distributed          to   an    Alaska                        
resident.        Therefore,         trustees       will     only    retain      income      in    trusts                        
if    there     is    a  compelling         reason      to    do   so.    Such     examples        are    a                     
beneficiary         who     should      not    receive       distributions           because       he   or                      
she     has    substance         abuse     problems,         and    a    special       needs      trusts                        
where not all the income is consumed and needs to be retained.                                                                  
MR.    BLATTMACHR        advised       that    HB   115    prevents       DING    trusts.       This    is                      
a   planning       strategy       that     is   used     by   high    income      individuals          who                      
live     in     states      that      have     very      high     state      income       taxes.       The                      
purpose       is   to    avoid     taxes      on   accumulated          income.      He    reiterated                           
the    warning       that     if    HB    115    were     to    pass,      residents        would      use                      
another state to create a non-grantor trust.                                                                                    
2:47:43 PM                                                                                                                    
MR.    BLATTMACHR         said      regardless         of   the     decision        on   what     to    do                      
about       taxation         on     resident         non-grantor           trusts,         the     trust                        
industry        feels     some     amendments         should      be    made     if   Alaska       is   to                      
remain      competitive.          He   listed      the    following:        [HB    115    adds     a   new                      
chapter 22 to AS 43.]                                                                                                           
    · Trusts           should         receive          the       $10,300         exemption           that                       
        individuals receive.                                                                                                    
    · If Alaska foregoes an income tax regime, Sec. 43.22.020(c)                                                                
        should      make     an   affirmative         statement        that    nonresident         trust                        
        and estates are not subject to Alaska income tax.                                                                       
    · Sec. 43.22.040(a) references 26 U.S. Code § 651 and it                                                                    
        should also reference 26 U.S. Code § 661.                                                                               
    · Sec. 43.22.150(1) provides a definition of domicile. It                                                                   
        says     an   individual         might     be   considered         a   resident       if   their                        
        dental      and     medical      services        are    provided       in    the    state.      He                      
        opined       that     this      might      discourage         former       residents         from                       
        returning         to     Alaska       to     get     these       services        from      their                        
        established          dentist       or   doctor.       He    acknowledged          this     isn't                        
        trust related.                                                                                                          
    · Sec. 43.22.150(19) defines a resident trust. This should                                                                  
        include       a   definition         as   to    when     a   transfer       to    a   trust     is                      
        deemed to have been made.                                                                                               
    · Sec. 43.22.150(19) should make an affirmative statement                                                                   
        that      if    a    nonresident          transfers         property         to    an     Alaska                        
        trust, it is deemed a nonresident trust.                                                                                
MR.     BLATTMACHR         highlighted          that     the     definition         of    a   resident                          
trust     in   HB   115    may    discourage        Alaskans       from     planning       in   Alaska.                         
For    example,       if   a  resident        created      a  trust     for    children       residing                          
in    Montana       and     Texas,       the     accumulated         income       from      the    trust                        
would be subject to Alaska income tax.                                                                                          
2:51:55 PM                                                                                                                    
CHAIR COSTELLO asked how many trusts are registered in Alaska.                                                                  
MR.     BLATTMACHR         said      his     institution          has     created       about      2,600                        
different        trusts,      and    that    is   just     a  small     representation           of    the                      
number      of    trusts       that     have     been     created       in    Alaska.       Not    every                        
individual         needs       the    services         of    a   professional           trustee        and                      
practitioners           estimate       that     they     create      as   many     as   one    in    four                       
trusts or as few as one in eight.                                                                                               
CHAIR      COSTELLO       asked      how    HB    115,     as   written,        would     affect       his                      
MR.    BLATTMACHR         said     the    bill     is    okay    as    written,        but    it's     not                      
great.       The     problem       relates        to    the     public       perception.          Alaska                        
started       the     "new      age"     trust      industry        20    years      ago     and     it's                       
regarded        as     the     gold     standard.         If    HB     115     were     to     pass     as                      
currently        written,       Alaska      would     no   longer      hold    that     distinction.                            
He    opined      that     significant          business        would     be    lost     due     to    the                      
public perception. It doesn't help the industry move forward.                                                                   
CHAIR        COSTELLO         found        no     further         questions,           thanked         Mr.                      
Blattmachr, and held HB 115 in committee.                                                                                       

Document Name Date/Time Subjects
HB 115 - Trust Taxation Presentation.pdf SL&C 4/27/2017 1:30:00 PM
HB 115
Millsap-Tax-Reform-Alaska-Testimony-v1.pdf SL&C 4/27/2017 1:30:00 PM