Legislature(2015 - 2016)BILL RAY CENTER 208
05/24/2016 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB4001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB4001 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
May 24, 2016
8:38 a.m.
8:39:04 AM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 8:38 a.m.
MEMBERS PRESENT
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman, Co-Chair
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; Ken
Alper, Director, Tax Division, Department of Revenue;
Representative Ivy Spohnholz; Representative Sam Kito.
PRESENT VIA TELECONFERENCE
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue.
SUMMARY
HB 4001 OMNIBUS TAXES & CREDITS; MINING LICENSES
HB 4001 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson discussed the meeting agenda.
HOUSE BILL NO. 4001
"An Act relating to taxation, including establishing
an individual income tax; relating to the marijuana
tax and bonding requirements for marijuana cultivation
facilities; relating to the exploration incentive
credit; increasing the motor fuel tax; increasing the
taxes on cigarettes and tobacco products; taxing
electronic smoking products; adding a definition of
'electronic smoking product' and requiring labeling of
an electronic smoking product; increasing the excise
tax on alcoholic beverages; relating to exemptions
from the mining license tax; removing the minimum and
maximum restrictions on the annual base fee for the
reissuance or renewal of an entry permit or an
interim-use permit; increasing the mining license tax
rate; relating to mining license application, renewal,
and fees; increasing the fisheries business tax and
fishery resource landing tax; relating to refunds to
local governments; and providing for an effective
date."
8:39:04 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
provided opening statements about the legislation. He
discussed the governor's introduction of a comprehensive
package to reform the government's current fiscal
situation, which included new revenue, reduced
expenditures, and use of financial assets to balance the
budget and close the $4 billion gap. He believed that over
the course of the session it become clear $4 billion was a
very large number and closing the gap was a very difficult
task. He detailed the House Finance Committee had already
dealt with two of the large components including the oil
and gas tax credit reform [HB 247] and the budget. Two
major components were remaining that would come before the
committee during the current special session including the
Permanent Fund Protection Act [HB 245] and the omnibus tax
bill currently before the committee [HB 4001].
Commissioner Hoffbeck relayed the committee had already
seen some of the bill components including those related to
mining, fishing, motor fuel, and income taxes; the alcohol
and tobacco taxes had not yet been considered by the
committee. Additionally, a marijuana enforcement component
had been added to the bill, which was a portion of
Representative Gabrielle LeDoux's HB 337. The revenue
package included in HB 4001 would raise approximately $350
million per year by FY 19 and would be a substantial
portion of the effort to close the fiscal gap. The bill
combined previous tax bills before the legislature [during
regular session] including income tax (HB 250 and SB 134),
motor fuel tax (HB 249 and SB 132), tobacco tax (HB 304 and
SB 133), alcohol tax (HB 248 and SB 131), mining tax (HB
253 and SB 137), fish tax (HB 251 and SB 135), and
marijuana tax enforcement (HB 333). For the most part HB
4001 incorporated work that had already been done during
session; most of the committee adjustments had been
included within the bill.
Commissioner Hoffbeck addressed the structure of the
presentation titled "New Sustainable Alaska Plan: Pulling
Together to Build Our Future; Governor's Special Session
Omnibus Tax Bill HB 4001" dated May 24, 2016 (copy on
file); there were two pages for each of the bill components
including what the bill did and how it differed from
legislation heard during regular session and how much money
it raised and how it impacted individual Alaskans. The
original bills had included a component for electronic
filing, which had been taken care of with the passage of HB
375 [related to the filing of electronic tax returns and
reports]; therefore, it had been stripped out of the
various components of HB 4001.
8:42:36 AM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
addressed slide 5 related to income tax. He relayed he
would discuss the items in the sequence they appeared in
the bill. The income tax statute would be a new AS 43.22
for individual income tax tied to 6 percent of the federal
tax liability. He explained it was very similar to a
previous income tax in Alaska that had lasted for several
decades and had been repealed in 1980. The former rate had
peaked as high as 16 percent of the federal liability (6
percent was slightly more than one-third of the former
tax). The bill language provided for withholding by
employers that would send money to the state (effectively
equivalent to a W2 form). The bill would enable the state
to tax income out of state residents, partnerships, and S-
corporations.
Mr. Alper highlighted how the income tax section differed
from the regular session bill. He relayed it cleaned up
language related to the taxation of trusts. He elaborated
that Alaska was something of a trust haven and the
administration did not want to harm money residing in
Alaska for trust purposes. He noted the department had just
heard the bill did not remove fishery crew shares from the
withholding tax requirements; however, the intent was to
remove the language in the withholding section of the bill.
He explained that fishery crew tended to be contractors as
opposed to wage employees and it would be burdensome on the
captain to have to do withholding taxes for non-wage
employees. Individuals with no taxes withheld would have a
higher tax liability at the end of the year, which would
have to be dealt with on the enforcement side. The most
important change was the delay of the effective date to
January 2018 from the initial January 2017 date. He
detailed the change made a big difference for the
Department of Revenue (DOR) because it would provide the
department with time to gain some outside expertise, learn
about building an income tax from scratch, and removed much
of the implementation cost out of the fiscal note. The
department did not currently have a complete sense on the
cost it would take to implement the income tax; it intended
on reporting back to the legislature in the coming January
on the actual cost including a staffing plan and software
needs. The project was large and the department did not
want to base the implementation on a partially constructed
idea on cost.
Mr. Alper moved to slide 6 and addressed the fiscal aspects
of the income tax. The bill had originally been projected
as $200 million and was a $205 million bill based on
inflation by the time the full value would be reached in FY
19. The revenue was only $100 million in FY 18 because the
state would begin collecting withholding taxes in January
2018; therefore, by June 30, effectively half a year's
worth of taxes would have been withheld. The first full
year the tax would be in effect was FY 19. After FY 19,
revenue numbers would increase slightly every year based on
inflation and the expectation of income growth.
Mr. Alper relayed the tax would only be paid by people who
owe the federal government money. The department estimated
that between 20 to 30 percent of Alaskans had zero federal
liability and would therefore have zero state liability.
The percentage was a bit lower than the national average -
typically about 40 percent of households paid no federal
income tax. He detailed part of the reason the state had a
lower number was due to the Permanent Fund Dividend, which
provided a base income for Alaskans and pushed some
individuals up into a tax bracket they may not otherwise
fall into. The tax was somewhat progressive, meaning the
effective rate increased the higher a person fell on the
income scale. There was a very low or no tax burden on
households making less than $50,000 per year. He elaborated
most households would pay substantially less than 1 percent
of their income and no one would be over the 1 percent
threshold until they earned over $100,000 in household
income. He specified state income taxes were deductible
from federal income tax; therefore, individuals who itemize
(generally homeowners with a mortgage) would have the
ability to deduct their state income tax and save from
their federal income tax at the marginal tax rate
(typically 25 percent); some of the money would be coming
out the federal government's pocket. There were 43 states
that currently had an income tax.
8:47:59 AM
Mr. Alper turned to slide 7 related to the motor fuel tax
(AS 43.40). He relayed the subject had previously been
heard by the House Finance Committee after going through
the House Transportation Committee during regular session.
He highlighted the various tax changes:
What it Does
• Increases current tax rates
• Highway Fuel: 8 cents to 16 cents
• Marine Fuel: 5 cents to 10 cents
• Aviation Gas: 4.7 cents to 7 cents
• Jet Fuel: 3.2 cents to 6.5 cents
• Doubles the credit for highway fuel used off-road
Mr. Alper relayed there was a current credit of $0.06 for
highway fuel used off-road, generally claimed by mining
operators or people purchasing large amounts of fuel for
use off the road system. The credit was applied to the
$0.08 cent tax, bringing it down to $0.02. He explained
that because highway fuel tax would double under the
legislation to $0.16, the credit was doubled to $0.12,
which would mean an increase to $0.04.
Mr. Alper addressed how the motor fuel tax differed from
the regular session bill on slide 7. He explained the
administration had used language from a House Finance
Committee substitute for HB 249, which reduced proposed
increases on aviation and jet fuel. Additionally, the bill
did not incorporate a two-year sunset that had been
included in the House Transportation Committee bill [HB
249]. The sunset had been built into FY 18 with the
expectation the issue would be revisited based on the price
of oil at the time. The current bill would implement a
permanent tax increase.
8:49:40 AM
Mr. Alper addressed slide 8 and relayed that the motor fuel
tax would generate about $43 million per year. The tax
would roughly double the current motor fuel collections. He
detailed that about $200,000 would be shared with municipal
airports. He elaborated it related to standard statutory
formulas on aviation fuel collected from areas with
municipal airports and included a revenue sharing
component. He relayed the last time the highway fuel
increased had been in 1970. He referred to a remark by
Deputy Commissioner Jerry Burnett that he could fill his
car for $3.00 in 1970. He specified the state would still
have one of the lowest tax rates in the country if it were
doubled to $0.16. He explained that a typical person
driving 12,000 miles per year in a vehicle getting 20 miles
per gallon, would pay an additional $48 in tax.
8:51:00 AM
Mr. Alper addressed tobacco tax (AS 43.50) on slide 9. The
cigarette tax was measured in mills (one-tenth of one
cent); the current tax was 100 mills between two different
taxes with two slightly different funding destinations,
which for all intents and purposes was a single tax of 100
mills per cigarette. The bill would increase the tax to 150
mills or $0.15 per cigarette or from $2.00 to $3.00 per
pack. He referred to the tax stamp sold by the State of
Alaska, which was placed on every pack of cigarettes sold.
He detailed a new series of stamps would be generated and
would be sold for $3.00 instead of $2.00; it was considered
a pre-paid tax in some ways. Other tobacco products were
taxed at a percentage of the wholesale value; the bill
would increase the tax rate from 75 percent to 100 percent
of total sale value. Electronic smoking products fell under
a new industry also known as the "vape" industry. He
elaborated the industry was becoming quite sophisticated
and there were several full-time vape shops in the
Anchorage area; the product was currently untaxed. The
product was made of generally tobacco derivatives and
typically contained nicotine. The bill expanded tobacco
definitions in order to tax the new products; however,
because the products were currently not taxed the
administration felt it was appropriate to establish a lower
tax rate of 75 percent.
Mr. Alper elaborated the tobacco sections of the bill were
the longest because there were numerous definition changes
involved with electronic smoking products. There was also a
definition cleanup for wholesale price in order to clarify
some issues which had arisen in some tax audits within the
excise tax group related to tobacco taxes. He addressed how
the sections differed from the regular session bill. He
explained it was the only one of the governor's bills with
distinctly different language introduced to the House and
Senate at the beginning of session. He explained the Senate
bill had been introduced at the beginning of session and
some corrections had been made before the House bill had
been introduced a week or so later related to the
definition of electronic smoking products. The House bill
had been used as the starting point for the current
sections in HB 4001 and definitions had been cleaned up
based on work done in the Senate. He detailed the bill
would only tax electronic smoking products that contained
nicotine. He furthered that people used vape technology for
non-nicotine purposes, which the bill would not tax;
however, it added a labeling requirement - products had to
show whether or not they contained nicotine.
Mr. Alper discussed how much the tobacco tax would raise
about $29 million per year (slide 10). The tax would
decline a little bit every year due the forecast projecting
a decreasing number of smokers in Alaska over the next
several years. He added the decline was not anticipated to
be tremendous, but the projected revenue for later years
was closer to $27 million. The revenue represented about a
50 percent increase above current tobacco tax collections.
The fiscal note was indeterminate because revenue from
electronic cigarettes was currently unknown, which was in
part why the department felt the need to include the
product under the tobacco umbrella. The department could
only guess at the actual revenue that could come in because
it did not know how much the product was out there. About
$2 million of the new revenue would go to the Tobacco Use
Education and Cessation Fund, which represented a statutory
percentage of the mill rate tax on cigarettes.
8:54:45 AM
Mr. Alper continued to address slide 10 and addressed how
the tobacco tax would impact Alaskans. The bill did make it
more expensive to smoke; $1.00 per pack at a pack per day
would be an increase of $365 per year. The state currently
had the 11th highest cigarette tax and would move to 5th
place with the increase. He noted the numbers were a bit
misleading because there were numerous local cigarette
taxes all over the country including some cities within
Alaska. For example, Juneau had an additional cigarette tax
of at least $2.00. The state had substantial healthcare
costs through the Department of Health and Social Services
(DHSS) related to tobacco illness, which the increase would
help offset. He detailed the state's chief medical officer
had testified in the previous committee about the issues.
The bill would add a tax for the first time to the new vape
industry.
Mr. Alper moved on to discuss alcohol tax (AS 43.60) on
slide 11. He detailed the alcohol tax had not received
significant hearings apart from in the House Labor and
Commerce Committee. The bill would double current tax
rates:
• Distilled Spirits: $12.80/gallon to $25.60
• Wine: $2.50/gallon to $5.00
• Beer and Cider: $1.07/gallon to $2.14
Mr. Alper explained the numbers were not random. He
explained that the last time the alcohol tax had been
increased in 2002 the decision had been made to tie the tax
to $0.10 per drink. He elaborated that 1 gallon was 128
ounces, 1 ounce was about a standard shot of liquor;
therefore, a tax of $12.80/gallon or $0.10 per drink was
established. Likewise, 1 gallon of wine based on a 5 ounce
pour would be $2.50 and $1.07 per gallon for beer was the
equivalent of $0.10 for a 12 ounce beer. The craft brewery
rate was tied to the federal definition of a small craft
brewery - not just breweries in-state, which would be
unconstitutional - it also included small breweries from
outside Alaska. The first 60,000 barrels per year from a
craft brewery would have a tax of one-third of the full
rate: $0.35/gallon increasing to $0.70. The bill created
something of an advantage for the industry; the spread
between larger and small breweries became larger when the
taxes were doubled. The tax would increases the cost of a
drink from $0.10 to $0.20. He explained the bill would
change the requirement tax payers had to pay a as a
security bonding payment to DOR from $25,000 to variable
based on the department's decision about what would be the
best number for the individual taxpayer. He noted that many
taxpayers were quite small and the $25,000 was somewhat
onerous; whereas, some taxpayers were quite large and
$25,000 may not be an adequate incentive for them to
continue paying their taxes. The bill contained no
differences between the one introduced during regular
session. He reiterated the prior bill had not received many
hearings.
Mr. Alper addressed the increased alcohol tax would raise
approximately $40 million per year (slide 12). He drew
attention to a table on the back page of the fiscal note
showing the 2017 revenue from alcohol would be $4 million.
He corrected the amount was actually $40 million, which
would add $36 million to the bottom line total in FY 17.
The tax increase roughly doubled current collections. About
$20 million would go to the Alcohol and Other Drug Abuse
Treatment and Prevention Fund. He elaborated the fund was
included in the mental health budget and funded many DHSS
programs. He added that the funds were supplemented by a
large number of GF. He noted it did not mean the state
needed to be putting $20 million more into the programs;
the GF could be backed out in the budget making process.
Mr. Alper addressed how the bill would impact Alaskans. He
relayed it would make it more expensive to drink. The tax
could equal $0.10 per drink or could be built into the
wholesale price and could lead to a larger increase than
the typical price of a drink. The state had among the
highest alcohol taxes in the country at present and the
increase would make Alaska number one by a substantial
margin, which he was certain the alcohol industry would be
quick to point out.
Mr. Alper moved to slide 13 related to marijuana tax (AS
43.61) and relayed the bill would not increase the specific
tax. The bill included some provisions from a bill
Representative LeDoux had submitted during the regular
session, which had come out of the House Labor and Commerce
Committee. He did not believe the bill had been heard by
the House Finance Committee. The 2014 marijuana initiative
had established a $50 per ounce rate; through the
regulatory process a lower rate had been established for
the non-smokable portions (i.e. the concentrates industry).
The bill would requires a surety bond of $5,000 for
taxpayers (i.e. the growers). The requirement was slightly
atypical among the department's surety bonds because it
gave the option for the growers to provide the money in
cash rather than an insurance plan because there was some
concern the marijuana taxpayers would not be able to access
traditional banking services and would therefore be working
in a cash economy. The primary goal was to give certain
enforcement powers to DOR that it had for some other taxes.
Mr. Alper explained the bill would empower DOR to enforce
the tax against a marijuana retailer who is selling product
that did not come from a licensed/taxpaying cultivator.
Additionally, the bill would empower DOR to enforce a tax
penalty on illegal grow operations in excess of the
personal use limit. He noted the limit had been six, but HB
75 had increased the limit to 12. He referred to a recent
arrest of a grower in Homer with 1,000 plants and relayed
that 988 of the plants were illegal, which could be a
felony. However, an alternative enforcement mechanism that
would be much easier to collect would be to include a tax
penalty on that marijuana. For example, the state could
charge $50 an ounce for the illegal plants; it would be a
civil fine and in the case of the Homer growing operation
it would have equated to approximately $250,000. He
furthered it would hopefully act as a deterrent from large
illegal grow operations.
9:02:11 AM
Representative Wilson clarified that the number of plants
had not been increased. She stated that the limit had been
6 plants per person and HB 75 had changed it to 12 per
household regardless of the number of individuals living in
the home. She reasoned effectively the number had been
lowered because previously if there were three adults
residing in a home they could have had 18 plants, but now
they could only have 12.
Mr. Alper replied in the affirmative. He relayed the bill
contained no difference in the marijuana sections from the
bill that came out of the House Labor and Commerce
Committee several weeks back.
Mr. Alper moved to slide 14 and relayed the revenue from
the marijuana tax was indeterminate. He detailed that any
money raised by the changes would be through enforcement
actions, which were impossible to predict. Ultimately the
administration's goal was to make it as advantageous as
possible to be a legal and licensed business and
disadvantageous to remain in the black market. He equated
the current situation to 1934 when alcohol prohibition had
just been repealed. The bill would indirectly increase
revenue to the state from legal marijuana.
Mr. Alper turned to slide 15 related to mining license tax
(AS 43.65), which had been included in a bill with several
small taxes previously considered by the House Finance
Committee. The bill would increases the current top tax
rate on net profits greater than $100,000 per year from 7
percent to 9 percent. The bill would reduce the production
tax holiday for new mines from 3.5 years to 2 years. The
bill would prevent the mining exploration incentive credits
from being used to reduce royalties, limiting to just the
tax (the change had originally been incorporated in the
House Resources Committee). He explained the credits were
not cashable and were rolled forward for use against taxes.
He elaborated the state was only the land owner for a
couple of the large mines in Alaska. The bill would add a
$50 annual license fee for miners. He noted that miners
were exempted from needing a business license, which was
also $50. He furthered that because miners already had
mining licenses there was no reason to make people get a
second license.
Mr. Alper addressed how the bill differed from the regular
session bill. The original bill sought elimination of the
tax holiday; the 2-year tax holiday was a compromise
proposal. Additionally the exploration incentive credits
and royalty change made in House Resources Committee had
been incorporated. The 2 percent increase at current
commodity prices (the industry was closely tied to the
global price of gold and zinc) would bring in about $7
million per year (about $25,000 of the total would result
from the $50 license fee). He addressed how the increase
would impact Alaskans. He relayed the typical "mom and pop"
miner would not feel an impact apart from the $50 fee. He
shared that in 2014 there were only 14 taxpayers earning
over $100,000 in taxable profits and were the only ones who
would be impacted by the tax increase. Out of the 14, there
were only about 5 large mines in the state. He specified
there were smaller miners who had a particularly good and
earned over $100,000; only the amount above $100,000 would
be subject to the tax. He relayed that if someone owned
land leased by a mine and the mine paid the landowner a
private royalty, the royalties were current subject to a
mining license tax; therefore, several of the $100,000
taxpayers were not actually miners, but were landowners who
were paid royalties by a miner.
9:06:42 AM
Mr. Alper turned to slide 17 and addressed the fisheries
business tax (AS 43.75) and the fisheries landing tax (AS
43.77). He highlighted that the business tax applied
primarily to processors and the landing tax applied mostly
to federal fisheries. The bill would increase the current
tax rates by one percentage point. The rates were currently
between 3 percent and 5 percent depending on status (i.e.
onshore, offshore, canneries, shore-based, etcetera).
Currently the fisheries taxes were shared with the
municipal government 50/50. Under the bill, the first 1
percent of the increased tax would go 100 percent to the
state and the rest would be shared 50/50, effectively
holding the municipalities harmless. He noted that the tax
increase would not be shared with the municipalities.
Mr. Alper explained the bill would remove the $3,000 cap on
annual Commercial Fisheries Entry Commission (CFEC) entry
permit fees. The elimination of the cap would increase the
permit fee for certain large boat owners (a couple hundred
large boat owners who were almost entirely non-resident).
The developing fisheries designated annually by the
Department of Fish and Game were exempted from the
increase. He discussed how the sections differed from the
regular session bill. The original bill had increased the
rate for one of the developing fisheries, which had been
removed in the current bill. Additionally, the entry permit
fee had not been included in the original bill, but had
been added in committee. He believed it may have been in
other legislation, but he had not found the source
document.
Mr. Alper highlighted the increases would bring in about
$18 million from the tax change and about $2 million from
the CFEC fee change. He addressed how the sections would
impact Alaskans. He relayed the price of fish was generally
set by the commodity market; the market would not
necessarily absorb the tax increase. He elaborated that
although the tax would be paid by processors, it was
typically backed out of payments made to harvesters. So in
effect, the fisherman would pay the tax.
9:09:33 AM
Representative Gara addressed the state's $4 billion-plus
deficit. He noted that the governor's revenue proposal did
not reach $4 billion. He discussed that there were
opponents of each of the various taxes; therefore he
thought it seemed to be a recipe for failure to put all of
the taxes in one bill. He asked why it was the strategy
that the administration had chosen.
Commissioner Hoffbeck answered that there had been much
discussion about whether to offer the bills separately or
combined during regular session. The administration had
weighed whether combining them or leaving the taxes in
separate bills would give people to give people the ability
to vote for something they did not necessarily like because
they were potentially alright with the other five
components of the bill versus a situation where people
would not vote for the bill. The administration had offered
the taxes in separate bills during regular session, but the
bills had not moved forward. Therefore, the administration
had elected to introduce the taxes in an omnibus bill where
it was easier to see all of the components in one place at
one time. One of the major pushbacks the administration had
received was there had not been a large desire to work on
an individual tax bill separate from other tax bills.
9:12:47 AM
Representative Gara expounded on his prior question. He
remarked that when numerous popular bills were combined it
was a method for increasing votes; however, combining
numerous bills that people did not love, resulted in fewer
votes. Based on conversations he had with other legislators
he surmised the bill was almost guaranteed to fail because
people disliked various components of the bill. He asked
the administration to rethink the strategy. He spoke to the
income tax component. He believed the administration
testified it had chosen an income tax that was the lowest
in the country. He elaborated the income tax would raise
close to $200 million or one-twentieth of the state's $4
billion deficit. He reasoned that the public would say the
administration was imposing the tax at present and would
increase it in the future. He believed there was some logic
behind that line of thinking. He wondered why the
administration chose not to propose something more similar
to the state's former income tax or a proposal offered by
Representative Paul Seaton earlier in the regular session,
which would raise more money. He continued the current
proposal only applied to people making capital gains
income. He equated the individuals who would be impacted by
the tax to the Warren Buffets of the state; he added there
were few individuals in that category in Alaska. He
concluded the income tax would be less than 1 or 2 percent
on a person's 15 percent capital gains tax.
Mr. Alper answered that no one wanted to add an income tax
just to add an income tax; there was no strong desire to
tax the Alaskan people. The income tax had been the last
component added to the governor's revenue plan the previous
fall. The size had been chosen based on what was needed to
balance the state's budget. The administration had looked
at the other components including what the change to the
Permanent Fund would do, all of the smaller taxes, the oil
and gas tax credit reform, and the expected and additional
budget cuts and without the income tax the plan had been
$200 million short by FY 19. Therefore, the last component
chosen was the income tax, which was as small as it needed
to be in order to balance the budget. Until it became clear
which bills passed or did not pass by the current
legislature, it was not possible to calculate what the
income tax rate may need to be. At present, the number had
been selected in order to balance the budget assuming the
passage of the other components.
Representative Gara countered that the administration knew
its Permanent Fund Protection Plan had been replaced by a
plan that raised less money. He stated that if HB 4001
passed he would have to be honest with the public that
people would pressure a second income tax increase. He
reasoned the last thing people wanted was to be taxed
twice. He referred to the current $4 billion deficit and
discussed that any version of the passed oil and gas credit
bills brought in zero revenue in FY 17 or FY 18.
Co-Chair Thompson asked to the committee to stick to the
current bill.
Representative Gara continued that the oil and gas tax
credit bill brought in no revenue and the proposed income
tax brought in no revenue for two years. He wondered why it
was a good idea.
Mr. Alper answered that the income tax was new. The
administration could quadruple the other taxes if the
legislature desired and absorb it into the existing staff.
The dollar part was not the difficult part. However, the
state did not have the infrastructure, people, or equipment
to handle the income tax; it was necessary to procure the
items and the state needed to learn how to implement the
income tax from people who know about the issue. He
furthered developing the infrastructure would take time; it
was not that the administration did not want the money at
present to balance the current budget, but the state was
physically incapable of beginning to collect an income tax
at present. The decision had been made to delay for a year.
He continued that it was currently May and the thought of
having the infrastructure in place by January 2017 was
challenging. He reasoned the work would be done better if
implemented in FY 18. Additionally, the administration
would do a better job asking for the resources if it came
back in January with expertise about what it would take. He
remarked the legislature had seen a fiscal note a few
months ago specifying $14 million and 60 new employees were
needed. He believed the estimate was probably about right,
but the administration honestly did not know; it would take
real money to implement an income tax. He would rather be
accurate than need to ask for funding twice.
Representative Gara asked for verification that it would be
the lowest income tax in the nation. Additionally, he asked
how much revenue the income tax would raise if it was
imposed at the level of the state's former income tax.
9:18:41 AM
Mr. Alper answered in the affirmative. He elaborated that 2
states had a tax on capital gains (not a true income tax).
Out of the 41 other states with an income tax, Alaska would
have the lowest if the 6 percent tax was implemented. He
relayed Representative Seaton's HB 182 during the 2015
session, had included Alaska's former income tax of 16
percent combined with a capital gains component and would
have generated $650 million in revenue per year.
Vice-Chair Saddler asked if the administration believed
combining seven taxes together would make the bill more or
less likely to pass.
Commissioner Hoffbeck answered that based on the
administration's lack of success passing the bills
individually, he surmised combining the taxes together in
one bill it was probably not less likely the bills would
pass. He detailed some people had been willing to vote for
a package if they liked six out of the seven taxes. He
continued that others would have preferred to vote against
an individual tax and hope that the rest of the legislators
would pass it. He believed it was "six to one, half dozen
to another" as far as the best way to get the taxes
through. He believed the option to take the bills apart
again was still within the legislature's purview even in a
special session. However, the administration thought it was
important for all of the bills to be in one place at one
time. He elaborated that addressing the taxes separately
had been one of the biggest criticisms the administration
had received during regular session - people had vocalized
they were not willing to move a bill until the other bills
were also available to move. He added that legislators had
vocalized they did not want to move a bill they did not
support only to see other bills they supported not make it.
Vice-Chair Saddler surmised that based on advice by some
legislators, the administration believed it was more likely
to see the taxes passed in a combined package.
Commissioner Hoffbeck that the decision had not been based
on advice by legislators. He elaborated that some
legislators believed individual bills were better and
others thought an omnibus bill was better.
Vice-Chair Saddler asked if the administration believed it
was more or less likely for the taxes to pass as a combined
package. He recognized different legislators had different
views on the issue.
Commissioner Hoffbeck believed it was more likely some form
of a bill would pass as a package because the taxes were
now all in play in the same location for everyone to deal
with.
Vice-Chair Saddler surmised the administration believed it
was more likely some elements would pass, but not others.
He asked which elements the administration believed would
pass.
Commissioner Hoffbeck answered that the governor had
included all of the taxes because they were each important.
He chose to avoid placing odds on which taxes would pass
versus not.
Vice-Chair Saddler remarked on Commissioner Hoffbeck's
statement that some legislators thought the taxes would all
pass and others did not. He referred to the grounds that
some of the taxes may pass. He was trying to determine if
the administration believed it was more likely to get the
taxes passed in the current combined form.
Commissioner Hoffbeck answered that the governor wanted to
see all of the proposed taxes passed; the idea was for all
of the taxes to pass.
Vice-Chair Saddler asked if the governor told anyone in the
legislature that he planned to call a special session on
bills such as the one before the committee regardless of
what legislators had passed during regular session.
Commissioner Hoffbeck asked Vice-Chair Saddler to repeat
the question. Vice-Chair Saddler complied and restated his
question.
Commissioner Hoffbeck answered not that he knew of. He
believed the governor's statement all along was that he
would look at what passed and if the numbers had been
sufficient to bring the budget in line he was willing for
some things to not be part of the package as long as the
numbers worked.
Vice-Chair Saddler asked if the answer was a "no."
Commissioner Hoffbeck replied that as far as he knew the
governor had not told anyone that.
Vice-Chair Saddler asked if Commissioner Hoffbeck would be
in a position to know. Commissioner Hoffbeck replied he
believed he would know.
Co-Chair Thompson asked about the tobacco tax stamp. He
noted the tax had been included in HB 155 related to
indirect expenditures and had required the industry to
place the stamp on packages. Currently the state paid over
$300,000 to have the stamp put on cigarette packages. He
reasoned the work should be done by the industry. He noted
it was not addressed in the current bill, but he believed
the issue needed to be addressed in the future.
Mr. Alper answered that he did not know whether HB 155 had
passed during regular session.
Co-Chair Thompson replied that the bill did not pass; it
had been hung up in Senate Rules.
Mr. Alper explained how tax was paid on cigarettes. He
relayed the wholesaler purchased stamps from the State of
Alaska, which the state bought in bulk. The stamps were
valued at $2.00 apiece and were kept in a safe.
Subsequently, it was the wholesalers' responsibility to get
their money back by sticking the stamps to the cigarette
pack and selling the pack. In years back a tax credit had
been proposed for the physical act of applying the stickers
to help defray the costs of some advanced sticker applying
equipment that had been purchased a few decades ago. He
explained that HB 155 would have eliminated the credit. He
furthered it was the wholesalers' responsibility to put the
stamps on the cigarettes and they continued to do so. He
explained with HB 155, they had tried to eliminate any
advantage or payback for the act of placing the stickers on
the packages. He explained that the equipment should have
all been paid for at present; it was an old piece of
legislation.
9:25:26 AM
Representative Gattis referred to about the craft brewery
component of the alcohol tax. She was uncertain what a
craft brewery was. She wondered if the craft brewery
component pertained to craft distilleries and wineries.
Mr. Alper answered that the federal definition of craft
brewery was broader than one may think and related to
facilities producing "something like less than 2 million
barrels per year." Almost all companies other than the
largest 10 or fewer in the country fit within the
definition. The state's statute specified that from the
qualifying breweries, 60,000 barrels per year were taxed at
the lower rate. He did not know whether there were distinct
federal definitions for craft wineries or distilleries. He
relayed something could certainly be worked into the
statute for a lower tax rate on craft distilleries, which
was a growing industry; the topic had not been included in
the conversation in 2002 when the legislature had last
addressed the alcoholic beverage tax. He was certain craft
distilleries would appreciate it. He clarified that the
state would not have the ability to only carve out Alaskan
distilleries; it would open the door for a lower tax rate
for craft distilleries for products made out-of-state as
well.
Co-Chair Thompson asked how many breweries qualified for
the credit. Mr. Alper deferred to his colleague.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), answered that
there were only three of the major brewers that did not
qualify under the federal definition of a craft brewer.
Therefore, many of the applicants (not all breweries
submitted an application) received the credit.
Representative Gattis asked how many in-state and out-of-
state breweries applied for the credit. She was asking the
question from the standpoint of looking out for Alaskan
distilleries and breweries. She referred to Mr. Alper's
testimony that the state could not offer the credit to in-
state businesses only.
Mr. Alper replied that there were 20 in-state breweries
that qualified for the credit. He noted Mr. Spanos may have
detail on the number of out-of-state applicants. He
provided an example of an out-of-state brewery such as Red
Hook, which sold through a distributor in Alaska. He
clarified the distributor was the taxpayer. The state was
not able to parse out the individual products going through
the distributors; therefore, it was hard to say how many
products were receiving the credit. He explained there was
beer sold directly, which was easy to parse out and
included mostly local businesses; and the beer sold through
a warehouse distributor, which was a much larger volume of
beer receiving the craft brewery exemption.
Representative Gattis noted that there were a few Alaskan
distilleries and she wanted to explore the idea of
including a credit for craft distilleries.
Representative Wilson asked for clarification on the
state's actual deficit. She noted the committee kept
hearing the state's deficit was over $4 billion, but it was
her understanding that figure was actually the amount of
the state's budget. She reasoned the state still had
revenue. She detailed the budget was approximately $4.3
billion and the state had approximately $1.3 billion in
revenue at present, which left approximately $3 billion to
fill. She asked for the accuracy of her estimates.
Mr. Alper answered that the original $4.3 billion budget
did not include the oil and gas tax credits that were in
the governor's original budget; therefore, the revenue was
about $700 million short pertaining to the specific
component. He understood the conference committee was
funding a portion of the amount with another funding source
through a Constitutional Budget Reserve (CBR) appropriation
from the previous year. Presuming that nothing changed and
the operating budget passed as is, the GF portion would be
$4.3 billion and the deficit would realistically be about
$3 billion. He agreed her assessment was correct; however,
there were still a few missing pieces before "we get to the
finish line."
9:31:17 AM
Representative Wilson countered that the pieces were not
missing and everyone knew they were there. She believed the
real question was how the legislature may or may not pay
them. She wanted to be clear about the state's actual
deficit. She stressed that the deficit was definitely not
the entire budget. She had heard statements repeatedly made
that the state's deficit was over $4 billion; however, it
was really $3 billion at present that the legislature
needed to fund with a combination of its savings account
and incentives/enhancements.
Mr. Alper responded that the prior year budget (FY 16) was
closer to $5 billion. There had been cuts and components
that had yet to be funded. Based on Representative Wilson's
reasoning, the anticipated deficit was down to about $3
billion for FY 17.
Vice-Chair Saddler noted that some of the bill's components
had been heard earlier in the regular session. He recalled
the administration had relayed the only analysis the
administration had done on the impacts of the taxes on the
economy was consultation with its own departments. He asked
if the administration had contracted for any analysis
outside its own departments in the past several months.
Commissioner Hoffbeck answered that the only new piece of
information introduced, which dealt with the income tax
more than anything else was the Institute of Social and
Economic Research (ISER) study. The study had looked at the
impacts of various income and sales taxes and the various
cuts that needed to be made.
Vice-Chair Saddler asked if Commissioner Hoffbeck believed
it was important to understand what the impact of the taxes
would be on the state's economy. Alternatively, he asked if
the only criteria was how much money the taxes would raise.
Commissioner Hoffbeck answered that the administration's
concern was the state's large deficit. He elaborated that
everything they did to close the deficit would have an
impact. He reasoned the same statement could be made for
every cut that had been made in terms of how it would
impact the state's economy. The administration recognized
that difficult decisions needed to be made and that the
changes would have impacts. The department had worked to
highlight the relative size of the state's tax compared to
other taxing jurisdictions. He furthered that other places
had taxes to fund governments and their economies thrive.
He believed the assumption that any tax increase would
devastate the economy was probably an overstatement. He
agreed there would be impacts and the administration could
not specify at present what the impacts would be. He
believed a fairly major study could be conducted and the
precise impacts would still be unknown and how they would
compare to doing nothing to address the deficit, which
would have to be dealt with one way or another. The
question was whether to do it at present or later when the
impacts would be even greater.
9:35:13 AM
Vice-Chair Saddler remarked the administration acknowledged
there would be impacts, but he saw no evidence the
administration tried to assess what the impacts would be.
He addressed the legislative process for compiling
information including speaking to the administration and
talking to the public about what the impact may be. He
reiterated the department testified that it had not studied
the impacts other than how much money the taxes would
raise.
Commissioner Hoffbeck replied with an example related to
the motor fuel tax of $0.08 per gallon. He noted the price
for gas in Anchorage had increased by $0.35 in the past few
months. He questioned whether the $0.08 per gallon increase
would have a greater impact than the $0.35 per gallon
increase going to refineries. Some of the taxes would be
absorbed within the normal volatility of the markets.
General statements could be made, but the administration
did not have information showing the exact economic impact
of the various components.
Vice-Chair Saddler countered "or even generally."
Representative Gara wanted a balanced fiscal plan. However,
he believed individuals with the least amount of money were
being hit hard, while wealthy individuals were not
impacted. He looked at the income tax, which was basically
1 or 2 percent. He added the Permanent Fund Dividend was
about 20 percent of the income for people in the lowest 50
percent of wage brackets. He wondered why the
administration had not considered a corporate tax for
companies making over $250,000 per year. He remarked that
over 6,000 Alaska corporations paid no corporate tax
because they were not C corporations. He continued that
the companies would pay a tax of about 2 percent if the
income tax passed; however, the state's corporate tax was
about 9.5 percent.
Commissioner Hoffbeck answered that the governor's decision
on the income tax was to spread the burden of the economic
issues across the broader economy. The administration had
looked at a specific corporate income tax to include S
corporations and limited liability companies (LLC), but it
was more complicated. He detailed the revenues in those
cases flowed to the individual; therefore, it was not an
easy piece of legislation. He furthered that many LLCs were
not big lucrative businesses; many were mom and pop
businesses that were just getting by. He explained that the
income really equated to personal income than a corporate
income in many cases. He added there were some very large
companies as well.
9:39:05 AM
Representative Gara replied that he had proposed a
corporate tax bill for companies making over $250,000 per
year. He reasoned it was not overly challenging to apply a
corporate tax to profitable businesses. He asked a separate
question related to craft breweries. He surmised the lowest
income tax had been proposed, but the administration was
also proposing the highest alcohol tax in the nation. He
supported the growing craft brewery industry and he had no
problem with taxing the group at a lower rate. He reasoned
that locally owned restaurants were locally owned as well.
He wondered why the decision had been made to make a
distinction between locally owned craft breweries but not
restaurants selling alcohol. He declared a conflict of
interest related to his restaurant in Anchorage. He made
remarks about the specific restaurant. He reasoned there
were families who owned local restaurants and he wondered
why the state would treat the businesses differently.
Mr. Alper answered that the restaurant owner would be
paying individual income tax under the plan. To the extent
the alcohol tax would impact restaurants it would increase
the cost restaurants paid to a supplier, which restaurants
would have the ability to pass on to customers. The
business owner was impacted by the income tax. He addressed
the idea of an s-corporation specific tax or partnership
specific tax and conceded it could be done, but the
decision had been made that the broadest way to reach the
entire population was to implement an income tax. He
detailed an income tax was inherently progressive, meaning
it had a higher percentage of income for the higher income
earners. He continued it would offset the inherent
regressiveness of anything changing the nature of the
Permanent Fund Dividend, which disproportionately hit the
lowest income households. To get to a true balance it would
probably take a higher income tax to have an equal
percentage of income participation across the different
income levels.
HB 4001 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson relayed that the afternoon meeting was
canceled. He recessed the meeting to a call of the chair
[Note: the meeting never reconvened].
ADJOURNMENT
9:42:43 AM
The meeting was adjourned at 9:42 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR presentation omnibus tax bill 5-24-16.pdf |
HFIN 5/24/2016 8:30:00 AM |
HB4001 |