Legislature(2017 - 2018)HOUSE FINANCE 519
02/14/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 14, 2017
1:34 p.m.
1:34:05 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
John Hutchins, Attorney, Department of Law; Angela Rodell,
Executive Director, Alaska Permanent Fund Corporation; Ken
Alper, Director, Tax Division, Department of Revenue;
Taneeka Hansen, Staff, Representative Paul Seaton.
PRESENT VIA TELECONFERENCE
Carl Davis, Research Director, Institute on Taxation and
Economic Policy, Washington DC; Brandon S. Spanos, Deputy
Director, Tax Division, Department of Revenue.
SUMMARY
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
1:34:19 PM
Co-Chair Foster discussed the meeting agenda.
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
1:35:04 PM
JOHN HUTCHINS, ATTORNEY, DEPARTMENT OF LAW, introduced
himself and was available for questions.
Representative Kawasaki remarked that members of the other
body had commented on the single subject rule and whether
it applied to HB 115. He asked for comments from the
Department of Law (DOL).
Mr. Hutchins answered that the test in the single subject
rule was not about whether it was possible to have two
analytically distinct subjects covered by the same bill; it
was clear from existing Alaska case law that it was not
true. For example, in Gellert [v. State of Alaska], the
court had looked at a bill that would combine small boat
harbors in coastal cities and flood control projects in
Fairbanks. He furthered that Fairbanks was not close to the
coast, which made it easy to say the two subjects were
separate. However, the court had determined it was a single
subject related to navigation and water control. The
pertinent question was whether there was a subject that
would cover everything in the bill and whether it was too
broad. He was confident HB 115 would pass scrutiny under
that test for a variety of reasons.
Mr. Hutchins detailed that the purpose of the single
subject rule was to prevent tactical use of the committee
structure. The court had specified that one of the primary
things the rule was trying to avoid was combining a
multitude of different constituencies to pass legislation
that otherwise could not pass on its own. He surmised that
the bill could perhaps be analytically divided into a
Permanent Fund component and an income tax component, but
the reason for including both in one bill was not because
neither would pass on its own. He continued that when
considering each component separately, neither option was a
popular measure that would pull a weaker bill along. He
detailed that both components were millstones that could be
used to sink a measure rather than the other way around;
therefore, he surmised there was limited concern in that
area.
Mr. Hutchins stated that more importantly, the components
were both part of a solution to one problem and were
interrelated - action taken on one of the components would
impact the desirability of what could be done with the
other, while reaching the same revenue requirement. He
believed it made sense to talk about, debate, and consider
amendments to the two components simultaneously in the same
bill because they were both aimed at fixing the budget
problem. For that reason, he would be stunned if a court
decided the bill did not meet the single subject rule. He
did not believe the issues could be efficiently considered
without being considered at the same time.
1:39:55 PM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced herself and was available for
questions.
Co-Chair Seaton stated the bill had a 4.75 percent market
value draw from the Permanent Fund. He asked if the draw
would place the fund at risk of depletion.
Ms. Rodell answered it was important for the legislature to
know that the Alaska Permanent Fund Corporation (APFC)
board of trustees did not want APFC to take a position on
the bill in terms of the appropriate draw amount. She
elaborated that APFC recognized it would be a give and take
and that the legislature would ultimately decide on what
was best for the state. She detailed that APFC would
respond accordingly. The 4.75 percent draw would generate a
certain amount of money for the state budget, which the
corporation would deliver if directed.
Co-Chair Seaton stated that the only other section of the
bill pertaining to the Permanent Fund was a distribution
draw (33 percent to the Distribution Fund for the Permanent
Fund Dividend and 67 percent to the General Fund). He asked
if it was an obstacle for APFC to calculate and distribute
the draw to two different funds.
Ms. Rodell answered in the negative. She believed in
practice APFC would remit one transfer of cash to the
Department of Revenue (DOR). She detailed that DOR would
then allocate the funds between the two accounts, which
were under its management. A portion would be transferred
into the dividend fund and 67 percent would be transferred
to unrestricted general fund (UGF) accounts.
1:43:25 PM
Representative Guttenberg stated there were various flow
charts showing how the Permanent Fund worked at present
versus other proposals that had arisen over time. He stated
it was not like going to a percent of market value (POMV) -
it was not all one lump sum of cash (it involved various
pots of money). He asked how similar investing the Permanent
Fund based on POMV would be to the structure in HB 115 - to
maximize the return.
Ms. Rodell answered it was important to recognize APFC's
mandate to protect the fund principal and to maximize
income. She noted the objectives could be competing because
in order to maximize growth there was a tendency to take
more risk, but taking more risk could jeopardize the
protection of principle. The corporation had worked hard to
create a diverse asset allocation that balanced the two
competing requirements. She furthered that when considering
the provisions in HB 115, APFC was focused on that the draw
was equal to 4.75 percent of the market value and what type
of liquidity it would require each fiscal year. She detailed
that because it was five of the six previous years there
would be dollar amount certainty on the draw amount. In
other words, the current statutory process for transferring
money for the dividend was based on an estimated amount of
the statutory net income for the fiscal year currently in
progress. The corporation was moving that uncertainty from
the calculation and looking at the previous five years. The
benefit to the legislature would be knowing with certainty
(at the start of session) what one of its revenue streams
would be for the upcoming fiscal year.
Ms. Rodell continued that in terms of managing the
investments, currently APFC did not foresee a needed change
to the asset allocation and investment management. The
challenge would be as programs matured, whether the asset
allocation of the [Permanent Fund] Earnings Reserve Account
(ERA) needed to be adjusted into a different asset
allocation that more fully recognized the inability of that
account to take on the risk the corpus currently endured.
She underscored that the ERA could not afford to lose at
all.
1:47:04 PM
Representative Guttenberg recalled voting for a
constitutional amendment proposed by former Governor Frank
Murkowski related to POMV. He remarked there had been
numerous conversations and presentations over the years on
endowments and how they worked around the world. He
remarked that it was not unique in the world, but it was
unique for Alaska. He spoke to establishing a fixed draw
from the Permanent Fund. He asked if other nations did a
fixed rate draw or a percentage of what was made on an
annual basis or in five of the past six years. He asked
what the usual definition was for how much money was taken
off a sovereign fund. He added that perhaps there would be
inflation proofing, but perhaps there would not be.
Ms. Rodell addressed one of the important distinctions
between the constitutional amendment in 2003 or 2004 and
what other sovereign wealth funds were able to do. She
detailed that Alaska's constitutional amendment required
all income go to the General Fund. She explained it was
creating the machinations at present because the way
traditional POMV processes work was to look at the fund
value and take a percentage of the market value, which
became the spend; additionally, there was no reference to
realized and unrealized earnings or income (it was based
fully on the value). The APFC board of trustees had
enthusiastically supported the constitutional amendment
because it cleaned up all the income language and made it
clear that APFC would transfer a set percentage annually.
It had meant the fund had no longer had to worry about
inflation proofing or income, because the money was all in
one big pot.
Ms. Rodell referred to the current requirement for income
to go to the General Fund. The corporation was trying to
make something work within the language it was required to
operate under. She referenced other sovereign wealth funds
and endowments and shared that she had recently seen a
survey showing that the average payout on endowments was
4.2 to 4.3 percent in 2016. She reminded the committee that
those endowments were able to take it without regard to
what actual income was because all the income was swept
back into the fund and invested. Currently in Alaska the
income was flowing into another account that was available
to be appropriated in its entirety regardless of the rules
that were in place and the legislature was deciding how
much it wanted to spend on an annual basis.
Ms. Rodell continued that when discussing inflation
proofing, it was very important to recognize that because
all the income flowed into the ERA, none of the gain or
income generated by the corpus got reinvested into the
corpus without the inflation proofing mechanism. For
example, ten years back APFC had purchased an office
building - the ERA bought a pro rata share of every
investment the fund held - under a four to one ratio, the
office had been $50 million ($40 million from the corpus
and $10 million from the ERA). She continued that the
investment was sold in 2017 and was valued at $100 million;
the $50 million gain went into the ERA and the $10 million
the ERA invested into the office building went back into
the ERA. All the corpus received was the original $40
million investment. She explained that if the $60 million
was needed for other purposes and it could not be
reinvested for another 10 years into a long-term
investment, all that would be available to put back into
real estate was the original $40 million, but at present
office buildings cost $100 million. She elucidated it was
how APFC was losing investment power and why inflation
proofing was so important. She underscored the need to
distinguish between what the ERA could do and what the
corpus could do. The accounts were very different: the
corpus could not be spent, but the ERA could.
1:52:59 PM
Representative Wilson asked if there was a mechanism that
would enable APFC to alert the legislature if a POMV was
determined to be too high. She asked if a mechanism could
be put in place to indicate if the corporation may be
endangered, may not have the ability to invest as it
wanted, or may not adequately protect the Permanent Fund.
Ms. Rodell replied it was possible to include the
safeguards into legislation. She referred to separate
legislation (HB 61), which included a provision for a
lookback to occur every three years. She believed the
legislature would be alerted well before the three-year
mark, based on her experience reviewing various reserve
levels annually with the legislature. However, it would be
nice to codify it in the legislation to force a lookback to
check on whether things were working out as anticipated.
Representative Wilson asked for verification the bill did
not currently have the provision. Ms. Rodell replied in the
affirmative.
Representative Pruitt stated that one thing he had not seen
in any of the bills in the current year was providing APFC
with the tools to manage what it had. He cited procurement
changes as an example. He remarked that the legislature was
putting more weight on APFC and he wondered if the
corporation believed some changes to give it the ability to
hire and manage the fund were still needed. He asked why
the corporation felt the items were good to have.
1:55:29 PM
Ms. Rodell answered that the previous year the corporation
had asked for an exception to the state procurement that
had not been included in one of the bill version's
procurement language. She noted it was an important tool.
Currently the APFC was not exempt from state procurement,
while other agencies such as the Alaska Housing Finance
Corporation (AHFC) and the Alaska Retirement Management
Board (ARMB) were. For example, if the corporation wanted
to hire an expert consultant for a private equity
engineering idea, the corporation would have to go through
the state's procurement process to hire the engineering
consultant. Often investments did not have the six to
eight-week lead time to allow for procurement, getting the
individual up to speed, and get the work done; it
potentially meant a 12-week delay, which would result in
lost opportunity. The corporation was seeking relief that
its other partners like ARMB had. The corporation was
seeking the ability to manage more quickly and be more
flexible in its response. None of the bills currently
accounted for the requested change. She would love to see
the detail added to a bill or to a standalone bill.
1:57:43 PM
Representative Pruitt believed Ms. Rodell's testimony was
that the ERA needed to be managed differently than it had
been managed in the past. He was trying to understand how
the need for increased liquidity impacted the corporation's
goal. He asked if the corporation's goal remained at 6.95
percent for the fund overall if the bill passed with the
4.25 percent draw.
Ms. Rodell replied it was a challenging question to answer.
Part of it was the tension surrounding the corporation's
desire for the legislature to do business as usual and to
continue to manage the fund as it always had. The APFC
board target return was 5 percent plus CPI [Consumer Price
Index]; the 6.95 percent was a forecast generated by [fund
consultant] Callan Associates based on the fund's asset
allocation. She elaborated it was the median forecast -
there was a 50 percent likelihood of achieving better
returns and a 50 percent likelihood of achieving below that
result. She explained that instead of leaving the ERA alone
and merely taking its statutory net income calculation to
pay out dividends, the fund was being considered for a
budget stabilization fund. She was concerned that even
though the POMV was sustainable, the corporation had a
fiduciary responsibility to be prudent and responsible.
Hypothetically, if all that was left in the ERA (after the
budget passed in the current year) was $5 billion and the
4.75 percent, 5.25 percent, or 6 percent draw came with the
expectation $3 billion would be needed for FY 19, she would
want to invest the $5 billion the same way the corporation
would have at present, knowing that it could not afford to
lose; a minimum of $3 billion was needed.
Ms. Rodell continued that it was challenging to answer
these types of questions because if there was a severe down
market (e.g. down 24 percent as in 2008) and there was an
excess of $2.5 billion in losses. She asked what the
response would be if she came to the legislature in January
of 2018 and reported that the money had all been lost
because the market was off. At a minimum she wanted
recognition that if the corporation was going to invest the
way it always had, there needed to be awareness that the
ERA would lose some years. She elaborated that if the state
could not afford the loss, perhaps the solution was
something different than or a mitigation of was under
discussion. It was a recognition that the return was not
6.95 percent on the ERA or a recognition that there were
other mechanisms that could be discussed. She recognized
the challenge facing the state and the need for using the
fund. She did not want the legislators to misinterpret her
statements to not touch the fund.
2:02:46 PM
Vice-Chair Gara stated regardless of the percentage
selected (e.g. 4, 4.5, 5.25 percent) if there were poor
consecutive market years and the legislature implemented a
statutory POMV, he surmised the state would probably be in
trouble and the issue would have to be dealt with at that
time.
Ms. Rodell believed it was fair to say.
Vice-Chair Gara remarked that no one believed a
constitutional amendment was likely; if there was majority
support to do something with the ERA, it would be
statutory. He assumed the legislature would act
appropriately if there were numerous consecutive poor
market years and no POMV formulas worked because there were
no earnings remaining. Separately, he referred to prior
testimony by David Teal, Director, Legislative Finance
Division related to a 4.25 or a 5.25 percent POMV of five
of the past six years, which Mr. Teal found reasonable
provided that if there were multiple negative stock market
years something different would need to be done. He asked
if Ms. Rodell could agree.
Ms. Rodell believed all the numbers spoken about in the
current meeting were in the realm of reasonableness.
Vice-Chair Gara noted that Ms. Rodell had been very clear
that at some point she would like to see inflation proofing
return, which had been absent in the past two years. He
observed that the state's budget was still strapped. He
asked if she would feel more comfortable if there was an
inflation proofing mechanism put in place.
Ms. Rodell replied in the affirmative. The only way for
future generations of Alaskans to get the same type of
benefits the population was currently receiving off the
fund, was for the Permanent Fund corpus to retain its
investment power; it would be diminished without inflation
proofing.
Vice-Chair Gara believed the most comfortable part of
inflation proofing would be if someone put a substantial
amount of money into the fund principal. He thought it was
the most comfortable scenario for the corporation.
Ms. Rodell replied the most comfortable place to be was
somewhere in the waterfall, preferably at the top - to take
a bit each year. If the legislature opted to allocate a
lump sum to the fund, she questioned whether the state
would track what inflation proofing would have been in
2016, 2017, and other years where a moratorium was taken.
She stated the method was a possibility without knowing
what inflation in those future years would be.
2:07:11 PM
Vice-Chair Gara provided a scenario where there was a
formula specified that would cap the amount taken out of
the ERA and the account grew. He asked if the scenario
would provide APFC some comfort even in the absence of
annual inflation proofing.
Ms. Rodell replied in the negative because the ERA could be
spent for any purpose at any time. She used Vice-Chair
Gara's scenario with the addition of a catastrophic event
that led to a bad budget gap year, which meant the draw
from the ERA needed to be larger than 4.5 to 5.25 percent.
She spoke to flexibility given to the ERA and explained
that part of the nice thing about inflation proofing was
that the funds went back into the corpus and kept the
corpus value growing. She elaborated that it would avoid
the current debate of determining what the ERA should be
spent for.
Vice-Chair Gara asked if a hard cap on what could be spent
from the ERA would cause Ms. Rodell some comfort.
Ms. Rodell replied "no."
2:09:20 PM
Representative Thompson surmised the current bill did not
include anything to address revenue volatility of revenue,
yet it appeared the governor's plan included some items
that addressed the issue. He asked if he was accurate.
Ms. Rodell believed comparing the two bills was
challenging, because the HB 115 included the income tax
components, which led to a different revenue outcome than
the governor's bill in terms of volatility. She stated the
Permanent Fund needed to not be the only answer to the
budget deficit, because it would have volatility in
outcome. She did not know how much volatility in outcome
the legislature was willing to take.
Representative Ortiz referred Ms. Rodell's response to an
earlier question that she was not comfortable supporting
one plan over another. Ultimately, the legislature would
have to decide on one type of plan versus another or on no
plan at all. He asked if it was safe to assume that
investment return fluctuation was the biggest threat to the
success of any plan. He asked if that was true.
Ms. Rodell replied in the affirmative. She clarified that
they did not necessarily need to be talking about a
scenario where the market was down 20 percent (i.e. events
that occurred once every 20 years). She was referring to a
scenario where the fund returned 1 percent per year for a
variety of reasons and fixed income rates were low. She
cited the volatile 2015 stock market as an example. The
concern was not about multiple years of losses, but about
years with very low returns, which prevented the generation
of significant income. A recognition of the potential
impact was important. She relayed the state faced
significant volatility in revenue sources through oil
commodity prices. There would continue to be volatility in
revenue, although it would probably be smoother than it had
been in the past, due to the five-year average and other
things.
Representative Ortiz set the volatility aside. He asked
otherwise if it was as simple as looking at the difference
between the various plans regarding the POMV draw and
weighing it as a tradeoff where the lower the POMV draw,
the lower the revenue for the GF. He asked if it was that
simple.
Ms. Rodell answered in the affirmative.
2:14:14 PM
Representative Pruitt addressed the topic of inflation and
noted it had not been done for the fund over the past
couple of years. He believed the current bill and several
bills aimed at dealing with the issue with the four times
amount that spilled over. He surmised it could create a
situation where the corpus was not maintained at the needed
level going forward. He referred to the current bill where
two-thirds would go to government and one-third would go to
the dividend. He asked if a form of inflation should be
included. He asked how to design it if so. He wondered if
it would merely follow the CPI.
Ms. Rodell responded that HB 115 and HB 61 were helpful in
that they both provided a mechanism of inflation proofing.
She clarified that the calculation of four times had no
relationship to inflation or what would have been deposited
had the existing statutory remained in place, but it
created a recognition that some money should flow back into
the corpus. She believed some ways to look at it related to
the definition of statutory net income. She knew that HB
115 had eliminated "available for distribution" and had
changed it to "market value." The legislature could choose
to put it into a waterfall or in the definition of
statutory net income subtract an amount out - statutory net
income by definition, would be the amount available for
distribution that was deposited into the ERA. There were
probably a couple of formats. It was important the bills
contemplated inflation proofing and did not do away with it
all together. She believed it was hard when language was
repealed to reinstate it. She recognized that the bill did
contain a mechanism, albeit it was not perfect. The perfect
scenario would be something higher up that was automatic
each year.
2:17:50 PM
Representative Pruitt asked what if part of the issue was
merely changing definitions. For example, perhaps the
definition of income was changed. He cited Ms. Rodell's
earlier building example where $40 million ten years after
the investment had been made should be valued at "x," so
that the income remaining within the principal became
whatever would have been adjusted. He asked if definition
mechanisms could be used.
Ms. Rodell deferred the question as it related to
constitutional law interpretations and the definition of
income. The Permanent Fund had been in place 40 years and
there had been a series of attorney general interpretations
over the years and different kinds of investments had been
added to the fund. She was hesitant to fully respond, but
she could follow up with his office on what options may be.
Co-Chair Seaton spoke to the four times the draw remaining
and waterfall that would be designated for inflation
proofing. He stated the modeling took effect, but not
annually. He looked at balancing the draw and inflation
proofing. He asked if Ms. Rodell was referring to a
scenario where the draw was increased to 5 percent and 0.25
percent was dedicated to inflation proofing.
Ms. Rodell answered in the affirmative.
2:20:28 PM
Vice-Chair Gara remarked that having the current statute
specifying inflation proofing was nice; however, the
legislature did not follow it the past two years. He
surmised that one of the bigger threats to inflation
proofing was the failure for the state to have a way out of
the fiscal crisis. He asked Ms. Rodell if she believed
letting the fiscal crisis continue was a threat to
inflation proofing.
Ms. Rodell answered that her job was to protect the corpus
of the fund.
Vice-Chair Gara asked for verification the fund had not
been inflation proofed for two years. Ms. Rodell answered
in the affirmative.
Vice-Chair Gara understood that APFC could not get involved
in politics. He referred to an earlier question by
Representative Thompson related to the various bills. He
recalled that Ms. Rodell had testified that since the bill
was not only reliant on Permanent Fund revenue to fund
public services, but it also had another element to produce
revenue it gave her more comfort. He wondered if he had
mischaracterized her statement.
Ms. Rodell replied that she had been trying to point out
that the bills were not an apples-to-oranges [apples]
comparison because there was other income [in HB 115],
which may have dampening effects that other bills did not
have because of the combination nature of the bill. As
opposed to pulling two bills together making it a plan.
Vice-Chair Gara asked if Ms. Rodell was using the term
"dampening effects" to mean less pressure on the Permanent
Fund if there was extra revenue coming in besides revenue
from the Permanent Fund.
Ms. Rodell answered in the affirmative.
2:23:04 PM
CARL DAVIS, RESEARCH DIRECTOR, INSTITUTE ON TAXATION AND
ECONOMIC POLICY (ITEP), WASHINGTON DC (via teleconference),
introduced himself. He relayed that ITEP was a nonprofit
and nonpartisan research group based in Washington, D.C.
Co-Chair Seaton asked if Mr. Davis had experience with
Alaska's taxes and fiscal situation.
Mr. Davis replied in the affirmative. He detailed that ITEP
had done two reports on Alaska's fiscal situation the
previous year. The first report had looked at a variety of
different packages for raising revenue to help close the
budget gap. The institute maintained a microsimulation tax
model, which was similar to a model maintained at the
federal level by the Congressional Budget Office and the
Joint Committee on Taxation. A number of states maintained
the models as well. The model contained information on
taxpayers' incomes, consumption habits, property owned, how
much gasoline they purchased, etcetera. When there was a
proposal to change state tax law, ITEP could run it through
the model to determine how it would impact a state's
population. The organization had the model for all 50
states and the country. The model could analyze changes in
the dividend, the creation of an income or sales tax,
gasoline tax changes, and other. The model could produce
revenue figures, similar to the information included in the
fiscal note by DOR.
Mr. Davis continued that ITEP could also break down the
revenue by income level to show whether a tax would fall
primarily on middle, high, or low-income families. The
focus of ITEP's reports thus far had been largely on
changing the dividend and the potential of enacting an
income tax and how the two may balance. The organization
recognized that Alaska was facing a fiscal challenge that
would not be fixed with only one solution. The solution
would likely involve a package of changes; how that package
was comprised had very different impacts in terms of the
distribution. For example, if the package relied more
heavily on scaling back the dividend, it may impact low-
income families more heavily. Whereas, a package relying
more on income tax could hit higher income families more. A
mix of the two may end up with a more proportioned result
where similar shares of income were paid by individuals at
different income levels.
2:26:58 PM
Co-Chair Seaton asked what kind of workload and timing on a
work product looking at the provisions in the bill. He
asked if the entity could do the work in a reasonable
timeframe.
Mr. Davis answered in the affirmative. The organization was
intending to do an analysis on the bill in the next several
weeks. He relayed that ITEP liked to take its time and
ensure it accurately captured all the nuances. He had taken
a preliminary look at the income tax in the bill and
offered to report on how it stacked up nationally.
Co-Chair Foster agreed.
Mr. Davis reported that it was tricky comparing income
taxes across states because every state had different
exemptions, deductions, and different rates. The simplest
way to measure was to look at the size of the overall tax
relative to a state's economy. The organization had found
that relative to Alaskans' personal income, the tax would
collect about 1.5 percent of the state's personal income.
He advised the committee that the rate would vary by income
level. For example, a very low-income earner paying the $25
minimum tax could be paying a rate significantly below 1.5
percent, whereas, the rate could be higher than 1.5 percent
for higher-income earners. Overall, the tax was equal to
about 1.5 percent of Alaska personal income. Relative to
other states, the proposed tax would be the fourth lowest
broad-based personal income tax in the nation. Currently,
the country's lowest personal income tax was in North
Dakota, which was the second most energy dependent state.
State's with significant energy revenues could raise
revenues in nontraditional ways. North Dakota also had a 5
percent sales tax, which also helped explain why it had a
such a low income tax. Additionally, Arizona and Louisiana
had smaller income taxes than the tax proposed in HB 115.
Arizona got by on levying the 11th highest sales tax rate
in the country and Louisiana recently took the top spot in
sales tax, which averaged at 10 percent when state and
local taxes were combined. He concluded that states with
income taxes smaller than the tax proposed in HB 115, was
generally because of significant energy revenues or sales
tax revenues.
2:30:13 PM
Co-Chair Seaton requested to receive the information in
writing.
Co-Chair Foster agreed to follow up to ensure the
information was received.
Vice-Chair Gara provided a scenario where states taxed at a
percentage of the federal income tax rate. He noted states
did not currently use this method. He asked if it was
possible to determine where the bill ranked with other
states with income tax in terms of what percentage of the
federal tax rate states were charging.
Mr. Davis responded that the bill topped out slightly below
6 percent on ordinary income, which took 15 percent of the
top federal tax rate of 39.6 percent. He stated it was
below the national median and average in terms of a top
income tax rate of 6.4 percent. He continued that it was
possible to take a look by income level to see how it
stacked up on a more fine-grained level.
2:32:28 PM
Vice-Chair Gara relayed it would be useful to know what
percentage of the federal tax rate the proposed tax would
charge and how it stacked up to what percentage of the
federal tax rate other states charged. He understood that
other states taxed differently and had individual
percentages as opposed to taxing a percentage of federal
taxes. He was interested in the average percentage of
federal taxes charged by other states.
Mr. Davis replied he could provide the information.
Vice-Chair Gara asked how many tax brackets existed in the
federal tax code.
Mr. Davis reported there were seven federal brackets. He
noted that occasionally the issue was brought up in the
context of simplicity and whether having more brackets was
complicated. He explained that most taxpayers did not
notice how many brackets existed; there was a table at the
end of the tax booklet that reported a tax amount based on
the individual's taxable income. The number of brackets
needed to be thought through carefully, but the average
taxpayer did not generally notice.
Vice-Chair Gara stated that there could be a proposal to
tax a certain percentage of the federal tax. For example,
the proposal could pick 15 percent of the federal tax to
tax each bracket. If one of the tax brackets was 20 percent
and the state taxed 15 percent of the amount, the tax would
be 3 percent. He reasoned that under the scenario the state
would have a set number in statute if federal taxes went up
and down. He asked if Mr. Davis could provide the seven tax
brackets.
Mr. Davis answered in the affirmative. He believed the
approach was reasonable in terms of lessening the
vulnerability of the tax to whatever changes may be passed
by Congress. It was necessary to think through how federal
tax credits came into play. If there was interest in
keeping a linkage to federal tax liability, but limiting
the extent it would swing with whatever federal changes
were enacted, some states used use fixed date conformity.
He detailed that the method meant not automatically
coupling to whatever the Internal Revenue Code happened to
be at a given point in time. The method meant coupling to a
version of federal law. For example, it would be possible
to specify that Alaska's income tax was based upon federal
law as of January 1, 2017. He explained that the date could
be updated from time-to-time if the federal government
enacted tax changes, but when Alaska was debating whether
to update the date, it would have information at its
disposal showing what Congress had enacted and what would
occur if the date was updated to January 1, 2018 when
federal taxes may be significantly lower.
2:37:10 PM
Representative Guttenberg was interested in hearing Mr.
Davis's perspective on comparing apples-to-apples. He
explained that it could be difficult analyzing things when
they were so different in Alaska compared to other states.
For example, when comparing tax liability, Alaska had the
Permanent Fund. He noted that other places had sales taxes
that could have a cap (e.g. there could be the same cap on
tax for a new or old car). He continued that there were
deductions and other calculations for income tax. He asked
how accurate could a comparison could be between Alaska and
other states.
Mr. Davis responded that it was complicated because every
taxpayer's financial situation was different. For example,
if there were two individuals with identical incomes, but
one owned a larger home or had a home in a more expensive
area, that individual would pay significantly more property
tax. Additionally, if one individual's buying habits were
different they could pay significantly more sales tax.
Where an individual's income was derived could make a
difference, given that social security income had a partial
or full exemption. Hypothetical examples could illustrate
how individuals were impacted at different levels.
Mr. Davis addressed how individuals were impacted by a
different mix of policy options. He detailed if a $500
million revenue package was constructed in the form of a
sales or income tax, the University of Alaska had done a
study showing that most residents would end up paying
significantly less under the income tax option. He
explained that an income tax could raise more revenue from
individuals with very large incomes and the income
collected from low, middle, and even upper middle-income
taxpayers were significantly lower. He added that something
like the Permanent Fund Dividend, being unique to Alaska,
complicated comparisons across states. The organization
tried to be mindful about those things, but it was
difficult to generalize too much because it depended on
each taxpayer's specific financial situation.
2:41:09 PM
Representative Pruitt asked who Mr. Davis was and he
wondered why he was selected to testify. He asked if ITEP
had worked on tax policy for the Alaska Legislature in the
past.
Mr. Davis reported that the organization did research in 50
states; ITEP was a small and could sometimes be spread a
bit thin. The previous year it had done a report supported
by the Rasmussen Foundation that had been published online.
The organization was funded by foundations including the
Annie E. Casey Foundation and Ford Foundation (the list of
donors was available on the ITEP website). The
organization's work was largely pro bono; it used the tax
model to help fill informational voids at the state level.
At the federal level there were already numerous groups
doing distributional and revenue analyses of tax policy
changes. The capacity within government to do the analyses
varied from state-to-state. The company frequently helped
to fill in the gaps.
Representative Pruitt referred to an informational sheet on
the ITEP organization in members' packets (copy on file).
He read from the company's mission statement:
ITEP is committed to fair and sustainable tax laws
that protect lower income Americans from aggressive
policies while generating revenues adequate to serve
the public interest. ITEP's timely, accessible, and
accurate analysis for advocacy groups and public
servants who share that commitment.
Representative Pruitt observed that the mission statement
did not include a conversation related to the impact on the
private sector or the economy as a whole. He asked what
role those things played in ITEP's modeling.
Mr. Davis stayed that there was a debate on dynamic scoring
and whether tax policy changes should be analyzed in the
light of what broader ripple impacts the changes would have
on the economy. It was a straighter forward matter to
consider how a tax proposal would impact the current
economy. When starting to try to determine impacts on the
broader economy, the question became much more complicated,
particularly at the state level. He elaborated that at the
state level, states were generally not able to run a
deficit for a sustained amount of time; any change in tax
policy would generally lead to a change in spending policy
as well. There were states with analysts that would attempt
to analyze the economic impact of a change in tax policy.
He explained it was not possible to answer the question
unless what the change in tax policy would fund was also
analyzed. He detailed if the money was spent on
infrastructure, there were measurable impacts of
infrastructure spending as well. There were longer-term,
less measurable impacts of education spending.
2:45:50 PM
Mr. Davis continued that the economic analysis of tax
policy became much more speculative. He furthered there
were limited things states could do in terms of their tax
policy to impact their economies. Evidence from states that
had recently changed their personal income tax rates showed
that about half of them did better after the change and the
other half did worse. He explained it was hard to tease out
the effect of the tax policy change because there were so
many other things happening (e.g. a decline in
manufacturing, an influx in revenue due to nice weather,
and other). He concluded the economic impacts were not as
easily measured as the distributional impacts.
Representative Pruitt surmised the organization focused on
what it took to fill the gap and the levers a state could
move to limit the impact on certain populations. He asked
for verification that the economic analysis was for the
legislature to determine separately.
Mr. Davis agreed. He added that the organization did not
make statements or judgements about the appropriate level
of taxes, which was outside its purview. Once it had been
decided that a certain amount of revenue needed to be
raised, ITEP could help fill in gaps about what it meant to
raise it in various ways. He believed the economic impact
it was much more speculative and was not something that
could usefully be modeled with economic models at the state
level.
2:48:18 PM
Representative Grenn asked which state most recently
implemented an income tax. He knew Michigan had implemented
an income tax a few years back. He asked about the
environment in which the tax had been implemented and
whether ITEP had done any associated reports the committee
could review.
Mr. Davis replied Connecticut had enacted an income tax in
1991 and had expanded what had been a tax on investment
income. New Jersey had implemented had implemented an
income tax in the 1970s. Generally, the states that had
enacted income taxes had been a facing budget gap. He
continued that income tax tended to be enacted during
tougher times. He had recently seen an analysis about the
11 states that had most recently enacted income taxes. He
believed the source of the study was Arthur Laffer. He
noted that Mr. Laffer was known for the Laffer Curve - the
idea that certain types of tax cuts could produce such
explosive economic growth that they ultimately pay for
themselves.
Mr. Davis believed the look at the 11 states could have
been useful if it had been for a randomized experiment of
states spread out across the country that were
demographically or economically diverse. However, all 11
states had been concentrated in the Mid-West, Appalachia,
and the North East - many states that could be
characterized as the Rust Belt including Michigan, West
Virginia, Ohio, Pennsylvania, and Indiana. There was
history of states that had recently enacted income taxes,
but it was difficult to tease out the effects of tax policy
changes on the economy versus other bigger picture things
that had already been going on with manufacturing or
westward migration.
2:51:12 PM
Co-Chair Seaton asked if Mr. Davis was familiar with any
other states with a minimum tax like the one included in HB
115. He detailed the bill had a $25 minimum tax for any
filer.
Mr. Davis answered the method of a minimum tax was more
commonly seen in corporate income taxes (e.g. $100, $250,
or $500). He did not believe any state had a minimum under
the personal income tax. Many states allowed their income
taxes to go negative through refundable credits (e.g.
earned income tax credit, which was offered in 26 states).
He noted that most of the taxes were refundable, but not
all. Alaska was a unique state with the Permanent Fund
Dividend, which may take some of the interest in refundable
tax credits off the table. He shared that Oklahoma and
Hawaii had no minimum tax and offered refundable credits to
offset things like its sales tax on groceries. He
reiterated that the minimum tax at the state level was
primarily confined to the corporate income tax.
2:52:46 PM
Co-Chair Seaton believed the tax in the bill was simple. He
detailed it was 15 percent of line 56 plus 10 percent on
line 13. He was trying to determine if they did not use the
bill's current method and went to generating each of the
exemptions, deductions, tax brackets, and what the
percentages would be for the tax brackets. He asked if ITEP
had followed income tax debates in other states. He asked
if the generation of the exemption and deduction and
percent for tax brackets was long and complex compared to
the tax method in HB 115.
Mr. Davis responded it had been so long since a state had
enacted an income tax, but some had changed brackets in
more recent years. Much of the negotiation tended to happen
behind closed doors and there were many tradeoffs involved
if a bracket was changed by one amount, an exemption was
changed by another, and the sales tax base was also
changed. There were numerous moving pieces. At the same
time there were other states like Alabama, Virginia, and
West Virginia that enacted brackets and personal exemptions
decades ago, which they did not appear to have revisited in
subsequent years. In some cases, it was a problem because
they had written their bracket and exemption amounts in
flat dollar terms. Bracket creep could occur, where flat
dollar amounts were not updated for inflation and
eventually the personal exemption was so small in real
dollars it became meaningless and everyone became subject
to the top income tax rate.
Mr. Davis continued that $5,000 decades earlier may have
been a significant bracket, whereas currently, it was
almost a token bracket. It was a fact under any tax and may
be witnessed even more under sales tax in terms of
negotiating over exemptions. State sales tax bases tended
to be incredibly narrow, not just carveouts for things like
groceries or prescription drugs. He cited exemptions for
broad types of personal services like haircuts and
massages, business services like accounting or legal fees,
and industry specific exemptions. There would always be
significant wrangling over which exemptions should be
created or closed for any type of broad-based tax.
2:56:19 PM
Vice-Chair Gara asked if any states took the federal
taxable income line and came up with their own tax rate
within each bracket to avoid fighting over exemptions and
deductions.
Mr. Davis replied in the affirmative. The states that
started with federal taxable income and applied their own
brackets were Colorado, Minnesota, North Dakota, South
Carolina, and Vermont. He noted the states typically
offered their own tax credits as well. The method made the
forms significantly shorter and simple. States would often
couple to federal adjusted gross income. He agreed that
coupling to federal taxable income would make simplify
things - it came prepackaged with a personal exemption,
standard deduction, and set of itemized deductions.
Vice-Chair Gara referred to a taxable and adjustable gross
lines. He knew there were several different lines for
income on the income tax form, but he did not remember what
they were. He asked about the differences. He wondered if
it was taxable income and adjustable gross income.
Mr. Davis answered the two lines were adjusted gross
income, which was a fairly comprehensive measure of income,
although it included certain adjustments for things like
self-employment taxes or moving expenses. There were a
handful of adjustments. Adjusted gross income was a broad
measure of income. An individual could subtract up to
$4,000 per family member. A taxpayer could also subtract
either the standard deduction or homeowner property taxes
and mortgage interest. Other items that could be subtracted
were charitable donations, state income tax, and sales
taxes (in states without income tax). The taxable income
definition was lower down the form and tended to be a
smaller amount for most people because by the time a
taxpayer reached that point, exemptions and deductions had
been subtracted.
2:59:36 PM
Representative Wilson asked if Mr. Davis knew the minimum
earning amount before a person had to file.
Mr. Davis answered in 2016 the minimum was earning level
was $10,350 for a single taxpayer and $20,700 for a married
couple. There was also the head of household filing status
- a single person taking care of children did not have to
file unless they earned over $13,350 per year. Many
taxpayers may choose to file anyway to claim tax credits
(e.g. child tax credit or earned income tax credit).
Representative Wilson had thought the amount was much
lower. She thought it was $400 or $500 of interest or
income that a person had to file and that they got it all
back. She asked for verification that a single person did
not have to file unless they brought in a minimum of
$13,000 in income.
Mr. Davis affirmed. He believed the number was built from
taking the personal exemption - nobody was taxed on the
first $4,000 of income. Under the standard deduction,
nobody was taxed on the next $6,000 or so. The exemption
and deduction combined created a filing threshold.
3:01:31 PM
Co-Chair Seaton clarified that Mr. Davis was talking about
earned income. There was also a threshold of $1,050 for
unearned income; if a person received more than $1,050 from
unearned income they qualified to file.
Representative Wilson asked for verification that if the
dividend was $1,100, everyone in Alaska would be required
to file.
Co-Chair Seaton answered, "either that or children
receiving that can be filed on their parents' form."
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
addressed the committee. He could not speak authoritatively
to the federal tax code. He asked for a repeat of the
questions.
Co-Chair Seaton referred to Representative Wilson's
question about what it took to be required to file a
federal tax form.
Mr. Alper did not know with any certainty. He shared that
is family's taxes were prepared by an accountant. He had
three children and even when the dividend had exceeded
$2,000 a couple of years back, they had been able to file
as part of his family return.
Representative Wilson stated that the committee had been
told that a person was not required to file under certain
circumstances. She referenced the $13,000 threshold cited
by Mr. Davis. She surmised that if the $13,000 was correct,
the only people the $25 minimum would apply to was people
receiving earned income. She asked if her understanding was
correct.
Mr. Alper replied that the $25 minimum tax would be per
filer and anyone required to file the tax return (anyone
earning income in the state) would pay $25 if the formula
sent them to zero. Minors with no income, who were
dependents on someone else's return, would be part of that
person's tax calculation.
Co-Chair Seaton pointed to the tax tables in members'
packets titled "HB 115: Estimates for Income Tax and PFD
Refundable Tax Payment; Estimated Federal and State Income
Tax for Year 2016" (copy on file). He pointed to a scenario
on the third page of a married couple with four children -
there was a $25 minimum tax at $20,000 up to $70,000. Other
people who were single with no children never reached the
$25 minimum and paid at $20,000. A single person with two
children would pay the minimum through $40,000 (shown on
the third to the last page); at $50,000 an individual would
pay $243 for the Alaskan income tax. He stated that how a
person filed was dependent on whether they were married,
single, or had children.
Representative Wilson surmised that a person earning
$19,999 would not pay tax because the minimum was $20,000.
She thought it had sounded like everyone would have to pay
the $25 at whatever level - she guessed it was $30,000 for
a married couple with no children. However, she noted that
Mr. Davis had testified that a person could chose to file -
the minimum was $13,000 for a single individual and $20,000
for a married couple - because they may have low enough
income to receive earned income back. She stated that if a
person was not eligible for earned income because they
earned slightly over a certain amount, they would not file
or give anything. She thought there could be two people
making similar income and one person may file while the
other may not. She expounded that the individual filing was
only doing so to get some income back into the household,
but the bill would mean they would be charged $25.
3:07:37 PM
Co-Chair Seaton clarified the handout did not reflect the
complete tax table - it only represented relevant incomes.
He explained that if someone filed and earned $13,000, the
federal tax as a percent of gross income was 0.00. If a
married couple with no children earned $20,000, they would
not pay any federal tax, but they would pay a $25 minimum
tax to the state. He continued that the couple had not
reached enough income to pay more than the $25 - as soon as
income reached $30,000, the taxpayer would pay $140.
Representative Wilson thought there could be a situation
where a child would have to pay $25 as well, depending on
how much their interest or other income they may receive.
Co-Chair Seaton replied in the affirmative.
Vice-Chair Gara asked if the $25 minimum tax applied to
every adult without a federal tax liability.
Co-Chair Seaton replied in the negative. He clarified the
minimum $25 tax applied to every required filer. He
detailed that taxpayers earning $30,000 would pay $140 in
tax, but they did not pay $25 in addition to that amount.
He clarified that $25 was the minimum tax people would
contribute.
3:09:54 PM
Vice-Chair Gara expressed confusion about who the $25
minimum tax applied to. He asked if the tax would apply
only to individuals required to file, but who did not pay a
tax. Alternatively, he asked if it applied to people
earning below the required filing level.
Mr. Alper referred to page 5 of the legislation and read:
"an individual required to make a return under the Internal
Revenue Code shall also file with the department a return."
He clarified the language applied to individuals filing
with the federal government for any reason. He remarked
that the examples provided by the co-chair the previous day
were a bit stylized because every family's circumstances
were different (some taxpayers would itemize). At around
$20,000 a person would have some federal tax liability; if
a person had some federal tax liability that calculation
would govern. He continued that if a taxpayer had numerous
children with many deductions, even if a person was at a
higher income (the tax calculation may bring them to zero),
the bill ensured that the person would pay a minimum of $25
to the state.
Vice-Chair Gara was trying to understand at what minimum
income a person would not have to pay the $25.
Mr. Alper answered that a person filing taxes had to pay
the $25. He explained that "pretty much everyone" would
have to pay. He believed it was $25 per household.
3:11:56 PM
Vice-Chair Gara was trying to understand the $25 minimum.
He did not understand the federal rules on who had to file
when they did not owe a tax liability. He continued there
were different categories of people - those who did not
have to file, those who had to file even though they had no
federal tax liability, and those who had a federal tax
liability and had to file.
Mr. Alper deferred to a colleague.
Vice-Chair Gara asked who would pay the $25 minimum tax. He
asked if everyone would pay or if it only applied to
individuals at a certain income level.
Mr. Alper answered that some fraction of taxpayers filed
their federal tax and owed zero; the number changed from
year-to-year and varied widely throughout the country.
Based on the best available data, DOR presumed that about
25 percent of the taxpayers in Alaska owed zero federal tax
for one reason or another (i.e. earned income tax credits,
the number of individuals in a household, and lower
income). For its fiscal note, the department had presumed
about 100,000 taxpayers out of 400,000 households would be
at the zero federal rate. Per the statutory rate of 15
percent, those taxpayers would owe zero; individuals owing
zero federal taxes would pay $25 in state tax.
Vice-Chair Gara expressed confusion about filers who did
not pay. He asked if an adult would be required to pay the
$25 tax if their only income was a $1,020 Permanent Fund
Dividend.
Mr. Alper believed Vice-Chair Gara was trying to determine
who had to file with the federal government at all. He
deferred the question to a colleague.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), answered the
federal minimum for individuals required to file was
$10,300 gross income for individuals under the age of 65.
An individual who was not a dependent and received an
$1,100 dividend would not have a filing requirement if that
was their only form of income because it was under the
$10,300 threshold. Dependents earning over $10,050 of
unearned income were required to file their own tax return
or usually with their parents. Individuals under the age of
65 filing as head of household who earned less $13,250 had
no federal filing requirements. Under HB 115, individuals
would not have to file if there was no federal filing
requirement. Many people chose to file even if they earned
less than $10,000 because they had withholdings and could
get a refund.
3:16:47 PM
Mr. Alper added that an individual making less than $10,000
may not have to file, but could chose to file if they had
withholding they wanted back. Also, if the individual had
dependents who also had to file, it may be easier for the
entire household to file together. He clarified that even
if they did not need to file because of the individual's
income threshold, they may need to because of a child's
income threshold due to the PFD.
Co-Chair Seaton provided a scenario of an adult head of
household with dependents receiving the PFD. He asked if
each member of the household would have to pay the $25.
Mr. Alper answered that if a child was filing an individual
return separately, they may individually be susceptible to
the $25 tax. However, if the household filed together there
would be a single $25 tax.
Representative Wilson asked for clarification. She surmised
that a person would not be subject to the $25 tax if they
did not have to file, but decided to file because they had
children and could receive earned income back.
Mr. Alper believed the individual would be subject to the
$25 tax. He thought that filing the Alaska tax return would
trigger the $25 minimum.
Representative Wilson disputed the statement. She noted
that Mr. Alper had pointed out that a person was subject to
the $25 tax if they were required to file an income tax
return. However, those earning below a certain income were
not required to file, but could choose to do so because it
would be financially beneficial. Under the scenario, she
questioned how the state could make them pay the $25.
Mr. Alper responded that if a person chose to file the
federal return, they would be required to file the Alaska
return. He believed the benefit received would have to be
reduced by the $25.
Co-Chair Seaton relayed it was a good reason for committee
discussion. He wanted to make sure the intent was clear.
3:20:04 PM
Mr. Alper explained if the bill became law, DOR wanted to
ensure the regulations were written in accordance with the
legislature's intent.
Representative Wilson stated that the $25 was based on how
many returns a household gave. She provided a scenario
where a household included three adult children with their
children as well. She asked for verification that the
household would only be charged one $25 tax if they filed
as a household.
Co-Chair Seaton believed it was the way the bill was
currently written.
Representative Wilson was not objecting, but just wanted to
understand.
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, replied
that the ability for a dependent to file under the
household - if they had unearned income such as the PFD -
required the dependent to be under the age of 19. Adult
children living in a parent's household would be required
to file for their own PFD.
3:22:12 PM
Representative Wilson relayed she was not referring to
unearned income. She understood that earned income could
only come from a parent who had children in the household
based on their income; however, they could still have
others living in the household who were making some money,
but not enough money to file. She explained that when her
children had been in college they had still been her
dependents. Although they had earned some income, it had
not met the filing threshold. She was trying to ensure that
the $25 fee was not based on how many adults lived in a
household.
Ms. Hansen replied there was a requirement to file for
unearned income for a dependent if the unearned income
exceeded $1,050. Children could be claimed by a parent, but
only if they were under the age of 19. An adult receiving a
dividend living in their parents' house would need to file
for the dividend. Any child under the age of 19 could be
claimed on their parents' return.
Representative Thompson noted the bill did not address the
volatility of revenue. He believed the governor's plan
would. He asked for detail.
Mr. Alper answered HB 115 had a relatively stable annual
draw from the Permanent Fund earnings towards the General
Fund as well as another that flowed directly to the
dividend. The governor's bill - the Permanent Fund
Protection Act - had a slightly higher draw at 5.25
percent. There was a claw back feature where if GF oil
revenue from the production tax and royalty grew above a
certain amount, there was a dollar-for-dollar pull back of
the PF draw, equal to the amount of the oil money above the
$1.2 billion threshold. It protected against the
circumstance in where the event of a big boom in oil
revenue an increase in PF money could overheat government
or cause an unsustainable runup in expenditures. When long-
term modeling was done it included high and low years and
there could be a slightly higher annual draw at 5.25
percent with the expectation that at some point in the next
25 years there would be a few years where the full amount
was not taken due to the volatility provision; the average
draw would remain at a sustainable number.
3:25:33 PM
Representative Pruitt commented that he had heard no
discussion about military personnel living out-of-state
receiving a PFD. He asked if the bill would mean the state
would have to chase the individuals for the $25.
Mr. Alper answered that certain types of military wages
were exempt from the income tax. There were a number of
rules unique to service personnel and the federal income
tax. One of the weaknesses was a lack of expertise on
individual income taxes at DOR, given that Alaska had not
had an income tax in 35 years. The department would need to
learn more about the subject. He hoped the state would not
expend significant resources chasing after people living
out of state; however, people living out of state should
not be claiming a dividend.
Representative Pruitt noted that the state had allowed
provisions for military personnel intending on coming back
to Alaska. He believed they needed to be very clear about
how they respect military personnel living in Alaska those
that planned on living in Alaska. He noted the fiscal note
addressed 100,000 taxpayers paying the $25 minimum tax
rate. He spoke to a withholding and estimated it was $1 per
pay period (twice a month). He asked about the cost to the
state in administering the $25 for 100,000 taxpayers. He
asked how the department would ensure the state was
receiving the $25 and what would happen for nonpayment.
Mr. Alper answered the individuals would have to file
because they were filing a federal tax return. If
individuals were not filing with the state, but were filing
with the IRS, the state would go after them for failure to
file. He continued that if an individual filed, but failed
to send the $25, it was something the state would have to
address. There were a number of small dollar people owing
money in taxes, which was not the highest priority. He did
not know if the amount owed could be attached to a person's
PFD, but he thought it was likely. He spoke to the cost of
administering the tax and remarked there was significant
paper involved. The fiscal note indicated that as many
people as possible would file electronically. However, a
$25 check required no fewer resources than required to
produce a $2,500 check; there would still be substantial
data entry.
Representative Pruitt referred to a bill introduced by the
governor the previous year with a 6.25 percent. He recalled
an estimate from DOR of around 60 people. He believed the
fiscal note for HB 115 was similar. He asked if the
estimate was still the same.
Mr. Alper replied in the affirmative. The department was
estimating roughly the same additional staff increment to
administer and be prepared to deal with 400,000 income tax
returns on an annual basis.
3:29:26 PM
Representative Pruitt stated HB 115 was very different; it
was not a flat 6.25 percent of a federal tax, which was
simple - information from federal taxes could be paired.
Whereas, HB 115 had other moving mechanisms connected to
whether an individual decided to check the box for the
dividend and/or had paid the $25. He asked staffing would
still be 60 people or if the Permanent Fund Dividend
Division would also need additional people. He reasoned
more people would be needed because he thought the work
under HB 115 would be a bit more burdensome.
Mr. Alper answered that he could only speak to the Tax
Division. He believed the Permanent Fund Dividend Division
had its own fiscal note, but he did not believe there was
additional staffing needed. The math of the 15 percent tax
versus the 6 percent tax proposed by the governor the prior
year (the 10 percent capital gains tax). He stated that the
arithmetic was largely done by computers. The biggest
burden from a staffing point of view would relate to a
multistate individual; ensuring the person with income in
and outside of Alaska was paying the appropriate share to
the state. The underlying complexity of the tax formula was
secondary to that.
HB 115 was HEARD and HELD in committee for further
consideration.
3:31:18 PM
Co-Chair Seaton reviewed the schedule for the following
day.
ADJOURNMENT
3:31:54 PM
The meeting was adjourned at 3:31 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB115 Supporting Docuemnt_ ITEP faq_2.13.2017.pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 federal filing requirements (2016).pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 federal tax brackets (2017).pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 income tax rankings - percent of federal.pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 income tax rankings - share of income.pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 state linkages to federal income tax (2016).pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 supporting doc AKrevenueoptions0416- ITEP.pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |
| HB 115 supporting doc fairnessmatterschartbook ITEP 1-17.pdf |
HFIN 2/14/2017 1:30:00 PM |
HB 115 |