Legislature(2017 - 2018)HOUSE FINANCE 519

03/23/2017 09:00 AM FINANCE

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09:21:24 AM Start
09:22:16 AM HB115
11:02:03 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 9:15 AM --
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 23, 2017                                                                                            
                         9:21 a.m.                                                                                              
                                                                                                                                
9:21:24 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 9:21 a.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 Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Steve Thompson                                                                                                   
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Taneeka Hansen, Staff, Representative Paul Seaton; Brandon                                                                      
S. Spanos, Deputy Director, Tax Division, Department of                                                                         
Revenue; Representative Colleen Sullivan-Leonard.                                                                               
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 115    INCOME TAX; PFD CREDIT; PERM FUND INCOME                                                                              
                                                                                                                                
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."                                                                                                           
                                                                                                                                
9:22:16 AM                                                                                                                    
                                                                                                                                
Co-Chair   Seaton   MOVED   to  ADOPT   proposed   committee                                                                    
substitute  for HB  115,  Work  Draft (30-LS0125\L,  Nauman,                                                                    
3/22/17).                                                                                                                       
                                                                                                                                
Representative Guttenberg OBJECTED for discussion.                                                                              
                                                                                                                                
9:22:59 AM                                                                                                                    
                                                                                                                                
TANEEKA HANSEN, STAFF,  REPRESENTATIVE PAUL SEATON, reported                                                                    
that  the  CS incorporated  the  amendments  adopted by  the                                                                    
committee.  There were  several new  sections. She  read the                                                                    
Summary of Changes (copy on  file) from version E to version                                                                    
L:                                                                                                                              
                                                                                                                                
     Title  - On  line one  the title  has been  expanded to                                                                    
     include "relating  to the  permanent fund;  relating to                                                                    
     the   procurement   by   the  Alaska   Permanent   Fund                                                                    
     Corporation; relating  to the management of  the budget                                                                    
     reserve fund" and on  line five "individuals, partners,                                                                    
     shareholders in S corporations, trusts, and estates."                                                                      
                                                                                                                                
     New  Section  2  -  Add  a new  subsection  (l)  to  AS                                                                    
     36.30.015  to   direct  the  trustees  of   the  Alaska                                                                    
     Permanent   Fund  Corporation   to  adopt   regulations                                                                    
     regarding procurement.                                                                                                     
                                                                                                                                
She  reported that  new sections  2  and 3  were related  to                                                                    
Amendment 11 offered by  Representative Pruitt and continued                                                                    
to read the summary of changes:                                                                                                 
                                                                                                                                
     New  Section 3  -  Amends AS  36.30.990(1)  to add  the                                                                    
     Alaska  Permanent  Fund  Corporation  to  the  list  of                                                                    
     entities excluded  from the definition of  'agency' for                                                                    
     the  purposes  of  the  state  procurement  code.  This                                                                    
     exempts the  corporation from  the requirements  in the                                                                    
     state procurement code.                                                                                                    
                                                                                                                                
     New Section 4 - Amends  AS Sec. 37.05.055(b) to conform                                                                    
     to the changes made in section 6.                                                                                          
Ms.  Hansen  elaborated  that  section  6  had  to  do  with                                                                    
Amendment   5   that   took    the   royalties   above   the                                                                    
constitutionally required  25 percent and deposited  them in                                                                    
the general fund (GF). She read New Section 5:                                                                                  
                                                                                                                                
     New  Section 5  - Amends  AS 37.10.430(c),  relating to                                                                    
     the  subaccount in  the  constitutional budget  reserve                                                                    
     fund,  to   remove  the  requirement  that   any  funds                                                                    
     invested in the subaccount  shall be invested under the                                                                    
     assumption that those  funds will not be  needed for at                                                                    
     least five years.                                                                                                          
                                                                                                                                
Ms. Hansen related that Section 5 was related to Amendment                                                                      
12. She turned to the following sections:                                                                                       
                                                                                                                                
     New Section 6  - Amends AS 37.13.010(a)  and deletes AS                                                                    
     37.13.010(a)(2).  The resulting  change means  that the                                                                    
     Alaska   Permanent  fund   will   be   filled  by   the                                                                    
     constitutionally  required 25  percent  of all  mineral                                                                    
     lease  rentals, royalties,  royalty sale  proceeds, and                                                                    
     net  profit shares.  The  additional  25% of  royalties                                                                    
     from leases  issued after December  1, 1979,  which are                                                                    
     above  the  constitutionally  required  25%,  will  now                                                                    
     remain in  the general fund  and will not  be deposited                                                                    
     into the permanent fund.                                                                                                   
                                                                                                                                
     Section  8 -  Amends AS  37.13.140(b), created  by this                                                                    
     act, to  change the  amount available  for distribution                                                                    
     from the  earnings reserve to  be 5.25% of  the average                                                                    
     market value  (POMV) of the permanent  fund. [This rate                                                                    
     of distribution  will be  in effect  from July  1, 2018                                                                    
     through  the  June  30, 2019.  Also  adds  a  technical                                                                    
     change to  include the  fiscal year  just ended  in the                                                                    
     average market  value of the fund  instead of excluding                                                                    
     the fiscal year just ended.                                                                                                
                                                                                                                                
Ms. Hansen noted that section 8 and section 9 was related                                                                       
to Amendment 1.                                                                                                                 
                                                                                                                                
     Section  9 -  Adds a  new section  to further  amend AS                                                                    
     37.13.140(b)  which will  reduce  the amount  available                                                                    
     for  distribution  from  5.25%  to 5%  of  the  average                                                                    
     market value (POMV) of the  permanent fund. This change                                                                    
     is  effective  July  1,  2019   and  will  replace  the                                                                    
    distribution rate created in the previous section.                                                                          
                                                                                                                                
     Section 10  -Adds a new  subsection to  AS 37.13.145(b)                                                                    
     which  states that  each  fiscal  year the  legislature                                                                    
     will transfer  an amount equal  to 0.25 percent  of the                                                                    
     market value  from the earnings reserve  account to the                                                                    
     principal of  the fund. Includes a  technical amendment                                                                    
    on lines 16 and 17 to change "income" to "amount."                                                                          
                                                                                                                                
Ms.  Hansen delineated  that the  transfer  was an  internal                                                                    
transfer from the  fund and not taken from  the 5.25 percent                                                                    
POMV  calculation. Section  10 was  related to  Amendment 1.                                                                    
She continued with section 12 related to Amendment 7:                                                                           
                                                                                                                                
     Section 12  - Amends  AS 37.13.145(e), created  by this                                                                    
     act,  to   clarify  that   the  amount   available  for                                                                    
     appropriation  to the  principal of  the fund  when the                                                                    
     earnings reserve account exceeds  four times the amount                                                                    
     calculated  in AS  37.13.145(b)  is the  lesser of  the                                                                    
     amount  in excess  of that  calculation  or the  amount                                                                    
     necessary  offset the  cumulative  effect of  inflation                                                                    
     since the last inflation-proofing transfer occurred.                                                                       
                                                                                                                                
     New Subsection  (f) is added  to AS 37.13.145  to state                                                                    
     that  the   legislature  shall  appropriate   from  the                                                                    
     earnings  reserve  account  the additional  amount,  if                                                                    
     necessary,  to provide  for a  per  person dividend  of                                                                    
     $1,250   per   eligible    Alaskan.   This   additional                                                                    
     appropriation is  in effect for  fiscal years  2018 and                                                                    
     2019.  [This  subsection  is repealed  at  the  end  of                                                                    
     fiscal year 2019.]                                                                                                         
                                                                                                                                
Ms. Hansen reviewed the following sections:                                                                                     
                                                                                                                                
     Section   13   -   Further  amends   AS   37.13.145(e),                                                                    
     previously created  by this  act, to  remove references                                                                    
     to  subsection  (f).  Subsection (f),  created  in  the                                                                    
     previous  section, is  repealed on  June 30,  2020 (the                                                                    
     last day of  fiscal year 2019). This new  version of AS                                                                    
     37.13.145(e),  without the  references to  (f), becomes                                                                    
     effective on that date.                                                                                                    
                                                                                                                                
     Ms.  Hansen reported  that subsection  (f) and  Section                                                                    
     13,  which  conformed to  the  repeal  of the  two-year                                                                    
     minimum dividend were related to Amendment 3.                                                                              
                                                                                                                                
     --------------Start of Income Tax section-------------                                                                     
                                                                                                                                
     Section 16  - This section, allowing  an exemption from                                                                    
     the requirement  to file  a tax  return electronically,                                                                    
     was  previously  included  in the  bill.  It  has  been                                                                    
     amended to reference AS 43.22.070(h),  which is now the                                                                    
     section of  stature which exempts individuals  from the                                                                    
     electronic filing requirement.                                                                                             
                                                                                                                                
     Section 17  - Previous  section 11  of the  bill, which                                                                    
     created an  individual income tax based  on federal tax                                                                    
     liability in AS 43, has  been replaced with section 17.                                                                    
     Section 17  creates an individual  income tax  based on                                                                    
     adjusted gross income. The  subsections of this chapter                                                                    
     have been modified  to reflect this change  in tax base                                                                    
    and to include certain administrative authorities.                                                                          
                                                                                                                                
Ms. Hansen  explained that  section 16  and section  17 were                                                                    
not related to prior amendments.                                                                                                
                                                                                                                                
--------------End of Income Tax section --------------                                                                          
                                                                                                                                
9:30:27 AM                                                                                                                    
                                                                                                                                
Representative Wilson  asked where  the Section  17 language                                                                    
originated.  Ms. Hansen  reported that  she worked  with the                                                                    
Department of Revenue  and was derived from  and in response                                                                    
to the testimony of Mr. Ed  King and the Institute of Social                                                                    
and  Economic  Research  (ISER).  She  summarized  that  the                                                                    
testimony  warned against  an income  tax  based on  federal                                                                    
liability, which  made revenue vulnerable to  changes to the                                                                    
federal  tax  code. In  addition,  some  public members  had                                                                    
expressed  concern  with   certain  deductions  and  credits                                                                    
associated with  the federal tax liability.  Finally, in the                                                                    
original version of  the bill there was a 10  percent tax on                                                                    
capital  gains  to  address a  disparity  between  long-term                                                                    
capital gains and  other income. The tax  did not accomplish                                                                    
its intent and by changing  to adjusted gross, capital gains                                                                    
were treated  like any other  income. Therefore,  a separate                                                                    
tax was not necessary.                                                                                                          
                                                                                                                                
Co-Chair Seaton  noted prior  testimony that  recommended an                                                                    
income tax  based on adjusted  gross income.  He interjected                                                                    
that when crafting the CS,  he worked with the Department of                                                                    
Revenue   (DOR)  who   had  previously   hired  a   national                                                                    
consultant  to   draft  income  tax  legislation   based  on                                                                    
adjusted  gross  income. The  CS  incorporated  some of  the                                                                    
language.                                                                                                                       
                                                                                                                                
Representative  Wilson   remarked  that  the   testimony  he                                                                    
referred  to  was  invited and  not  public  testimony.  She                                                                    
referred to  a document ["State Personal  Income Tax Revenue                                                                    
as a  Share of  Personal Income  in States  with Broad-Based                                                                    
Personal  Income Taxes"  by the  Institute  on Taxation  and                                                                    
Economic  Policy  (ITEP) (copy  on  file)]  that ranked  the                                                                    
state the  fourth highest  in the  nation with  the proposed                                                                    
income tax.                                                                                                                     
                                                                                                                                
Ms. Hansen  corrected Representative Wilson's  statement and                                                                    
reported that the proposed income  tax ranked Alaska the 4th                                                                    
lowest income  tax in the  nation, the same as  the previous                                                                    
version based on federal liability.                                                                                             
                                                                                                                                
9:34:48 AM                                                                                                                    
                                                                                                                                
Vice-Chair Gara referred to page  7 of the CS that contained                                                                    
the proposed  tax brackets. He  indicated that if  income is                                                                    
less than  $10.3 thousand  the tax is  zero. However,  a tax                                                                    
was not  owed if income  was under $14.3 thousand.  He asked                                                                    
her to explain  why. Ms. Hansen responded  that the brackets                                                                    
applied  to  the  income considered  taxable  and  the  bill                                                                    
included a personal deduction of $4 thousand per person.                                                                        
                                                                                                                                
Co-Chair   Seaton    acknowledged   Representative   Colleen                                                                    
Sullivan-Leonard in the audience.                                                                                               
                                                                                                                                
Vice-Chair Gara clarified that taxes  were calculated on the                                                                    
amount of income over the  tax bracket limit. He exemplified                                                                    
that taxes  were owed  on the amount  of income  above $14.3                                                                    
thousand; the  $14.3 thousand remained tax  free. Ms. Hansen                                                                    
replied in  the affirmative and  added that it was  the same                                                                    
as how the federal income tax was calculated.                                                                                   
                                                                                                                                
9:39:23 AM                                                                                                                    
                                                                                                                                
Ms. Hansen continued to read the summary of changes:                                                                            
                                                                                                                                
     New  Section 18  -  Adds  a new  subsection  (c) to  AS                                                                    
     43.23.025,   relating  to   the   calculation  of   the                                                                    
     permanent  fund  dividend,  to state  that  for  fiscal                                                                    
     years 2018  and 2019 the  amount of the  permanent fund                                                                    
     dividend  shall be  at least  $1250.  [This section  is                                                                    
     repealed at the end of fiscal year 2019].                                                                                  
                                                                                                                                
     New  Section 19  -  Amends AS  43.23.055(1) to  clarify                                                                    
     that  the  department  of  revenue  will  annually  pay                                                                    
     permanent  fund   dividends  from  the   dividend  fund                                                                    
     without further appropriation.                                                                                             
                                                                                                                                
Ms. Hansen  stated that Amendment  6 was related  to section                                                                    
19 and read New Section 23:                                                                                                     
                                                                                                                                
     New Section  23 - AS 37.13.145(f)  and AS 43.23.025(c),                                                                    
     both  created by  this act,  are repealed  on June  30,                                                                    
     2020. These subsections relate  to the minimum dividend                                                                    
     of $1250  which is  set of fiscal  years 2018  and 2019                                                                    
     only.                                                                                                                      
                                                                                                                                
Representative  Guttenberg asked  about new  section 20.  He                                                                    
wondered   whether   the    ballot   initiative   on   voter                                                                    
registration  was  affected  by the  provision.  Ms.  Hansen                                                                    
replied  in  the negative  and  added  that section  20  was                                                                    
renumbered  in   the  CS.  She  offered   that  the  section                                                                    
authorized a tax  payer to use their dividend  to pay income                                                                    
tax liability via a check box on the tax form.                                                                                  
                                                                                                                                
9:42:13 AM                                                                                                                    
                                                                                                                                
Ms. Hansen continued reviewing the summary of changes:                                                                          
                                                                                                                                
     New Section  24 - Creates  a new section  in uncodified                                                                    
     law  which   sets  the   amount  the   legislature  may                                                                    
     appropriate  from  the  earnings  reserve  account  for                                                                    
     fiscal year 2017.  The amount is equal  to 5.25 percent                                                                    
     of  the  average  market  value   of  the  fund,  minus                                                                    
     $695,650,000 which  is the value of  the permanent fund                                                                    
     dividends  already  paid   from  the  earnings  reserve                                                                    
     account for fiscal year 2017.                                                                                              
                                                                                                                                
Ms. Hansen  noted that section  24 was related  to Amendment                                                                    
2. She addressed Section 26:                                                                                                    
                                                                                                                                
     Section   26  -   Additional  transition   language  is                                                                    
     included   in  new   subsection   (b)   to  allow   the                                                                    
     commissioner of  revenue and the Alaska  Permanent Fund                                                                    
     Corporation  to  adopt  the  necessary  regulations  to                                                                    
     implement this act.                                                                                                        
                                                                                                                                
Ms. Hansen reported that Section  26 correlated to Amendment                                                                    
11  and was  related to  the Procurement  Act. She  read the                                                                    
following:                                                                                                                      
     Sections 27  - 33 -Effective dates:  Various conforming                                                                    
     amendments are  made to the effective  date sections to                                                                    
     reflect the new  sections that have been  added to this                                                                    
     bill. The effective date of  section 17, addressing the                                                                    
     income tax,  is now  January 1, 2019.  Unless otherwise                                                                    
     specified, this bill now has  an effective date of July                                                                    
     1, 2017.                                                                                                                   
                                                                                                                                
Ms. Hansen  indicated that currently  the only  section that                                                                    
had an immediate  effective date was section  24 and related                                                                    
sections and section 1. The  effective date of the remainder                                                                    
of the  provisions was  July 1, 2017.  She related  that the                                                                    
2019 effective date  for the income tax  was DOR's preferred                                                                    
effective date.                                                                                                                 
                                                                                                                                
9:45:46 AM                                                                                                                    
                                                                                                                                
Representative Wilson  could not find the  section referring                                                                    
to  personal  exemptions.  Ms.  Hansen  responded  that  the                                                                    
provisions were found in AS  43.22.030 beginning on page 12,                                                                    
line 8 of  the bill. Representative Wilson  wondered why the                                                                    
deductions applied to both  residents and non-residents. Ms.                                                                    
Hansen  responded  that  the   exemption  fell  under  equal                                                                    
protection  guidelines  and  had  to  be  offered  to  both.                                                                    
However,  on  certain  items  like   the  deduction  of  the                                                                    
Permanent Fund Dividend (PFD) a  resident only reduction was                                                                    
allowable. She  reported that  Vermont had  residential only                                                                    
deductions related  to property  owners, but the  tax system                                                                    
was  extremely complicated.  She was  examining whether  the                                                                    
value of a non-residents exemption may be reduced.                                                                              
                                                                                                                                
9:48:36 AM                                                                                                                    
                                                                                                                                
Ms.  Hansen  turned  to a  higher-level  discussion  of  the                                                                    
income tax portion of the  bill. She believed adjusted gross                                                                    
income  was a  much  simpler way  of  approaching a  capital                                                                    
gains tax.  She addressed  a brief  history of  the original                                                                    
income tax put into place in  the 1970s. She relayed that in                                                                    
1975,  the state  switched to  a tax  system similar  to the                                                                    
current proposal, in response  to significant changes to the                                                                    
federal tax brackets that had  reduced Alaska's tax revenue.                                                                    
One of the benefits of  changing to an adjusted gross income                                                                    
tax  was the  allowable exemption  of the  PFD from  a state                                                                    
tax.                                                                                                                            
                                                                                                                                
Representative Wilson alerted the  sponsor that she would be                                                                    
asking how the  income tax related to  trusts. She indicated                                                                    
that Alaska had been an  attractive state for entities to do                                                                    
business because of its tax  structure regarding trusts. She                                                                    
noted  that  native  corporations  were  exempt  because  of                                                                    
federal law.  She wanted to  ensure some parity  existed for                                                                    
non-native   corporations.  Ms.   Hansen   added  that   "C"                                                                    
corporations would not be taxed,  but S corporations or pass                                                                    
through  corporations and  partnerships  were  subject to  a                                                                    
tax.                                                                                                                            
                                                                                                                                
Co-Chair  Seaton  interjected  that   that  the  tax  was  a                                                                    
personal  income tax  and  not a  corporate  income tax.  He                                                                    
explained  that "S"  corporations passed  income through  to                                                                    
individuals.  He   asked  Ms.  Hansen  to   proceed  to  the                                                                    
sectional  analysis ["HB  115:  State Revenue  Restructuring                                                                    
Act Version:  L Sectional  Analysis- Long Version"  (copy on                                                                    
file)] and discuss  the personal income tax and  how the tax                                                                    
was structured.  Ms. Hansen reminded the  committee that the                                                                    
income  brackets applied  after deductions.  She highlighted                                                                    
that the key sections of the  income tax portion of the bill                                                                    
were:  AS 43.22.010  that established  the tax  brackets, AS                                                                    
43.22.30,  which defined  the taxable  income and  contained                                                                    
the  exemption language,  AS 43.22.045  that defined  Alaska                                                                    
sourced   income   specifying    the   taxable   income   of                                                                    
nonresidents,  and 43.22.150  that  contained the  section's                                                                    
definitions.  She   furthered  that  sections   070  through                                                                    
sections  095  were  the administrative  sections  and  were                                                                    
similar to  the sections contained in  the original version.                                                                    
Finally,  sections  040, 050,  055,  060,  and 065  provided                                                                    
guidance  and authority  to DOR  for specific  situations of                                                                    
taxable groups.                                                                                                                 
                                                                                                                                
9:55:57 AM                                                                                                                    
                                                                                                                                
Ms. Hansen  moved to the  sectional analysis and  began with                                                                    
Section 17 beginning on page 7 of the CS:                                                                                       
                                                                                                                                
     ------------Start of Income Tax section---------------                                                                     
                                                                                                                                
     Section  16   (page  7,  line  5)   -  AS  43.05.045(a)                                                                    
     clarifies that  there is  a penalty  if a  state income                                                                    
     form  is   not  filed  is  not   filed  electronically.                                                                    
     However,  individual   filers  are  exempt   from  this                                                                    
     penalty as noted  later in AS 43.22.070(h)  - (see page                                                                    
     20, line 27).                                                                                                              
                                                                                                                                
     Section 17 (page  7, line 15) -  Creates the Individual                                                                    
     Income Tax within AS 43.22                                                                                                 
     Sec.  43.22.010   (page  7,   line  17)  -   Imposes  a                                                                    
     progressive  income tax  on residents  and nonresidents                                                                    
     on their taxable income.  Taxable income, defined later                                                                    
     in  this chapter,  is based  on federal  adjusted gross                                                                    
     income   with   some  state   specific   modifications.                                                                    
     Residents  are  taxed  on  all  taxable  income,  while                                                                    
     nonresident individuals will be  taxed on income from a                                                                    
     source within the state.                                                                                                   
                                                                                                                                
     Subsection (b) outlines the income  tax brackets for an                                                                    
     individual.                                                                                                                
                                                                                                                                
Ms. Hansen described  how the tax brackets  worked listed on                                                                    
page 8  of the  CS. She expounded  that the  brackets worked                                                                    
the same as the federal tax brackets.                                                                                           
                                                                                                                                
Vice-Chair  Gara asked  whether  the  $4 thousand  deduction                                                                    
applied  to  all dependents.  Ms.  Hansen  responded in  the                                                                    
affirmative. Ms. Hansen continued with subsection (c):                                                                          
                                                                                                                                
     Subsection  (c) outlines  the income  tax brackets  for                                                                    
     two  individuals  who  file   jointly;  those  who  are                                                                    
     eligible to file a joint  federal income tax return are                                                                    
     eligible   to  file   jointly  in   the  state.   Under                                                                    
     subsection  (d) and  (e), those  that  are eligible  to                                                                    
     file  a joint  return federally  but do  not do  so are                                                                    
     directed how to file on the state level.                                                                                   
                                                                                                                                
Ms. Hansen  pointed to  an error  on page 8,  line 8  of the                                                                    
bill  that listed  the tax  brackets for  joint filers.  She                                                                    
noted that instead of $22.6  thousand the correct number was                                                                    
$20.6  thousand. The  $2 thousand  error carried  through to                                                                    
each   subsequent  bracket.   Ms.   Hansen  continued   with                                                                    
subsection (d) and (e).                                                                                                         
                                                                                                                                
In  response to  a question  by, Representative  Guttenberg,                                                                    
Ms. Hansen  replied that a  couple must choose  whether they                                                                    
want  to file  jointly or  each individually.  She continued                                                                    
with subsection (f):                                                                                                            
                                                                                                                                
     Subsection (f) describes how  two individuals who filed                                                                    
     a joint federal  return but who are  not both residents                                                                    
     of Alaska  shall file with  the state. They  may choose                                                                    
     to  file separately,  as  nonresidents,  under the  tax                                                                    
     brackets described in (b) of  this section, or they may                                                                    
     elect to  file jointly  under the  brackets in  (c) but                                                                    
     only if both choose to be taxed as residents.                                                                              
     Sec.  43.22.015 (page  9,  line 1)  -  Describes how  a                                                                    
     nonresident  individual  will  determine  their  Alaska                                                                    
     state income  tax due. Their  tax is determined  on all                                                                    
     of  their   taxable  income,  using  the   brackets  in                                                                    
     43.22.010(b).  That  tax is  then  reduced  by a  ratio                                                                    
     based on  how much of the  nonresident's taxable income                                                                    
     is from  a source  within the state.  [Nonresidents who                                                                    
     choose to  file jointly  are not  eligible to  use this                                                                    
     allocation  of income,  and are  instead considered  as                                                                    
     residents.]                                                                                                                
                                                                                                                                
Representative   Guttenberg    read   the    definition   of                                                                    
"nonresident individual" on  page 25, line 10  through 11 of                                                                    
the bill:                                                                                                                       
                                                                                                                                
     "nonresident  individual" means  and individual  who is                                                                    
     not  a resident  of the  state for  any portion  of the                                                                    
     taxable year.                                                                                                              
                                                                                                                                
Representative  Guttenberg  wondered  how  that  applied  to                                                                    
individuals who  worked in the  state for more than  30 days                                                                    
and  were then  considered  a resident.  Ms. Hansen  relayed                                                                    
that  the definition  of residency  was  dependent upon  the                                                                    
definition of "domiciled."                                                                                                      
                                                                                                                                
Representative  Wilson  wondered whether  non-residents  and                                                                    
resident  could  choose  whether   to  file  jointly  or  as                                                                    
individuals.  Ms. Hansen  responded that  both non-residents                                                                    
and  residents  had  the same  choice.  She  explained  that                                                                    
whether a  nonresident couple filed jointly  was affected by                                                                    
the  allocation of  income determined  by the  ratio for  an                                                                    
individual  or file  jointly as  residents eligible  for the                                                                    
resident credit  against income taxes paid  in other states.                                                                    
She continued with Sec. 43.22.020.                                                                                              
                                                                                                                                
10:09:14 AM                                                                                                                   
                                                                                                                                
     Sec. 43.22.020  (page 9, line  11) -Defines the  tax on                                                                    
     trusts and  estates. Resident trusts  are taxed  at 7%,                                                                    
     except  for  Alaska  Native Settlement  trusts.  Alaska                                                                    
     Native  Settlement trusts  receive alternative  federal                                                                    
     tax  treatment and  are  taxed at  2.5%  by this  state                                                                    
     income  tax. Nonresident  trusts are  also taxed  at 7%                                                                    
     but only on their income  that is connected to a source                                                                    
     in the state.                                                                                                              
                                                                                                                                
Ms. Hansen  elaborated that subsection  (b) on page  9, line                                                                    
18,  applied to  trusts  that were  "housed"  in Alaska  but                                                                    
lacked  a  taxable connection  in  the  state and  were  not                                                                    
subject to a tax. She noted that the provision was added in                                                                     
response to concerns raised in public testimony.                                                                                
                                                                                                                                
Co-Chair  Foster asked  for  clarification regarding  Alaska                                                                    
Native  Settlement  trusts.  Ms. Hansen  answered  that  the                                                                    
trusts were  outlined specifically in the  federal code. She                                                                    
deferred  to  DOR  for  a   definitive  answer.  Ms.  Hansen                                                                    
continued with the sectional analysis.                                                                                          
                                                                                                                                
     Sec. 43.22.025  (page 9, line  28) - Provides  a credit                                                                    
     to residents for  taxes paid to another  state based on                                                                    
     income earned  in that other  state (so someone  is not                                                                    
     taxed twice  on the same  income). A credit  for income                                                                    
     taxes paid in  another state cannot reduce  the tax due                                                                    
     to Alaska below  what it would have been if  the out of                                                                    
     state income  was never included in  the calculation of                                                                    
     the tax due.  This means that regardless  of the amount                                                                    
     of income  tax the resident  paid in other  states, the                                                                    
     credit cannot  reduce the amount  of income tax  due to                                                                    
     Alaska below what the resident  individual would owe on                                                                    
    just the income that is not taxed by other states.                                                                          
                                                                                                                                
10:10:04 AM                                                                                                                   
                                                                                                                                
     Sec. 43.22.030 (page  11, line 9) -  Defines the income                                                                    
     that is  considered taxable income under  this chapter.                                                                    
     This  is based  on  the federal  adjusted gross  income                                                                    
     with specific few items  added and subtracted. Specific                                                                    
     to Alaska,  this section allows a  per person exemption                                                                    
     of $4000  and also  allows the permanent  fund dividend                                                                    
     to be deducted from state tax.                                                                                             
                                                                                                                                
     Items   added  into   federal  adjusted   gross  income                                                                    
     include: interest  and income from state  and municipal                                                                    
     bonds  and certain  United States  bonds which  are not                                                                    
     taxed by  the federal government but  which are taxable                                                                    
     by the  states; deductions from federal  adjusted gross                                                                    
     income  for  Alaska  income  taxes  (normally  deducted                                                                    
     after  adjusted gross  income);  gain from  a trade  of                                                                    
     like-kind properties which  is not federally recognized                                                                    
     or  taken as  a  gain; and  any  deductions allowed  to                                                                    
     federal adjusted  gross income  which relate  to income                                                                    
     that is not being taxed under this chapter.                                                                                
                                                                                                                                
    Items subtracted from federal adjusted gross income                                                                         
     include: interest or income from federal bonds which                                                                       
    are not legally taxable by the states; refunds for                                                                          
    overpayment of an income tax; expenses that are not                                                                         
     deducted from federal adjusted gross income but that                                                                       
     relate to income taxed under this chapter; a gain from                                                                     
     a trade of like-kind properties that is federally                                                                          
     recognized as a gain; nonresident pension income under                                                                     
     4 U.S.C. 114; military compensation for nonresidents;                                                                      
     the permanent fund dividend; and $4000 per individual                                                                      
     claimed that is an exemption on the federal income tax                                                                     
     forms.                                                                                                                     
                                                                                                                                
     Subsection  (b) states  that expenses  not used  in the                                                                    
     tax year they were incurred  may not be carried back to                                                                    
     previous year returns, and may  only be carried forward                                                                    
     for a total of five years.                                                                                                 
                                                                                                                                
Ms.   Hansen  relayed   that  subsection   (D)  under   this                                                                    
subsection on  page 11,  line 20  of the  bill would  tax "a                                                                    
gain  realized  but  not recognized  under  26  U.S.C.  1031                                                                    
(Internal  Revenue  Code).  She  added  that  the  provision                                                                    
allowed an individual to trade  a piece of property or asset                                                                    
and  the  state would  similarly  not  tax the  transaction.                                                                    
Subsection  (E)  on  page  11,  line  22  provided  that  "a                                                                    
deduction  allowed  in  the determination  for  the  federal                                                                    
adjusted gross income that is  related to income that is not                                                                    
taxable  under  this chapter"  meant  that  the state  would                                                                    
disallow the  deduction. She delineated that  Section (2) of                                                                    
Section 43.22.030 specified items  that were prohibited from                                                                    
taxation under  federal law.  She communicated  that federal                                                                    
bonds, Alaska  pensions received by nonresidents  and income                                                                    
from  nonresident  military  personnel  were  exempted.  Two                                                                    
additional  exemptions were  added  including the  Permanent                                                                    
Fund Dividend (PFD) and the $4 thousand personal exemption.                                                                     
                                                                                                                                
Representative  Wilson  asked  for  clarification  regarding                                                                    
taxing  pensions. Ms.  Hansen explained  that a  pension was                                                                    
taxable in another state other  than the state it originated                                                                    
in. She  exemplified that  if an  individual with  a pension                                                                    
from  Washington  state  moved  to  Alaska,  Washington  was                                                                    
prohibited  from taxing  the pension,  but Alaska  could tax                                                                    
the  pension.  Representative   Wilson  asked  about  social                                                                    
security.  Ms.  Hansen  replied that  a  portion  of  social                                                                    
security was exempted from adjusted  gross income as defined                                                                    
by the federal level.                                                                                                           
                                                                                                                                
10:16:15 AM                                                                                                                   
                                                                                                                                
Representative Pruitt asked for a  list of all the potential                                                                    
exemptions. He wondered if the  proposed income tax base was                                                                    
an individual's  federal adjusted  gross income.  Ms. Hansen                                                                    
responded that  federal adjusted gross  income was  the base                                                                    
including  the  exemptions  specifically listed  in  Section                                                                    
43.22.030.  She  added  that HB  115's  taxable  income  was                                                                    
defined as  federal adjusted gross income  with the specific                                                                    
Alaska  changes in  the  bill.  Representative Pruitt  asked                                                                    
about mortgage interest. Ms. Hansen  responded that mortgage                                                                    
interest was  deducted at the federal  level. Representative                                                                    
Pruitt deduced  that mortgage interest was  not an allowable                                                                    
deduction   under   the   proposed   Alaskan   income   tax.                                                                    
Representative    Pruitt    ascertained   that    charitable                                                                    
deductions were  also not deductible. Ms.  Hansen replied in                                                                    
the   affirmative.  Representative   Pruitt  asked   whether                                                                    
wealthy people in Alaska could  reduce their taxes to a very                                                                    
low  liability.  Ms.  Hansen  answered  that  capital  gains                                                                    
income was considered  equal to other forms  of income under                                                                    
an adjusted  gross tax and  one reason the bill  was changed                                                                    
to a federal adjusted gross income system.                                                                                      
                                                                                                                                
Representative  Grenn  asked  where military  pensions  fell                                                                    
under in the  bill. Ms. Hansen replied that  it would depend                                                                    
on the person's residency status.  If a person was an Alaska                                                                    
resident,  the federally  taxable  portion  of the  military                                                                    
pension included  in the federal  adjusted gross  income was                                                                    
taxable  in  Alaska. She  furthered  that  the tax  was  not                                                                    
relative to where the pension was generated.                                                                                    
                                                                                                                                
10:21:10 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara thought that the  limited list of deductions                                                                    
was a "smarter" way to  administer the tax. He remarked that                                                                    
under  the federal  method  with  numerous deductions,  many                                                                    
interest  groups would  want exemptions  "and  HB 115  would                                                                    
become a  free-for-all." He favored the  income tax approach                                                                    
in  the CS.  Ms.  Hansen  replied that  some  of the  public                                                                    
comments the sponsor had received  were concerns about loop-                                                                    
holes in the  tax and was the reason the  deduction list was                                                                    
short.                                                                                                                          
                                                                                                                                
Representative  Wilson referenced  the  chart [titled "State                                                                    
Personal Income  Tax Revenue as  a Share of  Personal Income                                                                    
in States  with Broad-Based Personal Income  Taxes" (copy on                                                                    
file)].  She  used  Missouri  as an  example  -  it  allowed                                                                    
numerous deductions  and was ranked  16 with a  2.33 percent                                                                    
effective   tax  rate.   She  wondered   whether  the   same                                                                    
deductions  were considered.  Ms. Hansen  answered that  the                                                                    
chart had  been generated by  the Institute on  Taxation and                                                                    
Economic Policy (ITEP)  and the percentage was  based on the                                                                    
amount of  personal income  in the state  and the  amount of                                                                    
revenue from the  tax; the percentage of tax  revenue out of                                                                    
the total  personal income.  She furthered  that it  did not                                                                    
matter what the  tax rate was, it mattered  how much revenue                                                                    
was generated and  how it compared to the  amount of overall                                                                    
income  in  the  state. Representative  Wilson  thought  the                                                                    
information was  entirely different  than she  had initially                                                                    
believed. She  thought that the  chart's ranking  meant that                                                                    
Alaskans  had a  lower tax  liability than  Missourians. She                                                                    
was not  sure the  chart was  accurate. Ms.  Hansen answered                                                                    
that "on  average" the chart  was true, however  because the                                                                    
proposed  income  tax had  multiple  tax  brackets, in  some                                                                    
cases the  tax bracket may  be higher or lower  than another                                                                    
state. She delineated that the  bill directed the department                                                                    
to  inflation adjust  the brackets  and exemption  every two                                                                    
years.  Many  states  did  not inflation  adjust,  and  many                                                                    
residents   ended   up   paying   under   higher   brackets.                                                                    
Representative  Wilson reiterated  that  she understood  the                                                                    
chart differently than represented.                                                                                             
                                                                                                                                
10:25:48 AM                                                                                                                   
                                                                                                                                
Ms. Hansen answered that Carl  Davis from ITEP had generated                                                                    
the chart  and they  planned to have  him address  the issue                                                                    
later next week.                                                                                                                
                                                                                                                                
Vice-Chair Gara  pointed to  the footnote  on the  chart and                                                                    
detailed that  the data accounted  for the  differences. Ms.                                                                    
Hansen  replied that  her understanding  was  the model  was                                                                    
based  on  the  overall   effect  and  the  deductions  were                                                                    
removed.                                                                                                                        
                                                                                                                                
Co-Chair Seaton  stated the chart  was on the  effective tax                                                                    
rate and  not the statutory  tax rate.  He noted that  a tax                                                                    
system  could include  a statutory  tax  rate with  numerous                                                                    
deductions to account for the  effective tax rate. The chart                                                                    
represented  the effect  on the  entire  population and  the                                                                    
amount  of  income tax  paid.  He  explained that  "personal                                                                    
income was  divided by the  total number of  taxes collected                                                                    
in the state based on distribution."                                                                                            
                                                                                                                                
Ms. Hansen continued with the following sections:                                                                               
                                                                                                                                
10:28:13 AM                                                                                                                   
     Sec  43.22.035  (page  12, line  23)  -  Describes  how                                                                    
     income from a partnership  or an s-corporation shall be                                                                    
     adjusted  based  the   additions  and  subtractions  of                                                                    
     taxable income  under 43.22.030. Subsection  (c) states                                                                    
     that  if  partnership  income  is  allocated  with  the                                                                    
     specific  purpose  of  evading taxes,  that  allocation                                                                    
     shall be disregarded.                                                                                                      
                                                                                                                                
     Sec.  43.22.040  (page 13,  line  17)  - Describes  how                                                                    
     income from a  trust or estate shall  be adjusted based                                                                    
     the additions and subtractions  of taxable income under                                                                    
     43.22.030.  Taxable income  is  reduced  by the  amount                                                                    
     distributed  to the  beneficiaries, in  accordance with                                                                    
     U.S.C 661.  The Department of Revenue  may determine in                                                                    
     regulation  how  the  adjustments  to  income  will  be                                                                    
     allocated  between   the  trust   or  estate   and  the                                                                    
     beneficiary  of that  trust or  estate. Subsection  (b)                                                                    
     states that if  income or loss is  distributed with the                                                                    
     specific  purpose of  evading taxes,  that distribution                                                                    
     shall be disregarded.                                                                                                      
                                                                                                                                
Ms.  Hansen noted  that the  regulations  for both  sections                                                                    
would be written by the department.                                                                                             
                                                                                                                                
     Sec. 43.22.045 (page 13, line  31) -Identifies items of                                                                    
     income  that  are included  as  being  derived from  or                                                                    
     connected  with a  source  in the  state.  This is  the                                                                    
     income on which nonresidents will be taxed.                                                                                
                                                                                                                                
Ms.  Hansen  reported  having  a   similar  section  in  the                                                                    
original version  of HB  115 to better  define the  range of                                                                    
income connected with a source in the state.                                                                                    
                                                                                                                                
10:30:22 AM                                                                                                                   
                                                                                                                                
Representative  Pruitt  reverted  to  "S"  corporations  and                                                                    
asked  whether deductions  for  losses  were allowable.  Ms.                                                                    
Hansen responded that if the  S corporations could not carry                                                                    
the loss  back, but  the operating  losses could  be carried                                                                    
forward  for  5  years. Representative  Pruitt  mentioned  a                                                                    
scenario where  an "S"  Corporations requested  an extension                                                                    
to  file taxes  and  paid an  estimated  amount upfront.  He                                                                    
asked  whether the  corporation could  request a  refund for                                                                    
overpayment  under the  scenario. Ms.  Hansen surmised  that                                                                    
the provision  was related  to prior  tax years  rather than                                                                    
pre-payments  made.   She  noted   that  the   bill  defined                                                                    
"calendar  year"   as  calendar  year  or   fiscal  year  in                                                                    
recognition that  S corporations and partnerships  file on a                                                                    
fiscal year.                                                                                                                    
                                                                                                                                
10:32:18 AM                                                                                                                   
                                                                                                                                
Representative  Pruitt queried  what  would happen  if an  S                                                                    
corporation adjusted a  past return and were  owed a refund.                                                                    
Ms. Hansen responded that the  administrative section of the                                                                    
bill  specified that  if the  corporation  filed an  amended                                                                    
return with the federal  government the amended return would                                                                    
be  transmitted  to  the  state and  DOR  would  adjust  the                                                                    
return.  She clarified  that the  provision  he referred  to                                                                    
stated that  an expense from  the current year could  not be                                                                    
applied to profit from two years ago.                                                                                           
                                                                                                                                
Ms.  Hansen  added that  Florida  did  not have  a  personal                                                                    
income  tax  but  expanded their  corporate  income  tax  to                                                                    
include  S corporations  and partnerships.  She shared  that                                                                    
Alaska's exemption  for S  corporations and  partnerships in                                                                    
corporate  tax  law  was  included when  the  state  had  an                                                                    
individual  income   tax.  When   the  state   repealed  the                                                                    
individual income tax  it did not repeal  the exemption. She                                                                    
continued to Section 43.22.050.                                                                                                 
                                                                                                                                
     Sec.  43.22.050  (page  18,   line  9)  -  Directs  the                                                                    
     Department   of    Revenue   to    create   regulations                                                                    
     determining what is considered  income from a source in                                                                    
     the state for business  conducted by a nonresident. The                                                                    
     regulations  must  be  consistent with  AS  43.19,  the                                                                    
     multistate  compact.  This  provision  will  allow  the                                                                    
     department  to  create  regulations  to  allocate  what                                                                    
     income is  taxable under  this chapter  when an  out of                                                                    
     state business  is conducting business both  in and out                                                                    
     of state.                                                                                                                  
                                                                                                                                
     Sec.  43.22.055  (page  18,  line  18)  -  Directs  the                                                                    
     department to create regulations  to detail what income                                                                    
     from  a  nonresident  trust  or  estate  is  considered                                                                    
     derived  from or  connected with  a  source within  the                                                                    
     state.  This   regulation  shall  be   consistent  with                                                                    
     43.22.045,  which  identifies   income  from  a  source                                                                    
     within the state.                                                                                                          
                                                                                                                                
Ms. Hansen moved to the next section:                                                                                           
                                                                                                                                
10:36:21 AM                                                                                                                   
                                                                                                                                
     Sec. 43.22.060  (page 19, line  2) - Provides  that the                                                                    
     taxable  income for  a  part-year  resident, trust,  or                                                                    
     estate  shall   be  the  sum  of   all  taxable  income                                                                    
     associated  with   the  part  of  the   year  that  the                                                                    
     individual or entity  was a resident of  Alaska and the                                                                    
     income from a  source in the state for the  part of the                                                                    
     year that the  individual or entity was  not a resident                                                                    
     of the state.                                                                                                              
                                                                                                                                
Representative Wilson  thought a  resident was defined  by a                                                                    
person's domicile.  She asked whether a  person was required                                                                    
to have homes  in two states to be a  resident of two states                                                                    
at once. Ms. Hansen explained  that the provision applied to                                                                    
a taxpayer who  moved in the middle of the  year. There were                                                                    
also  some residents  that lived  half  of the  year in  one                                                                    
state and  then the other  half of  the year in  Alaska. She                                                                    
continued with the following section:                                                                                           
                                                                                                                                
     Sec.  43.22.65  (page  19,  line   17)  -  States  that                                                                    
     taxpayer's taxable  year and  method of  accounting for                                                                    
     the  state income  tax shall  be  the same  as for  the                                                                    
     taxpayer's  federal income  tax.  The department  shall                                                                    
     adopt   regulations  addressing   situations  where   a                                                                    
     taxpayer  changes  methods  of  accounting.  [For  most                                                                    
     individuals,  the taxable  year is  the calendar  year.                                                                    
     However,  entities such  as partnerships  that file  an                                                                    
     individual income tax  return may use a  fiscal year in                                                                    
     place  of  a  calendar  year, and  may  have  different                                                                    
     methods of accounting for their income.]                                                                                   
                                                                                                                                
     Sec.  43.22.070 (page  19, line  26) -  Establishes how                                                                    
     taxpayers  will submit  tax returns  and make  payments                                                                    
     for the  individual income tax. It  clarifies that this                                                                    
     tax is  due and payable  to the department at  the same                                                                    
     time and in  the same manner as the tax  payable to the                                                                    
     U.S. IRS  for federal taxes. The  section also outlines                                                                    
     procedures in case there are  changes to the taxpayer's                                                                    
     federal  income tax  return. Any  overpayments will  be                                                                    
     reimbursed by  the department out of  the general fund.                                                                    
     As  noted above,  (h) exempts  an  individual from  the                                                                    
     penalty    for   not    filing    their   income    tax                                                                    
     electronically. However, a person  paid to file returns                                                                    
     is not exempt, and must file electronically.                                                                               
                                                                                                                                
Ms. Hansen explained the provision.  An individual would not                                                                    
face  a  penalty  for  not  filing  electronically  but  tax                                                                    
preparers   were  required   to  file   electronically.  She                                                                    
summarized that the provision was  related to the prevention                                                                    
of  tax fraud  by  preparers. She  reported that  electronic                                                                    
filing  made it  more difficult  for  a preparer  to file  a                                                                    
fraudulent return and "skim some of the return."                                                                                
                                                                                                                                
10:40:54 AM                                                                                                                   
                                                                                                                                
Representative Pruitt  agreed with the provision  but wanted                                                                    
to  raise the  question about  the difficulty  of access  to                                                                    
electronic filing  for some,  especially rural  Alaskans. He                                                                    
also  raised  the  concern about  people  who  volunteer  to                                                                    
prepare  tax returns.  Ms. Hansen  deferred the  question to                                                                    
Mr. Spanos from DOR.                                                                                                            
                                                                                                                                
Co-Chair   Foster  appreciated   the  question   and  shared                                                                    
Representative Pruitt's  concern. He  related that  in small                                                                    
villages,  volunteer   or  hired  tax  preparers   might  be                                                                    
affected by the provision.                                                                                                      
                                                                                                                                
10:43:26 AM                                                                                                                   
                                                                                                                                
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT OF REVENUE, had volunteered  as a tax preparer in                                                                    
some of  the state's  small villages.  He relayed  that many                                                                    
villagers who decided  not to use the  free service traveled                                                                    
to Bethel  for tax  services. The  free tax  filing services                                                                    
allowed  paper  filing.  He  reported  that  some  paid  tax                                                                    
preparers traveled to  the villages and used  a computer for                                                                    
data  input then  filed electronically  from their  business                                                                    
location  upon return.  He reminded  the committee  that the                                                                    
statute that required electronic  filing offered a renewable                                                                    
five-year  waiver  provision. Representative  Wilson  stated                                                                    
that she always  filed her taxes on paper.  She wondered how                                                                    
the state could  track how the taxes were  filed. Mr. Spanos                                                                    
indicated that  federal law required paid  preparers to sign                                                                    
the  tax return  and  provide  their federal  identification                                                                    
number.                                                                                                                         
                                                                                                                                
Ms. Hansen interjected that the  fraudulent return issue she                                                                    
mentioned earlier did  not apply to tax  returns prepared by                                                                    
individuals.                                                                                                                    
                                                                                                                                
10:47:48 AM                                                                                                                   
                                                                                                                                
Ms. Hansen  continued with the  next section  that addressed                                                                    
tax  withholding on  wages  of  individuals and  independent                                                                    
contractors.                                                                                                                    
     Sec.  43.22.075 (page  20, line  30) -  Establishes how                                                                    
     taxes will  be withheld by employers  making payment of                                                                    
     wages  or  salaries.  The  employer  shall  deduct  and                                                                    
     withhold  the  amount of  tax,  remit  the tax  to  the                                                                    
     department,  and provide  a  written  statement to  the                                                                    
     employee by  January 31 of the  succeeding year showing                                                                    
     the  amount deducted  and other  necessary information,                                                                    
     similar to  the federal  W2. The Department  of Revenue                                                                    
     shall publish the rate of  withholding required by this                                                                    
     section.  Withholding  is  also required  for  payments                                                                    
     made to independent contractors.                                                                                           
                                                                                                                                
Ms.  Hansen  reported that  other  states  did not  withhold                                                                    
taxes on payments made to  contractors and planned to remove                                                                    
the  section. The  provision proved  to be  administratively                                                                    
"burdensome."                                                                                                                   
                                                                                                                                
10:49:26 AM                                                                                                                   
                                                                                                                                
Ms. Hansen  moved to the  next section and remarked  that it                                                                    
applied  to withholding  on nonresident  partners' composite                                                                    
return. She elucidated that the  provision was very specific                                                                    
to partners  required to file  an annual  information return                                                                    
to  the  federal  government  under   subchapter  K  of  the                                                                    
internal revenue code.                                                                                                          
                                                                                                                                
     Sec.  43.22.080  (page  21,  line  25)  -  States  that                                                                    
     partnerships  that  are  required  to  file  an  annual                                                                    
     return with  the federal government  shall also  file a                                                                    
     partnership return with the  Department of Revenue, and                                                                    
     shall withhold income tax from a nonresident partner.                                                                      
                                                                                                                                
Ms. Hansen briefly summarized the following sections:                                                                           
                                                                                                                                
     Sec. 43.22.085  (page 22, line  5) - Allows  a resident                                                                    
     the  option to  apply some  or all  of their  PFD as  a                                                                    
     refundable tax  payment to their upcoming  state income                                                                    
     tax due, less any  garnishment, levy, donations to Pick                                                                    
     Click  Give or  college funds,  etc., as  allowed under                                                                    
     other sections  of statute. For  example, a  person may                                                                    
     apply  some or  all of  their  2018 PFD  to their  2018                                                                    
     taxes  due. If  a  person's Refundable  Tax payment  of                                                                    
     their dividend is  more than the amount  of their state                                                                    
     income   tax  due,   any  remaining   amount  will   be                                                                    
     reimbursed to  the person  as a  tax refund,  after the                                                                    
     person has filed their state income taxes.                                                                                 
                                                                                                                                
10:50:19 AM                                                                                                                   
                                                                                                                                
     Sec.  43.22.090 (page  22, line  15)  - Authorizes  the                                                                    
     department  to create  all  necessary  forms and  adopt                                                                    
     regulations   to   implement    this   tax,   including                                                                    
     regulations for  online filing  and online  payment and                                                                    
     prepayment  of  taxes  due,  and  forms  for  itemizing                                                                    
     deductions.  This  section  allows  the  department  to                                                                    
     adopt  Internal Revenue  Code regulations,  as long  as                                                                    
     they do not conflict with this chapter.                                                                                    
                                                                                                                                
     Subsection (b) clarifies  that transactions or payments                                                                    
     between related  parties must have a  reason other than                                                                    
     the  purpose  of  lowering taxes.  The  department  may                                                                    
     determine and adjust  the tax due on such  a payment as                                                                    
     necessary.                                                                                                                 
                                                                                                                                
     Subsection  (d) directs  the department  to adjust  the                                                                    
     tax  brackets  and  the personal  exemption  every  two                                                                    
     years, based on the Anchorage rate of inflation.                                                                           
                                                                                                                                
     Sec.   43.22.095  (page   23,  line   18)  allows   the                                                                    
     provisions  of  the  Internal  Revenue  Code  that  are                                                                    
     mentioned in this  chapter to be considered  as if they                                                                    
     are fully  set out and  defined in the  chapter itself,                                                                    
     unless the provision is inconsistent with the chapter.                                                                     
                                                                                                                                
     Sec. 43.22.150 (page 23, line  29) - Defines terms used                                                                    
     in  this   chapter.  Key  terms   include  'domiciled',                                                                    
     'resident', and  'resident trust'. Resident  is defined                                                                    
     as  an  individual who:  lives  in  the state  for  the                                                                    
     entire  calendar  year;  receives an  Alaska  permanent                                                                    
     fund  dividend; or  receives a  tax benefit  such as  a                                                                    
     property  tax exemption  only available  to a  resident                                                                    
     individual.                                                                                                                
                                                                                                                                
Ms. Hansen  referred to  page 26 of  the bill  and explained                                                                    
that a person  domiciled in another state who  was in Alaska                                                                    
for less than 30 days did  not fall under the provision. Ms.                                                                    
Hansen moved to Section 20.                                                                                                     
                                                                                                                                
     Section 20 (page  29, line 6) - AS 43.23  is amended by                                                                    
     adding a  new section which directs  the Permanent Fund                                                                    
     Division  Department of  Revenue to  create a  place on                                                                    
     the PFD  application where an applicant  may apply some                                                                    
     or all of their PFD  to their upcoming state income tax                                                                    
     due.                                                                                                                       
Ms. Hansen indicated that Section 20 was included in the                                                                        
original version of HB 115.                                                                                                     
                                                                                                                                
Representative Guttenberg WITHDREW his OBJECTION.                                                                               
                                                                                                                                
Representative  Pruitt OBJECTED.  He thought  that the  bill                                                                    
was going  to undergo  changes through an  amendment process                                                                    
rather than through a committee  substitute. He WITHDREW his                                                                    
OBJECTION.                                                                                                                      
                                                                                                                                
Representative  Wilson  OBJECTED.  She elaborated  that  the                                                                    
bill  was  changed  substantially and  requested  additional                                                                    
public  testimony  hearings  on  the CS.  She  WITHDREW  her                                                                    
OBJECTION.                                                                                                                      
                                                                                                                                
There being NO OBJECTION,  the proposed committee substitute                                                                    
for HB  115, Work  Draft (30-LS0125\L, Nauman,  3/22/17) was                                                                    
ADOPTED.                                                                                                                        
                                                                                                                                
Co-Chair  Seaton  noted that  earlier  in  the week  he  had                                                                    
announced that  a new CS  would be introduced  that included                                                                    
the previously  adopted permanent fund amendments  and other                                                                    
changes.                                                                                                                        
                                                                                                                                
Ms. Hansen explained that  "S" corporations and partnerships                                                                    
were included  in the  previous draft  versions of  the bill                                                                    
and  that   trusts  were  not   dealt  with   properly.  The                                                                    
department  informed  the  sponsor  that  trust  income  was                                                                    
federally  taxable  and  the  bill  needed  to  provide  DOR                                                                    
clarity on how to tax trust income.                                                                                             
                                                                                                                                
Representative   Wilson   wanted   to  determine   how   the                                                                    
provisions in the CS affected Alaskan trusts.                                                                                   
                                                                                                                                
Co-Chair Seaton  reported that public  testimony for  the CS                                                                    
was scheduled the following Wednesday.                                                                                          
                                                                                                                                
Co-Chair  Seaton  reviewed  the  agenda  for  the  afternoon                                                                    
meeting.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
11:02:03 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:02 a.m.                                                                                         
                                                                                                                                

Document Name Date/Time Subjects
HB 115 income tax rankings Revenue.pdf HFIN 3/23/2017 9:00:00 AM
HB 115
HB 115_Summary of Changes_Version E to L.pdf HFIN 3/23/2017 9:00:00 AM
HB 115
HB 115_Sectional draft version L_long form_3.20.2017.pdf HFIN 3/23/2017 9:00:00 AM
HB 115
HB 115 CS WORKDRAFT v.L.PDF HFIN 3/23/2017 9:00:00 AM
HB 115