Legislature(2017 - 2018)HOUSE FINANCE 519
03/23/2017 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
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 |