Legislature(2017 - 2018)HOUSE FINANCE 519

03/27/2017 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
Heard & Held
+ Presentations by: TELECONFERENCED
- Carl Davis, Institute on Taxation & Economic
Policy (ITEP)
- David Teal, Legislative Fiscal Analyst
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
                     HOUSE FINANCE COMMITTEE                                                                                    
                          March 27, 2017                                                                                        
                            1:36 p.m.                                                                                           
                                                                                                                                
   1:36:01 PM                                                                                                                 
                                                                                                                                
   CALL TO ORDER                                                                                                              
                                                                                                                                
   Co-Chair Foster called the House Finance Committee meeting                                                                   
   to order at 1:36 p.m.                                                                                                        
                                                                                                                                
   MEMBERS PRESENT                                                                                                            
                                                                                                                                
   Representative Neal Foster, Co-Chair                                                                                         
   Representative Paul Seaton, Co-Chair                                                                                         
   Representative Les Gara, Vice-Chair                                                                                          
   Representative Jason Grenn                                                                                                   
   Representative David Guttenberg                                                                                              
   Representative Scott Kawasaki                                                                                                
   Representative Dan Ortiz                                                                                                     
   Representative Lance Pruitt                                                                                                  
   Representative 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;   David   Teal,   Director,   Legislative   Finance                                                                 
   Division.                                                                                                                    
                                                                                                                                
   PRESENT VIA TELECONFERENCE                                                                                                 
                                                                                                                                
   Carl Davis, Research Director, Institute on Taxation and                                                                     
   Economic Policy (ITEP), Anchorage.                                                                                           
                                                                                                                                
   SUMMARY                                                                                                                    
                                                                                                                                
   HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                          
                                                                                                                                
             HB 111 was HEARD and HELD in committee for                                                                         
             further consideration.                                                                                             
                                                                                                                                
   HB 115    INCOME TAX; PFD CREDIT; PERM FUND INCOME                                                                           
                                                                                                                                
             HB 115 was HEARD and HELD in committee for                                                                         
             further consideration.                                                                                             
                                                                                                                                
   Co-Chair Foster reviewed the agenda for the day.                                                                             
                                                                                                                                
   HOUSE BILL NO. 111                                                                                                         
                                                                                                                                
        "An Act  relating to  the oil and  gas production  tax,                                                                 
        tax  payments,  and   credits;  relating   to  interest                                                                 
        applicable to  delinquent oil  and gas production  tax;                                                                 
        and providing for an effective date."                                                                                   
                                                                                                                              
   1:36:36 PM                                                                                                                 
                                                                                                                                
   Co-Chair Foster CLOSED Public Testimony.                                                                                     
                                                                                                                                
   HB 111 was HEARD and HELD in committee for further                                                                           
   consideration.                                                                                                               
                                                                                                                                
   HOUSE BILL NO. 115                                                                                                         
                                                                                                                                
        "An  Act  relating  to  the  permanent  fund  dividend;                                                                 
        relating to  the appropriation  of  certain amounts  of                                                                 
        the earnings reserve account; relating  to the taxation                                                                 
        of  income  of  individuals;  relating   to  a  payment                                                                 
        against the  individual income  tax from the  permanent                                                                 
        fund  dividend  disbursement;  repealing   tax  credits                                                                 
        applied  against  the  tax  on  individuals  under  the                                                                 
        Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                 
        effective date."                                                                                                        
                                                                                                                                
   1:36:56 PM                                                                                                                 
                                                                                                                                
   TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL  SEATON, reviewed                                                                 
   the PowerPoint  Presentation:  "State Revenue  Restructuring                                                                 
   Act." She  relayed  that  the  slide presentation  had  been                                                                 
   presented earlier in the session but  was updated to reflect                                                                 
   the changes  in  the Committee  Substitute  (CS). She  began                                                                 
   with slide 2: "HB 115: Permanent Fund Earnings":                                                                             
                                                                                                                                
        5.25% Permanent Fund POMV, 5% after FY19.                                                                               
                                                                                                                                
        • 1/3 of POMV to pay dividends. $1250 and growing over                                                                  
        years, with payouts more stable than current                                                                            
        calculation.                                                                                                            
        • 2/3 of POMV directed to the General Fund. $1.69                                                                       
        billion in                                                                                                              
        FY18 growing to $2 billion in FY25.                                                                                     
        • Residents may choose to apply their PFD to their                                                                      
        upcoming state income tax due as a Refundable Tax                                                                       
        Payment. Any amount left over after paying taxes will                                                                   
        be refunded by the Tax Division.                                                                                        
                                                                                                                                
   1:39:12 PM                                                                                                                 
                                                                                                                                
   Ms. Hansen moved to slide 3: "Income Tax":                                                                                   
                                                                                                                                
        Adjusted Gross Income                                                                                                   
        $4000 personal exemption                                                                                                
        PFD exemption                                                                                                           
                                                                                                                                
        Total estimated revenue                                                                                                 
        FY19 -half year $330 million                                                                                            
        FY20- First full year $663 million*                                                                                     
                                                                                                                                
        Non-residents pay between 7-14% of total tax revenue:                                                                   
        $44-93 million in a full year                                                                                           
                                                                                                                                
   Ms. Hansen explained that  a $4000 personal  exemption would                                                                 
   be  allowed  rather  than  itemized  deductions  similar  to                                                                 
   federal income taxes.                                                                                                        
                                                                                                                                
   1:40:18 PM                                                                                                                 
                                                                                                                                
   Representative Wilson  asked  what  data  was used  for  the                                                                 
   percentage of non-residents.  Ms. Hansen responded  that the                                                                 
   percentage came from an ISER report and  in combination with                                                                 
   information from  the  Department  of  Labor  and  Workforce                                                                 
   Development (DOL)  and  based  on  non-resident  information                                                                 
   cited from  a Department  of Revenue  (DOR) previous  fiscal                                                                 
   note from  HB 182 (Individual  Income Tax  and Tax  Credits)                                                                 
   [Withdrawn -  04/20/2016]. Representative  Wilson asked  how                                                                 
   current the  data was and  where it  ultimately was  derived                                                                 
   from. Ms. Hansen offered to verify the  data she employed in                                                                 
   her  calculation  of  non-residents.  Representative  Wilson                                                                 
   wondered about the personal exemption  for non-residents and                                                                 
   why it was  offered to them.  Ms. Hansen responded  that the                                                                 
   U.S.  Constitution   prohibited   offering   the   exemption                                                                 
   exclusively to  residents.  She  noted  that  the  way  non-                                                                 
   resident income was  calculated based on  world-wide income,                                                                 
   the Alaskan  exemption  would  only  account for  a  smaller                                                                 
   portion of  the exemption  relative to  the amount of  their                                                                 
   income  connected  to   the  state.  Representative   Wilson                                                                 
   inquired whether the  U.S. or state  constitution prohibited                                                                 
   the non-resident  exemption. Ms.  Hansen  believed that  the                                                                 
   provision was contained in both constitutions.                                                                               
                                                                                                                                
   Representative  Kawasaki   asked  whether   the  half   year                                                                 
   calculation was based  on the  first year of  implementation                                                                 
   that began mid-way through the year. Ms.  Hansen answered in                                                                 
   the affirmative.                                                                                                             
                                                                                                                                
   1:44:07 PM                                                                                                                 
                                                                                                                                
   Representative Kawasaki commented  that Alaska had  a winter                                                                 
   season and a  construction season.  The construction  season                                                                 
   lagged a bit  because of the  weather. He wondered  when the                                                                 
   half year  began.  Ms.  Hansen  responded the  current  year                                                                 
   would capture January 1, 2017 through June 30, 2017.                                                                         
                                                                                                                                
   Representative  Pruitt   asked   whether   the   information                                                                 
   factored in the data for  job losses in the  state. He noted                                                                 
   that "dramatic shifts had  taken place in the last  year and                                                                 
   a half." Ms. Hansen  responded that Mr. Davis'  [Carl Davis,                                                                 
   Research  Director,  Institute  on  Taxation   and  Economic                                                                 
   Policy (ITEP)]  numbers were  reflected the  2016 tax  year,                                                                 
   which were  the most  recent.  She relayed  that his  report                                                                 
   noted unemployment as a possible change  in revenue, but did                                                                 
   not have enough definitive information to  adjust the model.                                                                 
   Representative Pruitt  thought  Ms. Hansen  was  referencing                                                                 
   calendar year 2015 with the information  filed through 2016.                                                                 
   He opined that due to  the loss of many high  paying jobs in                                                                 
   the oil sector  and other  job losses  the figures  were not                                                                 
   dependable two years later.                                                                                                  
                                                                                                                                
   1:47:14 PM                                                                                                                 
                                                                                                                                
   Ms. Hansen  continued  to  the flow  chart  on  slide 4:  AK                                                                 
   Permanent Fund." The  new committee substitute  (CS) numbers                                                                 
   were reflected on the  chart. She noted the  slight decrease                                                                 
   in the Permanent Fund and  that the income tax  was based on                                                                 
   adjusted gross income instead of federal  tax liability. The                                                                 
   intention of  the  chart was  to  show  where state  revenue                                                                 
   funds currently flowed  and where they  would flow  under HB                                                                 
   115.  The  green   boxes  reflected  new   information.  The                                                                 
   Permanent Fund Dividend  (PFD) calculation was  not altered.                                                                 
   The only difference was  that the distribution was  based on                                                                 
   the structured draw  from a Percent  of Market  Value (POMV)                                                                 
   rather than distributable  income.  In addition,  a resident                                                                 
   can opt  to  apply the  PFD  to  income tax  liability.  She                                                                 
   continued to slide 5: "HB Proposal:  Total Estimated Revenue                                                                 
   to General Fund":                                                                                                            
                                                                                                                                
        FY20 - First Full Year of Tax Implemented                                                                               
        Income Tax Revenue* $663,000,000                                                                                        
        2/3 of the 5% POMV Draw ** $1,780,000,000                                                                               
        Total Revenue to General Fund $2,443,000,000                                                                            
                                                                                                                                
        Separate 1/3 of POMV Draw to dividend $879,000,000                                                                      
                                                                                                                                
        *Dept. of Revenue initial estimate updated fiscal note                                                                  
        forthcoming                                                                                                             
                                                                                                                                
        ** 5.25%  draw for  previous  two years,  5% POMV  Draw                                                                 
        starting  FY20   amount   based   Legislative   Finance                                                                 
        calculations.  33% to  the  dividend  and  67%  to  the                                                                 
        general fund.                                                                                                           
                                                                                                                                
   1:50:04 PM                                                                                                                 
                                                                                                                                
   Ms. Hansen  advanced to  slide 6:  "Potential future  impact                                                                 
   based on projected status  quo & HB 115 dividends  in FY25."                                                                 
   She  reported  that   the  chart  portrayed   the  long-term                                                                 
   distributional impact of HB  115 and the reduced  PFD across                                                                 
   income groups. She noted that the  information was contained                                                                 
   in the  ITEP report  that would  be addressed  later in  the                                                                 
   meeting. She  relayed that  the change  in the dividend  was                                                                 
   not as  great  in the  out  years.  She cautioned  that  the                                                                 
   numbers were predictions, but  the PFD draw was  more stable                                                                 
   under HB 115  because of  the POMV draw.  In the  out years,                                                                 
   the chart showed  an even income  impact between  the lowest                                                                 
   20 percent and the top 1 percent.                                                                                            
                                                                                                                                
   1:52:31 PM                                                                                                                 
                                                                                                                                
   Representative Wilson  asked  how  many  actual  individuals                                                                 
   were included in each  income group. Ms. Hansen  deferred to                                                                 
   Mr.  Davis  to  answer  Representative   Wilson's  question.                                                                 
   Representative  Wilson   requested   further   clarification                                                                 
   regarding the composition of the income groups.                                                                              
                                                                                                                                
   Co-Chair Foster reported that Mr. Davis  would be presenting                                                                 
   after Ms. Hansen's testimony.                                                                                                
   1:53:40 PM                                                                                                                 
                                                                                                                                
   Ms. Hansen turned to slide 7: "Why Adjusted Gross Income?":                                                                  
                                                                                                                                
        Volatility of federal  tax liability  - If  federal tax                                                                 
        rates change this  automatically impacts  state revenue                                                                 
        levels, with  no  state input.  Issue  is addressed  by                                                                 
        using adjusted gross instead of tax liability.                                                                          
                                                                                                                                
        Exemptions &  credits -  Using adjusted  gross gives  a                                                                 
        clean slate instead  of automatically  adopting federal                                                                 
        credits and deductions.                                                                                                 
                                                                                                                                
        Equity between  capital gains  & other  income types  -                                                                 
        All income  is taxed  at the same  rate under  adjusted                                                                 
        gross income,  avoiding the  federal tax reduction  for                                                                 
        capital gains.                                                                                                          
                                                                                                                                
        Administrative ease  -  Calculating  what  non-resident                                                                 
        income is  taxable  is  simpler  under  adjusted  gross                                                                 
        income, and would have been very  complex under federal                                                                 
        tax liability.                                                                                                          
                                                                                                                                
        Alaska Specific - Adjusted gross income  now includes a                                                                 
        deduction for  the permanent  fund  dividend, which  is                                                                 
        not exempt on federal taxes.                                                                                            
                                                                                                                                
Ms. Hansen  elaborated that  the bill was  changed to  base tax                                                                 
rates  on adjusted  gross income  rather than  a percentage  of                                                                 
federal tax liability. She recounted  that the previous version                                                                 
of HB 115  added a tax on  capital gains on top  of the federal                                                                 
tax rate  due to  the federal reduction  on capital  gains tax.                                                                 
The  results were  more complicated  and had  a greater  impact                                                                 
than taxing  capital gains  with an  adjusted gross  income tax                                                                 
system. She  furthered that the  federal exemption on  the sale                                                                 
of a primary residence was also exempted in the CS.                                                                             
                                                                                                                                
1:59:06 PM                                                                                                                    
                                                                                                                                
Representative  Wilson   asked  about  the   primary  residence                                                                 
exemption. She thought  that the exemption only  applied if the                                                                 
value of  the house was  the same or  higher and the  tax payer                                                                 
lived in  the house  at least two  years. She  wondered whether                                                                 
the  exemption applied  to downsizing  to a  smaller home.  Ms.                                                                 
Hansen understood  that the  tax was connected  to a  gain over                                                                 
the purchase  price and the exemption  applied if you  lived in                                                                 
the house over two years. She offered to confirm the answer.                                                                    
2:00:32 PM                                                                                                                    
                                                                                                                                
Ms.  Hansen  continued  to  slide 8:  "Where  does  Alaska  sit                                                                 
currently?" The  chart depicted that  the state ranked  in 50th                                                                 
place for its  state and local  tax burden of 6.5  percent as a                                                                 
percentage of state  income in fiscal year  2012. She explained                                                                 
that the  data was from the  Tax Foundation and was  updated in                                                                 
2017, however, the  2012 data was included  because the ranking                                                                 
remained  the  same  and  included   more  detailed  data.  She                                                                 
recapped  that Alaska  ranked  the lowest  in  state and  local                                                                 
taxation in the country.                                                                                                        
                                                                                                                                
2:02:05 PM                                                                                                                    
                                                                                                                                
Representative  Wilson   asked  about  Alaska's   property  tax                                                                 
exemptions and  how they  factored in  the 6.5 percent  burden.                                                                 
She felt  that the exemptions would  "skew the numbers  a lot."                                                                 
Ms. Hansen offered to reexamine  the data. She recollected that                                                                 
the  rankings were  based per  capita and  per homeowners.  The                                                                 
data  did not  adjust  for the  senior  exemption,  but it  did                                                                 
adjust for the ratio of the number  of people in the state that                                                                 
were  homeowners; the  exemption  did not  affect the  ranking.                                                                 
Representative Wilson  commented that the chart  was from 2012.                                                                 
Ms.  Hansen  replied  in the  affirmative  and  reiterated  the                                                                 
reason  previously stated  for  including the  2012 versus  the                                                                 
2017 data.  She furthered  that the 2017  data did  not include                                                                 
the information  regarding the  taxes paid  to the  home state,                                                                 
taxes   paid   to   other  states,   and   the   income   rank.                                                                 
Representative  Wilson wondered  if  the  number reflected  the                                                                 
number of  individuals that had  left the state because  of job                                                                 
losses. Ms. Hansen believed the data was based on residency.                                                                    
                                                                                                                                
2:04:21 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt asked  for  clarification regarding  the                                                                 
amount of  taxes paid  to other states.  Ms. Hansen  offered to                                                                 
provide  the   information  regarding   how  the   organization                                                                 
performed the modeling. She highlighted  that the taxes paid to                                                                 
other states  included  tourism taxes  and production  taxes on                                                                 
oil and gas. She did not have  a short answer because the model                                                                 
was   complex  but   would  provide   the  information   later.                                                                 
Representative Pruitt cautioned that the tax was too complex.                                                                   
                                                                                                                                
2:06:14 PM                                                                                                                    
                                                                                                                                
Ms.  Hansen scrolled  to slide  9: "State  Personal Income  Tax                                                                 
Revenue as  a Share  of Personal Income  in States  with Broad-                                                                 
Based Personal Income  Taxes." She explained that  the proposed                                                                 
tax  ranked  Alaska  the  fourth lowest  in  the  country.  The                                                                 
figures included  the effective  tax rate;  the tax  revenue on                                                                 
personal income divided by the  total personal income. The data                                                                 
was provided  by ITEP.  She advanced  to slide  10: "Sample  of                                                                 
Other State  Income Brackets."  She elaborated  that  the slide                                                                 
incorporated income  tax bracket  data from four  other states:                                                                 
Hawaii, Ohio, Montana,  and Kentucky. She noted  the difficulty                                                                 
in  making a  direct state  by  state comparisons  due to  each                                                                 
states' unique modifications of  its tax brackets. She reported                                                                 
that  25 other  states  adjusted  its brackets  for  inflation,                                                                 
which was a provision in the  CS. She indicated that the reason                                                                 
the  CS  did   include  inflation  adjustments   was  to  avoid                                                                 
including more tax payers in the top brackets.                                                                                  
                                                                                                                                
2:08:04 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  for  clarification.  Ms.  Hansen                                                                 
responded  that income  rises with  inflation; therefore,  more                                                                 
individuals would  be included  in the  top brackets  over time                                                                 
without inflation  adjustments. She  pointed to  the Department                                                                 
of Labor and  Workforce Development chart: "Workers  and Wages,                                                                 
Major and Selected Industry Categories."  She remarked that the                                                                 
chart  excluded   the  self-employed,   fishermen,   and  other                                                                 
agricultural  workers,  and  private   household  workers.  She                                                                 
highlighted that the  2015 report showed that  the total number                                                                 
of nonresident  workers was 21.3  percent and the  wages earned                                                                 
by  nonresidents  reflected  16  percent of  the  states  total                                                                 
wages.  The income  tax  included  provisions  to raise  income                                                                 
taxes from residents and nonresidents.                                                                                          
                                                                                                                                
2:10:13 PM                                                                                                                    
                                                                                                                                
Ms. Hansen moved to slide 12:  "Corporate Income Tax avoided by                                                                 
Sub  S  Corps  and Limited  Liability  Corps  in  Alaska."  She                                                                 
relayed  that  the exemptions  were  "not  the norm"  in  other                                                                 
states. The chart  illustrated the state's corporate  tax rates                                                                 
applied to  C corporations. She  furthered that the  income tax                                                                 
proposal included Sub S Corps and Limited Liability Corps.                                                                      
                                                                                                                                
Representative Pruitt thought that  the tax impacted small "Mom                                                                 
and Pop" operations by placing  them in the "higher echelons of                                                                 
the corporate  tax structure."  He wondered  whether  there had                                                                 
been any  studies done  on the effects  of the  proposed taxes.                                                                 
Ms. Hansen replied  that the amounts on the chart  were not the                                                                 
brackets that  applied to  the sub  s corporations  and limited                                                                 
liability corporations.  The income from the entities  would be                                                                 
included in the individual's  income tax. Representative Pruitt                                                                 
provided an  example and wondered  whether he was  accurate. He                                                                 
was very  concerned about  the "substantial  change" for  small                                                                 
businesses in Alaska.  He emphasized that the  CS represented a                                                                 
"dramatic shift" for small businesses.  The legislation was not                                                                 
only taxing the  individual but businesses as  well. Ms. Hansen                                                                 
clarified   that  the   provisions   proposed  taxing   certain                                                                 
businesses through  the income  it provided to  the individuals                                                                 
as  owners, partners,  or  shareholders.  The businesses  would                                                                 
have the ability  to write off their expenses  and deduct their                                                                 
share of  corporate taxes paid. Representative  Pruitt wondered                                                                 
why the  tax would not just  be left to taxing  the individual.                                                                 
Ms. Hansen  replied that  the provisions  corresponded  more to                                                                 
the  nonresident   corporations   and  attempting  to   "firmly                                                                 
establish  income from  sources  within the  state." She  would                                                                 
work with Mr.  Spanos [Brandon S. Spanos,  Deputy Director, Tax                                                                 
Division, Department  of Revenue] for a more  precise response.                                                                 
Representative  Pruitt  believed  that the  provisions  created                                                                 
"multiple levels  of complexity." He  wondered why the  tax was                                                                 
not simply  an income tax that  was based on  the distributions                                                                 
to the individual instead of adding  the corporate tax as well.                                                                 
He deduced that  it was a matter  of "which side the  tax would                                                                 
be  taken from."  Ms. Hansen  responded  that the  corporations                                                                 
were  already taxed  in  every  other state.  The  corporations                                                                 
retained a  "certain amount of  leniency for where  they record                                                                 
the income." She deferred the answer to Mr. Spanos.                                                                             
                                                                                                                                
2:17:05 PM                                                                                                                    
                                                                                                                                
Representative   Pruitt  surmised   that  if  an   out-of-state                                                                 
corporation  could  choose  where  it paid  taxes,  the  action                                                                 
"dampened" the effect of the  state attempting to collect taxes                                                                 
on income gained in Alaska. He  questioned the reasoning behind                                                                 
taxing s  corporations. Ms.  Hansen communicated  that sections                                                                 
AS 43.22.50, AS 43.0.55 and other  sections that dealt with the                                                                 
"pass through"  entities  and how they  distributed  its shares                                                                 
was based  on how the income  was connected to a  source within                                                                 
the  state  and  on  the  multi-state  compact.  Representative                                                                 
Pruitt  pointed  out  that  Ms.  Hansen  had  just  stated  the                                                                 
entities had the  option to choose. He reiterated  his concerns                                                                 
about adding another layer of tax.  Ms. Hansen replied that the                                                                 
entities   could  decide   whether  the   corporation  or   the                                                                 
individual paid the tax, however  the tax remained connected to                                                                 
the source within the state.                                                                                                    
                                                                                                                                
2:20:06 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara believed that the  last line of questioning was                                                                 
very confusing to him. He ascertained  that the tax rate for an                                                                 
individual who gained  income from their business  was the same                                                                 
as the tax rate for a wage  earner. Ms. Hansen responded in the                                                                 
affirmative. Vice-Chair  Gara deduced that the tax  rate in the                                                                 
CS for  an individual  who made  $20 thousand  per year  or $40                                                                 
thousand per  couple minus  the $4  thousand exemption  was 2.5                                                                 
percent.  He  asked  whether  the statement  was  correct.  Ms.                                                                 
Hansen stated that  he was correct. Vice-Chair  Gara calculated                                                                 
that a  couple that owned a  business making $40  thousand paid                                                                 
approximately $300  in taxes. He did  not view the amount  as a                                                                 
hardship.  He stated that  currently only  C corporations  were                                                                 
taxed. He asked  whether he was correct. Ms.  Hansen replied in                                                                 
the affirmative.  He stated that  a lawyer or doctor  in Alaska                                                                 
making $5 million  per year did not pay any  state taxes unless                                                                 
part of a C corporation. He  requested confirmation. Ms. Hansen                                                                 
responded in the affirmative.  Vice-Chair Gara defined that the                                                                 
multi state tax compact prevented  double taxing tax payers. He                                                                 
asked whether the  statement was correct. Ms.  Hansen responded                                                                 
in the affirmative. He wondered  whether a corporation would be                                                                 
taxed in  Alaska if the  state did not  follow the  multi state                                                                 
compact. Ms.  Hansen deferred her  answer to Mr.  Spanos. Vice-                                                                 
Chair  Gara  inquired  whether  an individual  was  a  laborer,                                                                 
legislator, doctor,  or individual business owner  the tax rate                                                                 
was the  exact same  based on  their income  under the  CS. Ms.                                                                 
Hansen answered in the affirmative.  She added that the tax was                                                                 
based on income regardless of the source.                                                                                       
                                                                                                                                
2:23:40 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked where non-profits stood  under the                                                                 
CS.  She   wondered  about  native  corporations   that  issued                                                                 
dividends. Ms. Hansen answered that  Mr. Spanos was preparing a                                                                 
more detailed  answer. She noted  that the  native corporations                                                                 
were not  non-profits and paid  taxes. The dividends  were paid                                                                 
out  to   beneficiaries  and   were  deducted  from   what  the                                                                 
corporation  paid  and  were  taxed at  the  individual  level.                                                                 
Representative   Wilson   wondered  whether   the   beneficiary                                                                 
dividend was included in taxable  income. Ms. Hansen offered to                                                                 
double check  the federal tax status.  She related that  if the                                                                 
dividends  were  included  in  the adjusted  gross  income  the                                                                 
amount  was  taxed  at  the  individual  level.  Representative                                                                 
Wilson  wondered what  other  category the  dividends could  be                                                                 
included under.  Ms. Hansen replied  that there was  a category                                                                 
for  tax exempt  dividends,  but she  needed  to research  what                                                                 
dividends were included.                                                                                                        
                                                                                                                                
2:25:27 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  remarked  that  an  S  corporation  was                                                                 
simply  passing   through  money   earned  to   the  applicable                                                                 
individual. He  surmised that  the income tax  and tax on  an S                                                                 
corporation  "cancelled each  other  out" since  the money  was                                                                 
automatically passed  through to a shareholder.  The individual                                                                 
receiving the  money would  have to pay  a personal  income tax                                                                 
under the bill. He wondered about the tax being duplicative.                                                                    
                                                                                                                                
Co-Chair Seaton understood that  Representative Pruitt referred                                                                 
to the "normal  functioning" of an S corporation.  He qualified                                                                 
that  alternately,  an S  corporation  could  pay some  of  the                                                                 
distributed taxes and the provision  in the CS ensured that the                                                                 
amount paid in taxes was not  double taxed. He declared that no                                                                 
provision in the bill double taxed  anyone or entity, which was                                                                 
why the provisions  were very detailed. The  details guaranteed                                                                 
that loopholes  were not left open  to be interpreted  to offer                                                                 
loopholes or double tax anyone.                                                                                                 
                                                                                                                                
2:29:14 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara observed  that there was no  double taxation in                                                                 
the bill.  He provided an example  of an architect who  made $1                                                                 
million  in wages  that  would  be subject  to  the income  tax                                                                 
unless  the  income  was  earned  as  a  shareholder  in  an  S                                                                 
corporation; then the architect  paid nothing. He surmised that                                                                 
a  continued   exemption  created  the  scenario.   Ms.  Hansen                                                                 
deferred  the  details of  the  amounts  that could  be  passed                                                                 
through at the corporate level  to Mr. Spanos. She relayed that                                                                 
if the shares  were directly passed through  to the shareholder                                                                 
individual income taxes applied.                                                                                                
                                                                                                                                
2:30:29 PM                                                                                                                    
                                                                                                                                
BRANDON S.  SPANOS, DEPUTY  DIRECTOR, TAX DIVISION,  DEPARTMENT                                                                 
OF  REVENUE, commented  on the  discussion. He  offered that  S                                                                 
corporations and  partnerships were  pass through  entities and                                                                 
were not  taxed separately  in  the CS. A  provision allowed  a                                                                 
partnership  or   an  S  corporation   to  pay  on   behalf  of                                                                 
nonresidents.  A  credit was  available  to the  individual  to                                                                 
indicate that the  S corporation paid the  taxes. He summarized                                                                 
that  S   corporations  and  partnerships  were   pass  through                                                                 
entities and taxes  due were owed by the  individual unless the                                                                 
tax payer elected to pay via the corporation or entity.                                                                         
                                                                                                                                
Vice-Chair  Gara  wanted  to  confirm  that  an  S  corporation                                                                 
shareholder paid the same tax as  a wage earner making the same                                                                 
amount and  that no one was  double taxed. Mr.  Spanos answered                                                                 
that  ultimately the  bill treated  all income  the same  other                                                                 
things being equal, "regardless of  the structure of the entity                                                                 
the individual belonged to."                                                                                                    
                                                                                                                                
2:32:44 PM                                                                                                                    
                                                                                                                                
Ms. Hansen  turned to  the final slide  numbered 13.  The slide                                                                 
depicted a current  1040 federal tax form. She  pointed to line                                                                 
37 that specified  the amount of adjusted gross  income and the                                                                 
$4 thousand  exemption was  based on  the federal  exemption on                                                                 
line 6 d of the 1040.                                                                                                           
                                                                                                                                
Representative Wilson  wanted to  know the reason  for choosing                                                                 
the federal exemptions.  Ms. Hansen responded  that most states                                                                 
used  an  adjusted  gross  income.  She  relayed  that  it  was                                                                 
determined that  the federal exemptions  were "a good  place to                                                                 
start,"  were  consistently  used,  and  "leveled  the  playing                                                                 
field."  Representative Wilson  contended  that the  deductions                                                                 
were arbitrary and "at the end  of the day," the exemptions did                                                                 
not  even  the  playing  field. She  had  understood  that  the                                                                 
discussion  was income  tax and  was based off  line 22,  total                                                                 
income. She  thought that  $4 thousand  was the only  deduction                                                                 
allowed, but  by using  the federal  exemptions 13  other items                                                                 
were deductible. She asked whether  what was being proposed was                                                                 
based on what certain states had  done. Ms. Hansen replied that                                                                 
she  could  not speak  to  all  the  decisions that  were  made                                                                 
regarding  the CS.  Representative  Wilson  was  not trying  to                                                                 
place Ms.  Hansen on  the spot. She  asked Co-Chair  Seaton who                                                                 
made the decision to include the exemptions.                                                                                    
                                                                                                                                
Co-Chair Seaton  relayed that  the decision  was made  based on                                                                 
testimony  that listed  problems with  using tax liability.  He                                                                 
shared that  the administration had  hired a tax  consultant to                                                                 
develop  an income  tax. The tax  was based  on adjusted  gross                                                                 
income that  was used  in many other  states. He  suggested she                                                                 
offer an  amendment to  tax all  income without deductions.  He                                                                 
remarked  that  a starting  point  had  to  be chosen  and  the                                                                 
federal adjusted  gross income  was a "logical"  choice because                                                                 
it included sensible exemptions.                                                                                                
                                                                                                                                
2:40:09 PM                                                                                                                    
                                                                                                                                
Representative  Wilson stressed  that  her  questions were  not                                                                 
indicators of  whether she  agreed or  disagreed with  the bill                                                                 
but were an  attempt to understand the bill.  She thought there                                                                 
were many things  in the bill that were  complicated and wanted                                                                 
to better  understand all  the parts and  pieces. She  hoped to                                                                 
receive  answers  to  all  the  questions  asked  by  committee                                                                 
members.                                                                                                                        
                                                                                                                                
Representative Pruitt  inquired whether landlords  could deduct                                                                 
expenses  from their  rental  income before  paying taxes.  Ms.                                                                 
Hansen did not  know enough about the specific  issue. Co-Chair                                                                 
Seaton responded  that line 12 reported business  expenses from                                                                 
the federal Schedule C form and  would be subtracted from total                                                                 
income.                                                                                                                         
                                                                                                                                
Representative  Wilson  corrected   Co-Chair  Seaton  that  the                                                                 
accurate  form  was  Schedule  D, line  17.  She  continued  to                                                                 
explain that Schedule C was for small businesses.                                                                               
                                                                                                                                
Ms. Hansen relayed that Mr. Spanos  would present the following                                                                 
day.                                                                                                                            
                                                                                                                                
2:44:48 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster introduced Mr. Davis  and noted that a document                                                                 
dated  March  24, 2017  titled  "Assessing  the  Distributional                                                                 
Consequences of Alaska's  House Bill 115 (Version  L)" (copy on                                                                 
file) was distributed to members.                                                                                               
                                                                                                                                
CARL  DAVIS,  RESEARCH  DIRECTOR,  INSTITUTE  ON  TAXATION  AND                                                                 
ECONOMIC POLICY  (ITEP), ANCHORAGE (via  teleconference), spoke                                                                 
to  the  memo.  He  relayed   that  the  information  primarily                                                                 
contained a "distributional analysis"  on how the bill impacted                                                                 
Alaskan families at different  income levels. He commented that                                                                 
the  two   core  findings   were  that   the  income   tax  was                                                                 
progressive, and the amount of  tax paid increased with income.                                                                 
He  continued that  the cuts  to  the PFD  were regressive  and                                                                 
impacted  lower  income families  more  than middle  or  higher                                                                 
income families. He pointed to  figures 2 and 3 of the analysis                                                                 
[pages 4  to 5]  that compared  the changes  and the  impact on                                                                 
federal  taxes.  He  reported  that   the  net  impact  of  the                                                                 
progressive   income   tax   and   regressive   PFD   cut   was                                                                 
"proportional  overall."  Figure   3  portrayed  that  family's                                                                 
income from all  levels would be reduced by 1.8  percent to 2.8                                                                 
percent. The  plan relied  more heavily on  larger PFD  cuts in                                                                 
the  initial years  therefore,  the  plan was  more  regressive                                                                 
overall and  impacted families at  the bottom income  levels by                                                                 
8.6 percent relative to their income.                                                                                           
                                                                                                                                
2:48:09 PM                                                                                                                    
                                                                                                                                
Representative  Wilson pointed to  page 1  of an  ITEP document                                                                 
and read bullet point two and three:                                                                                            
                                                                                                                                
        Most states with personal  income taxes offset  some of                                                                 
        the impact of regressive fiscal policies  on their low-                                                                 
        income  taxpayers  by  offering  a   refundable  Earned                                                                 
        Income Tax  Credit (EITC)  patterned after  the federal                                                                 
        EITC. In  Alaska,  a  state  credit  calculated  at  25                                                                 
        percent of the federal EITC could  reduce the impact of                                                                 
        the bill  on  the  state's  low-income taxpayers  by  1                                                                 
        percent of  their income.  Such a  credit would  reduce                                                                 
        Alaska income tax revenues  by roughly $25  million per                                                                 
        year.                                                                                                                   
                                                                                                                                
        Low-income families,  for  whom  the PFD  represents  a                                                                 
        major source of income, would be  impacted more heavily                                                                 
        in the  years immediately  following implementation  of                                                                 
        this bill.  This  is  because  reductions  in  the  PFD                                                                 
        payout are forecast  to be  largest in the  short-term.                                                                 
        If the PFD  payout is reduced  by $950 per  person, the                                                                 
        bottom 20  percent of  earners could  expect to  see an                                                                 
        impact from  this bill  equal to 8.6  percent of  their                                                                 
        incomes.  This far  exceeds  the  2.9  to  4.1  percent                                                                 
        impact felt by other  groups under this  scenario. (See                                                                 
        Figure 2 and Table A.)                                                                                                  
                                                                                                                                
Representative  Wilson  asked for  further  clarification.  Mr.                                                                 
Davis replied that the analysis  was not based on provisions in                                                                 
the CS. He offered the information  after examining the results                                                                 
from the  data used in figure  2: "Impact of Alaska  House Bill                                                                 
115 (Version L)."  He discovered that the impacts  in the early                                                                 
years of  implementing HB 115  was steady across  income groups                                                                 
except  for a PFD  reduction of  $950 which  had an  "outsized"                                                                 
impact on  low income  groups; an  income reduction  of roughly                                                                 
one percent  for the lowest 20  percent. He furthered  that the                                                                 
bill did  not offer  an earned income  tax credit,  unlike most                                                                 
states  with a  personal  income tax.  He  elucidated that  the                                                                 
intent of an earned income tax  credit was to offset the impact                                                                 
of changes in fiscal policy on low income groups.                                                                               
                                                                                                                                
Representative Wilson referred to the  chart on pages 4 or 5 of                                                                 
the document.  She asked  where the  category data  was derived                                                                 
from  and whether  it reflected  the loss  of jobs  due to  the                                                                 
economy. Mr.  Davis answered that  he utilized the  most recent                                                                 
reporting  by the  Internal Revenue  Service  (IRS), which  was                                                                 
from 2014, and the data was  "aged forward" to 2016 using other                                                                 
sources  of  economic  analysis   including  the  Congressional                                                                 
Budget Office.  He shared that  ITEP attempted to  gather state                                                                 
specific forecasting data to  include analysis for future years                                                                 
but was  unable due  to the  imprecise nature  of the  data. He                                                                 
furthered that  the number of people  in each income  group was                                                                 
based on  IRS returns.  He reported  that each income  quintile                                                                 
represented  roughly  70 thousand  units  or tax  returns.  The                                                                 
number of individuals  in each quintile differed  due to family                                                                 
size; families at the top tended  to be larger than families in                                                                 
the  bottom  quintiles.  Representative  Wilson  asked  if  the                                                                 
lowest  number   of  returns  reflected  children.   Mr.  Davis                                                                 
reiterated that the families in  the lower quintiles "tended to                                                                 
have fewer children on average."  He delineated that the number                                                                 
of  people was  not  the same  in each  income  group, but  the                                                                 
number  of  tax units  remained  constant  at 70  thousand  tax                                                                 
returns per quintile.                                                                                                           
                                                                                                                                
2:54:25 PM                                                                                                                    
                                                                                                                                
Representative  Wilson mentioned  that she  was not  requesting                                                                 
forecasted  data. She  wondered  how he  would  have shown  the                                                                 
adjustment  for lost  jobs due  to the  economic downturn.  She                                                                 
also questioned how he determined  the 78 percent to 22 percent                                                                 
split between  residents and nonresidents. Mr.  Davis responded                                                                 
that  the information  was not  as  detailed as  he would  have                                                                 
liked. He had  obtained information on how  the Alaskan economy                                                                 
had changed  but did not  have sector specific  information. He                                                                 
elaborated that if a dramatic shift  had occurred over the last                                                                 
year  or  two within  one  sector,  the  affects could  not  be                                                                 
reflected in the  current data. The company relied  on the ISER                                                                 
figure of  income tax  revenue to  determine the  nonresident's                                                                 
percentage and  had to rely on  outside sources since  ITEP did                                                                 
not  have data  on nonresident  income  tax contributions.  The                                                                 
income  quintiles  only  included  Alaskan  residents  and  the                                                                 
nonresident   data  was   included  as   an  addition   to  the                                                                 
residential  data. He  added that  ITEP was  able to model  the                                                                 
federal  income  tax  in Alaska  and  an  alternative  scenario                                                                 
included  in  HB 115  where  Alaskans  can write-off  the  $660                                                                 
million of state  income tax, which triggered  a federal income                                                                 
tax cut of approximately $102  million. Therefore, the combined                                                                 
impact  of  federal  tax  cuts   and  income  tax  payments  by                                                                 
nonresidents  would  raise  an  estimated  22  percent  of  the                                                                 
revenue in HB  115 and reflected reliable  data. Representative                                                                 
Wilson was  very concerned  with not  having the  correct data.                                                                 
She  asked  whether   only  those  tax  payers   with  itemized                                                                 
reductions  could write the  state's income  off their  federal                                                                 
taxes.  Mr.  Davis  confirmed that  Representative  Wilson  was                                                                 
correct  and had  "an  important point"  but  his analysis  did                                                                 
account for  that scenario.  Representative Wilson  opined that                                                                 
her point made  her question the analysis  regarding the write-                                                                 
off impact  on federal  taxes. She  reiterated her  doubt about                                                                 
the accuracy of the data and projected revenue.                                                                                 
                                                                                                                                
2:58:31 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked him to  explain the $4 thousand exemption                                                                 
per person. He referenced the  provision that exempted a single                                                                 
filer  from the  income  tax who  earned  under $10.3  thousand                                                                 
dollars. He  asked whether someone  who earned less  than $14.3                                                                 
thousand  would  also  be  exempted  due  to  the  $4  thousand                                                                 
exemption. Mr. Davis responded  that he was correct. Vice-Chair                                                                 
Gara wondered whether the amount  was doubled for joint filers.                                                                 
Mr. Davis responded  in the affirmative. He  furthered that the                                                                 
additional  exemption   for  the   PFD  dividend   was  equally                                                                 
"significant." Vice-Chair  Gara wanted  to clear  up confusion.                                                                 
He relayed  that the  bill did not  impose a  tax for  a single                                                                 
filer  who  earned  $14.3  thousand or  less  and  under  $28.6                                                                 
thousand for joint  filers (after the PFD  exemption). He asked                                                                 
whether the  two percent tax only  applied to income  above the                                                                 
figures he  quoted and if  the tax due  totaled $25.  Mr. Davis                                                                 
answered  in the  affirmative and  confirmed Vice-Chair  Gara's                                                                 
statements.                                                                                                                     
                                                                                                                                
Representative Guttenberg  asked how he performed  the modeling                                                                 
and whether  most of  the figures  were "aggregate."  Mr. Davis                                                                 
affirmed that  the distribution  charts were based  on averages                                                                 
and represented  aggregate tax payer groups. He  mentioned that                                                                 
every  tax payer  would be  impacted  differently depending  on                                                                 
their  specific situation.  Representative Guttenberg  wondered                                                                 
when more  accurate figures would  be available to  upgrade the                                                                 
model to 2017.  Mr. Davis answered that the  annual update from                                                                 
the IRS  was the "fundamental" basis  for the model due  to its                                                                 
detailed data  on income levels  and sources. He  reported that                                                                 
updated figures would  be released later in the  year for 2015.                                                                 
He  incorporated   any  other  new  usable  economic   data  or                                                                 
projections when  released. Representative  Guttenberg referred                                                                 
to  the  population  and  job loss  projections  from  DOL.  He                                                                 
wondered how  appropriate it  was for  ITEP to incorporate  the                                                                 
data into  their model.  Mr. Davis  relayed that  ITEP examined                                                                 
the DOL  data and  adjusted the  model downward.  He noted  the                                                                 
dramatic  differences  in each  states'  economy  and tried  to                                                                 
incorporate  state  data  when  it  contained  enough  details.                                                                 
Representative  Guttenberg inquired  whether the quintile  data                                                                 
was adjusted downward and included  the loss of children in the                                                                 
economy in terms  of their effect on school  district counts or                                                                 
PFD  loss  of  family  income.  Mr.  Davis  confirmed  that  he                                                                 
adjusted the PFD  data for 2016. The information  on the number                                                                 
of recipients  was rooted  in 2016 data.  He detailed  that the                                                                 
income tax data was less concerned  with employment but focused                                                                 
on income  levels. The employment  data was less of  a priority                                                                 
than the correct  income levels which to some  extent reflected                                                                 
the employment levels.                                                                                                          
                                                                                                                                
3:05:25 PM                                                                                                                    
                                                                                                                                
Representative  Grenn recalled  a prior  year ITEP report  that                                                                 
indicated 70  or 80 percent  of Alaskans  would pay less  via a                                                                 
sales tax  than last  year's proposed  income tax.  He wondered                                                                 
whether the  same applied to  the current income  tax proposal.                                                                 
Mr.  Davis answered  that  the  number that  ITEP  used in  the                                                                 
previous   year  came   from  an  ISER   report  finding   that                                                                 
approximately 80  percent of  Alaskan taxpayers would  pay less                                                                 
under an  income tax linked to  federal liability than  under a                                                                 
general  sales tax  designed  to raise  the  same amount.  [Mr.                                                                 
Davis' teleconference call was dropped.]                                                                                        
                                                                                                                                
3:06:50 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:07:42 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster indicated  Mr. Teal would be  presenting to the                                                                 
committee.                                                                                                                      
                                                                                                                                
3:08:24 PM                                                                                                                    
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE  FINANCE DIVISION,  referred                                                                 
to documents in the member packets  titled: "HB 115 Amended OMB                                                                 
Budget" and  "HB 115  Amended Flat Budget"  (copy on  file). He                                                                 
indicated that the models reflected  HB 115 updated numbers and                                                                 
the bill's  impact on  the operating budget  and PFD.  He began                                                                 
with the  data on the  "HB 115 Amended  OMB Budget"  slide that                                                                 
contained four graphs depicting the  model results based on the                                                                 
Office  of Management  and  Budget's (OMB)  Ten  Year Plan.  He                                                                 
relayed that the data portrayed  a balanced budget beginning in                                                                 
FY 20  and draws  off the  Constitutional Budget  Reserve (CBR)                                                                 
ceased. He noted that in FY  19, the income tax revenue "kicked                                                                 
in"  halfway through  the year  and  was flat  at roughly  $700                                                                 
million in the  out years. He pointed out that  the CBR balance                                                                 
was rising from  interest and settlements because  the balanced                                                                 
budget  ended the  need  for CBR  draws.  The Earnings  Reserve                                                                 
Account  (ERA) was  steady at  roughly  $9 billion  due to  the                                                                 
increasing payout of $50 million  to the general fund (GF) with                                                                 
the remainder appropriated to PFD's.  He highlighted that in FY                                                                 
2018  dividends  were  $1250  and would  remain  steady  rising                                                                 
slightly to $1400 by FY 2026.                                                                                                   
                                                                                                                                
3:12:19 PM                                                                                                                    
                                                                                                                                
Representative Wilson ascertained  that trusts, S Corporations,                                                                 
and  LLC's  were currently  taxed  in  the  CS  and was  a  new                                                                 
provision.  She   assumed  that  the  additional   revenue  was                                                                 
included in the  model and wondered how it  impacted the model.                                                                 
Mr. Teal deferred the answer to  DOR. He commented that he only                                                                 
received the $700 million in  revenue estimated number from the                                                                 
department.  Representative Wilson  asked  whether the  figures                                                                 
were the  same as  the previous  version's estimates.  Mr. Teal                                                                 
answered  that the income  tax revenue  estimates were  roughly                                                                 
$30  million annually  higher  in  the new  CS.  Representative                                                                 
Wilson  asked, "what  part  of  the bill"  the  $30 million  in                                                                 
increased  revenue  impacted. Mr.  Teal  remarked  that the  CS                                                                 
contained  a major  change  in the  income  tax provisions  and                                                                 
presently, the tax  was based on adjusted gross  income. He was                                                                 
unable to answer the question  without detailed information. He                                                                 
received a single number from  DOR. Representative Wilson asked                                                                 
whether  a fair  conclusion  was  that the  revenue  in the  CS                                                                 
increased by  $30 million  but the source  of the  increase was                                                                 
unknown.  Mr. Teal  responded  that  Representative Wilson  was                                                                 
correct.                                                                                                                        
                                                                                                                                
Vice-Chair Gara remarked that the  CS did not add income from S                                                                 
corporations and  LLC's. The previous  version of the  bill and                                                                 
the state's  prior income  tax taxed  the individual  owners of                                                                 
the entities. He  asked whether the statement  was correct. Mr.                                                                 
Teal responded that he was correct.  He added that the entities                                                                 
were "pass throughs"  and the distributions to  individuals was                                                                 
taxed. Any  version of  an income tax  based on  the individual                                                                 
income that included the entities would tax the income.                                                                         
                                                                                                                                
3:15:41 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  interjected  that   the  CS  title  was                                                                 
changed to include the entities in  the new version of the bill                                                                 
and  she presumed  that  a change  occurred  from the  original                                                                 
version of HB 115.                                                                                                              
                                                                                                                                
3:16:16 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton affirmed  that the entities  were taxed  under                                                                 
the previous  version of the bill.  He explained that  when the                                                                 
bill changed to adjusted gross  income more detailed provisions                                                                 
were included  to avoid loopholes.  The CS was a  more detailed                                                                 
construction  of the  bill.  The intent  was  to include  "some                                                                 
balanced progressive tax rates." He  reported that the goal was                                                                 
to raise approximately $650 million  to $700 million in revenue                                                                 
from an  income tax  as part of  a balanced  sustainable fiscal                                                                 
plan that worked  under OMB's 10-year projection.  He furthered                                                                 
that  the  previous  version  of  the income  tax  based  on  a                                                                 
percentage  of  federal  tax  liability and  the  new  CS  were                                                                 
"relatively"  the  same  in terms  of  revenue  generation  and                                                                 
progressivity.  The difference  between the  versions was  that                                                                 
the volatility  from basing  the tax  on federal  liability was                                                                 
eliminated. The  change occurred based on advice  from previous                                                                 
testimony.  Representative Wilson  did not  understand how  the                                                                 
bill  impacted trusts  for individuals  who live  in the  state                                                                 
versus those who  did not and how it affected  the economy. Co-                                                                 
Chair  Seaton  replied  that  nonresident trusts  that  do  not                                                                 
derive income  from within the  state were not taxed  under the                                                                 
bill. He  surmised that  her desired  outcome regarding  trusts                                                                 
were integrated  into the bill. He elucidated  that individuals                                                                 
would  only be  affected  if the  trust's  income  came from  a                                                                 
source  within the  state.  A trust  manager  would likely  use                                                                 
diversified  investments. However,  if there  was a trust  with                                                                 
large investments  in the state  generating revenue  the income                                                                 
would be taxed under the bill.                                                                                                  
                                                                                                                                
Representative Wilson  appreciated his reply. She  deduced that                                                                 
the  bill  would  not  impact   nonresidents  but  thought  the                                                                 
provision would  impact residents  who therefore, might  set up                                                                 
their trusts in other states instead.                                                                                           
                                                                                                                                
3:21:03 PM                                                                                                                    
                                                                                                                                
Representative Ortiz  attempted to  summarize the impact  of HB                                                                 
115 with  an income tax  versus without  an income tax.  He did                                                                 
not believe any one was excited  about paying an income tax. He                                                                 
was aware of the potential impact  the income tax had on people                                                                 
in the  state. He wondered whether  an income tax  helped solve                                                                 
the  fiscal  problem in  the  state,  created a  stable  fiscal                                                                 
climate,  supported the  state's  bond rating,  created a  more                                                                 
certain business environment, and  if the state's savings would                                                                 
grow.  He  asked  if  there  was  a  "net  positive"  with  the                                                                 
legislation. Mr.  Teal explained  that bond ratings  were tough                                                                 
to  deal  with  and  the "raters  had  their  own  black  box."                                                                 
However,  it was  likely  safe  to say  that  "with a  balanced                                                                 
budget the  bond rating  would be  higher." He reiterated  that                                                                 
the  model  demonstrated  that  with  HB  115  the  budget  was                                                                 
balanced, and reserves  grew. He voiced that  without an income                                                                 
tax, deficits  of roughly  $600 million  to $700  million would                                                                 
continue and reserves declined, which  offered a plan without a                                                                 
solution  and created  uncertainty  because at  some point  the                                                                 
deficit had  to be addressed. A  plan that balanced  the budget                                                                 
provided more  certainty than a  plan that contained  a deficit                                                                 
and  did  not offer  assurance  on  how  the deficit  would  be                                                                 
filled; either by budget cuts or revenue generation.                                                                            
                                                                                                                                
3:25:08 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked  Mr. Teal to display a model  based on SB                                                                 
26 (APPROP LIMIT  & PER FUND: DIVIDEND; EARNINGS).  He wondered                                                                 
how much revenue  would be generated beginning in FY  18 and FY                                                                 
19 for public  services. Mr. Teal responded that SB  26 did not                                                                 
include  revenue  generation  and   lacked  approximately  $700                                                                 
million per  year. He noted that  the bill offered  a different                                                                 
PFD  amount  that remained  flat  at  $1000.  He noted  that  a                                                                 
provision  in SB  26 payed  out 25  percent of  the Percent  of                                                                 
Market  Value  (POMV)  appropriated   to  dividends  versus  33                                                                 
percent in  HB 115  and was  the difference  in the  deficit of                                                                 
$500  million   because  the   additional  $200   million  paid                                                                 
dividends. The  bills were very  similar except for  the income                                                                 
tax.  Vice-Chair  Gara  guessed  that the  FY  18  deficit  was                                                                 
roughly  $2.8 billion.  Mr. Teal answered  in the  affirmative.                                                                 
Vice-Chair  Gara  deduced that  SB  26  had an  estimated  $560                                                                 
million deficit  in FY 19. He  reported that some  had referred                                                                 
to SB 26 as a "95 percent solution" and wondered why.                                                                           
                                                                                                                                
3:28:19 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  interjected  that   the  Senate  had  a                                                                 
different philosophy  about the  actual "spend"  for government                                                                 
and wanted  higher  budget cuts,  which should  be part of  the                                                                 
discussion about SB 26 and the 95 percent.                                                                                      
                                                                                                                                
Co-Chair Foster indicated  that there would be  a more detailed                                                                 
discussion when  the committee would  hear SB 26  the following                                                                 
morning.                                                                                                                        
                                                                                                                                
Representative  Wilson  thought   that  the  discussion  should                                                                 
include the  top graph on the  left of the slide  that depicted                                                                 
the budget  cuts of $300 million  in the current year  and $250                                                                 
million for the following two years and compare the entire                                                                      
plan contained in SB 26.                                                                                                        
                                                                                                                                
HB 115 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
3:29:48 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster reviewed the agenda for the following morning.                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:30:42 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:30 p.m.                                                                                          

Document Name Date/Time Subjects
HB 115 ITEPanalysis_HB115vL.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 _CS Sponsor Statement.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 CS flow chart 3.23.17.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB115 CS 2017 AGI Chart filing status.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB115 Presentation in HFIN_CS V. L_3.27.2017.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 Amended, OMB Budget.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 Amended, Flat Budget.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 background _Adjusted Gross Income_main points of how the tax works_3.26.2017.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115 ITEPanalysis_PFDcuts.pdf HFIN 3/27/2017 1:30:00 PM
HB 115
HB 115_Sectional draft version L_long form_3.26.2017.pdf HFIN 3/27/2017 1:30:00 PM
HB 115