Legislature(2017 - 2018)HOUSE FINANCE 519
03/30/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| HB137 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | HB 137 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 30, 2017
1:38 p.m.
1:38:24 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:38 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue; April Wilkerson, Director, Division
of Administrative Services, Department of Corrections;
Randall Hoffbeck, Commissioner, Department of Revenue;
Kristin Kranendonk, Staff, Representative Harriet
Drummond; Ben Brown, Chair, Alaska State Council on the
Arts.
PRESENT VIA TELECONFERENCE
Kate Hudson, Executive Director, Violent Crimes
Compensation Board, Juneau; Alice Bioff, Kawerak, Inc.,
Nome; Andrea Noble-Pelant, Executive Director, Alaska State
Council on the Arts, Eagle River.
SUMMARY
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
HB 137 ST. COUNCIL ON THE ARTS: PUBLIC CORP.
HB 137 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster addressed the meeting agenda. He indicated
that the discussion focused around the Department of
Revenue (DOR) fiscal notes for HB 115.
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."
1:39:23 PM
Representative Wilson discovered that a consultant had been
hired by the administration to work on tax issues. She
stated that the individual had been hired through an
$85,000 contract. She wondered whether the committee would
have the opportunity to hear testimony from the consultant
in-person. She voiced the department's lack of knowledge
regarding trusts.
1:41:01 PM
AT EASE
1:43:26 PM
RECONVENED
Co-Chair Foster asked the administration to address the
question.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
provided background information about the consultant. He
informed the committee that Professor Rick Pomp's role with
the administration related to the development of an income
tax bill. He relayed that Prof. Pomp was an attorney and a
professor at the University of Connecticut. He explained
that during the prior session the governor had offered a
similar income tax bill. He learned through the process,
that the income tax language used in the governor's bill
was obsolete and needed updating. He delineated that DOR
placed a request for approval of a 2017 income tax bill to
the governor's office "long before" it was determined
whether the bill would be introduced. He wanted to update
the language in the bill regarding using adjusted gross
income rather than a share of federal liability. He shared
that issues had arisen related to using federal liability
such as, its elimination in every other state and the
difficulty to apportion income between resident and non-
resident among others. The Department of Law (DOL) alerted
DOR that it did not have the in-house expertise to draft
the updated language. He subsequently issued a RFP (request
for proposal) that was awarded to Prof. Pomp in the amount
of $85 thousand to draft an income tax bill. He qualified
that during the process, the governor had not approved
introduction of the bill. When DOR learned that the House
Finance Committee was introducing its own income tax bill
DOR offered the language on the "structure" of the tax and
technical language to the committee. He clarified that
Prof. Pomp contributed the tax structure and technical
language but the tax tables, personal exemption, and amount
of revenue was directed by the Co-Chairs of House Finance
in the committee substitute (CS) version. He communicated
that Prof. Pomp completed the contract but would be
available to testify although he was not a trust expert. He
clarified that he was an expert on state and local
taxation. The question on how trusts were taxed was
"technical and complex." He believed it would be beneficial
to the committee to hear how the bill was structured in
regards to trusts but did not know whether Prof. Pomp was
the appropriate person.
Representative Pruitt asked where the money had come from
to pay for the contract. Mr. Alper replied that the money
had come from the Tax Division's general fund (GF) budget
due to the hiring freeze. Representative Pruitt asked
whether the division followed the normal procurement
process and why Prof. Pomp was chosen. Mr. Alper delineated
that the money was transferred through an RSA to DOL who
"headed up the contract" due to its legal procurement
expertise through a typical RFP process. He did not know
the specific criteria DOL employed. Representative Pruitt
asked whether the governor had intended to introduce income
tax legislation if one had not been offered by the
legislature. Mr. Alper replied that the issue was left
undecided and his goal was to be prepared with a "good"
bill containing attention to technical details that could
be implemented and was enforceable. He did not know the
governor's intention regarding introducing an income tax
bill.
1:49:31 PM
Representative Pruitt spoke to the $85 thousand contract.
He believed that the cost was too high to spend on
something that may or may not have action taken. He
wondered how often DOR engaged in similar contracts for
things that might not come to fruition and what the costs
were. Mr. Alper did not have any specific example under his
two years as tax director. He noted that the contract was
the only outside contract the division funded. The division
discussed the need for "better income tax language" and the
contract seemed to be a "reasonable investment." He
emphasized that the department was not in the habit of
spending money on things that was not necessary. The tax
language contained in last year's bill was incomplete and
based on the repealed tax in 1979.
Vice-Chair Gara did not want members to think that Mr.
Alper attempted to conceal the information regarding the
contract. He shared that prior to session he asked Mr.
Alper whether the governor planned to introduce income tax
legislation. He emphasized that Mr. Alper had been
completely forthright about the contract. He asked whether
Mr. Alper would have provided the information about the
contract to other members of the committee if they had the
same conversation. Mr. Alper answered in the affirmative
and furthered that he spoke to "many people" prior to
session and it was well known that an outside contractor
was helping the division with tax language. Vice-Chair Gara
announced that he was a proponent of the state developing
its own income tax rates because using a percentage of
federal income tax prohibited the state from exempting the
Permanent Fund Dividends (PFD). He inquired whether an
exemption for the PFD was allowable if the state adopted a
percentage of federal income tax as a foundation for its
income tax. Mr. Alper replied that the bill could be
written however the legislature desired and that included a
deduction. He recognized that an income tax tied to federal
liability was vulnerable to changes in the federal tax
code. He deduced that if federal taxes were lowered,
Alaska's revenue from the income tax would be
simultaneously lowered. A tax based on gross income created
a more dependable and predictable revenue stream. Vice-
Chair Gara had not spoken to Prof. Pomp. He concluded
through his own analysis that a tax system tied to federal
liability created instability due to probable changes in
the tax code and felt that many others came to the same
conclusion without the help of an outside consultant.
1:53:50 PM
Mr. Alper agreed that a consultant was not needed to
recommend the type of tax; however, the bill was extremely
technical. He reiterated that DOL did not have the
expertise and requested outside council. He knew that the
state hired outside council for a variety of reason, mostly
for litigation but also for consulting reasons.
Representative Wilson clarified that she had asked about
the consultant because she wanted answers that the
committee had not yet received and believed her job was to
find the answers and had no other motive for the request.
She asked when the contract ended. Mr. Alper did not know
if there was a specific end date or whether Prof. Pomp had
been paid; the deliverable was the draft bill he produced
and he "deserved to be paid." Representative Wilson agreed
that Prof. Pomp should have been paid for his work. She
asked when the "deliverable had been delivered." Mr. Alper
replied that an early draft was received in December and a
final draft had been delivered in January. He communicated
that DOL used the draft to write a final bill version and
the bill was received by DOR in the later part of January.
Representative Wilson spoke to the cost of the contract.
She spoke to deductions and exemptions that would be given
to residents versus non-residents and heard from previous
testimony that taxing them differently was prohibited. She
asked whether Prof. Pomp had any information on how a
residential versus non-resident tax would be treated. Mr.
Alper explained that the technically complex provisions in
an income tax bill was properly apportioning in-state
versus out-of-state income and Prof. Pomp devised tightly
defined language that allowed the duality. He specified
that a few provisions in the bill favored a resident over a
non-resident. The $4 thousand personal exemption was
essentially prorated for a non-resident and was only able
to exempt the portion of income earned in Alaska. He
exemplified an individual non-resident with a seasonal
business in Alaska earning $50 thousand and another
business in a different state earning $200 thousand
totaling $250,000 in income. The tax payer would pay income
tax from the $250 thousand bracket but only 20 percent of
the tax, since only 20 percent of total income was earned
in the state. He noted that the pro rata was a small
benefit but was a way to favor the Alaskan over the non-
resident.
1:59:01 PM
Representative Wilson was uncomfortable that the committee
members had been asked to provide amendments by the
following day. She did not have the expertise to write an
amendment. She hoped that Prof. Pomp would be able to
answer some of the member's questions. She did not want the
bill to have consequences in the future that were
unintended. Co-Chair Foster noted that the committee would
take an "at ease" later in the meeting to determine when it
could hear from Prof. Pomp.
Representative Pruitt asserted that expert help for answers
to questions was previously requested. He expressed concern
that Prof. Pomp was not mentioned to the committee before.
He was frustrated by the issue. He thought some time may
have been wasted by not retaining Prof. Pomp to testify and
answer questions before the committee.
Co-Chair Seaton recounted that trust attorneys had
testified and expressed concern about problematic language
in the bill. The co-chairs were taking the concerns into
account. He was working with the attorneys on getting
answers as best as possible and would put forward
amendments. He presumed Representative Pruitt and
Representative Wilson were also speaking to trust attorneys
to get opinions about the bill's language. He maintained
that inquiry was part of the committee process and the
reason the trust attorneys were invited to testify to
answer all of the committee member's questions.
2:04:13 PM
Representative Pruitt appreciated the response; however, he
remarked that Mr. Alper had just stated there was no one in
Alaska with the expertise on trusts. He reiterated his
frustration that the person who wrote aspects of the bill
was not available to testify before the committee.
Vice-Chair Gara knew the comments were not meant as
accusations but the "rhetoric" bothered him. He wanted to
clarify the record. He stated that the suggestion that
Prof. Pomp "wrote the bill was patently untrue." He relayed
that legislators were not "helpless" when dealing with
legislation and could undertake their own research and
utilize resources. He noted his own personal attempts to
find answers for the trust issues.
Representative Pruitt clarified that he was not making
accusations.
2:07:01 PM
Mr. Alper moved on to address the fiscal notes. He noted
that four were from DOR. He turned to the new DOR fiscal
note allocated to the tax division showing income tax
revenues only. The fiscal note reported that the state
would raise over $700 million each year. He delineated that
the first full year of income tax collected was FY 20. The
income tax provisions in the bill had an effective date of
January 1, 2019. The first withholdings from paychecks was
subsequent to January 2019; hence, the figure for FY 2019
represented half a year's worth of revenue. The first
actual tax filings would not happen until April 15, 2020.
Mr. Alper explained the capital costs reported in the
fiscal note analysis of $14 million; 2 percent of one
year's amount of projected revenues. The division would
embark on four short term projects if the legislation
passed. A very "aggressive, lengthy, and extensive"
regulations writing project was necessary to clean up
details and address specifics and "gray areas." He expected
that outside contractors would be required. A database
would need to be built in order to collect and administer
the tax costing approximately $10 million. He highlighted
that DOR recently completed a $25 million contract to
rebuild the tax management system. He noted that the
results were very successful; the department expected to
employ the same contractor for the income tax database. The
department would provide outreach to the public about the
tax and how it was structured. Finally, the division would
also need to hire new staff to administer the tax. The
division estimated that about 60 individuals were required
to administer the tax by the time it was fully implemented
in FY 2020. He delineated that the department currently
operated 25 tax programs. The largest was the corporate
income tax that had 18 thousand tax payers; most were S
corporations filing zero tax returns. The income tax would
add 400 thousand Alaskan households as "customers" to the
division's customer base. The division would need auditors,
technical expertise, appeals officers, programmers,
accounting technicians, and supervisors. The fiscal note
contained a table listing the staff needs on page 4. The
ramp up would be gradual. He included four staff in the FY
18 budget for a leadership team; supervisor, technical
expert, programmer, and regulations staff.
2:13:16 PM
Mr. Alper shared the cost of the staff was a little over
$6.4 million per year plus the associated costs of
personnel. He reported that currently the division had 110
employees and an income tax would increase the staff and
costs half again as much as current expenses. He remarked
that implementing the tax took substantial effort, but the
department was up for the challenge. Mr. Alper continued
that the analysis on pages 2 through 4 described the
specific provisions in the bill such as tax brackets and
withholding in "plain English." He cited the two tables
contained in the analysis: one summarized the revenue and
the other summarized the anticipated staffing needs.
Representative Wilson asked whether any analysis had been
done on the cost to businesses to fill out the paperwork.
Mr. Alper deferred the question to his colleague. He
remarked that businesses were already doing the work at the
federal level and felt that the state's forms did not
create an extra burden.
2:16:12 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, expected that the largest cost to
businesses was related to the withholding tax that was
specific to the state. The other forms required would be
the same forms the IRS received, therefore the
administration did not anticipate additional costs to
businesses for other forms. Representative Wilson
ascertained that businesses needed to purchase some type of
programming in order to comply. She pointed to the $14
million cost for the state and assumed the tax would add
costs to businesses too. Mr. Alper answered that most small
business typically used a commercially available computer
program like Quick Books that automatically downloaded a
state's updated tax tables. He offered that the division
would ensure the national accounting software programs
internalized the Alaska's tax tables. A business owner
would be able to rely on a program to withhold the income
tax from their employees and the business could send their
monthly reports and checks.
Representative Wilson contended that there would be costs
to businesses and wanted to determine the amount. She
listed S corporations, trusts, estates, and individual tax
payers and wanted a breakdown of the amount of revenue that
would be generated from each group. She requested better
analysis of where the funds would be coming from. She
wondered whether certain groups would be "hit" more than
others. Mr. Alper clarified that "all of the revenue would
be coming from individuals." He voiced that earnings from
the various entities she listed were passed through to the
owners who filed as an individual tax payer. He indicated
that the tax division was not aware of the source of the
income but obtained information on the complete set of IRS
(Internal Revenue Service) data for the population of
Alaska, the various income levels, and how many types (e.g.
filing jointly) of filers there were. The IRS did not break
out the type of income. He reiterated that the tax was
specifically for individuals and the various sorts of
income they earn.
2:20:54 PM
Co-Chair Seaton clarified that the CS included another
category of non-grantor resident trusts that would file a
distribution if one was retained. Grants or trusts were
also attributed to the individual.
Representative Wilson asked whether any analysis had been
done related to the loss of jobs in the private sector in
the last 2 prior years. Mr. Alper answered that the income
tax was modeled using a complete set of calendar year 2014
IRS data. The 2015 data had recently become available and
the model would be updated. The division was working on
breaking down the tax liability in fifths. He explained
that the model was straight forward and was based on types
of filer and the various income levels. The calculation
then used the tax tables and made certain estimates on
averages, added up the data to determine the total revenue
impact. Representative Wilson stated she understood how to
do taxes. She noted that the information was based on data
from 2014. She believed that the economic impact from low
oil prices impacted the economy and job losses in 2016. She
surmised that the fiscal notes did not reflect the current
level of unemployment. She believed the committee received
information based on older data and was not accurate. She
advised integrating DOL statistics on employment data into
the forecasted revenue projections for a better estimate
than what was included in the fiscal notes. Mr. Alper
stressed that it was not possible to know exactly what the
numbers were in the future and the figures reflected in
2020 were forecasted.
Mr. Spanos relayed that the division's economists were
listening during the previous meetings to Representative
Wilson's questions and confirmed that the fiscal notes did
factor in the Department of Labor and Workforce Development
(DOL) statistics for the current years, but not
specifically job losses on the North Slope. However, the
DOL data did include job losses in the entire state. He
elucidated that the economists determined that the total
job loss figure was a better indicator on what the total
revenue was versus just looking at the North Slope numbers.
Representative Thompson stated that the fiscal note
analysis was based on Montana's tax agency to determine the
number of new staff that would be necessary in Alaska. He
asked how the state could do the work with half as many
staff as Montana had. He wondered who would be auditing the
companies to ensure they properly withheld taxes. He
questioned the employment numbers of 60 staff by 2020.
2:27:31 PM
Mr. Alper replied that the question was fair. He explained
the rationale used to calculate the fiscal note. He
indicated that the department had rounded down a bit due to
the fact that Montana had a specific department built
around administering an income tax. Alaska's tax division
was embedded in a department that already employed
administrative, IT (information technology), accounting,
and etc. staff. He presumed the increase could be added on
top of a "pretty robust framework" of employees that
already existed within the tax division and the division
could administer the tax for less. He deemed that the
information about the number of staff precisely necessary
was not yet known and was impossible to determine
accurately before any tax was collected. He communicated
that the costs embedded in the bill divided by the
anticipated revenue equaled about 1.5 percent of expected
revenue. He opined that 1.5 percent on startup costs and
staffing "was a pretty good overhead" figure.
Representative Thompson referred to specialized tax
accounting software that would need to be reprogrammed. He
asked whether tax accountants and tax preparers were
consulted about the costs to reprogram their software to
accommodate a state income tax. Mr. Spanos replied that the
administration had not specifically reached out to those
companies. He knew that many of the accounting firms used
either proprietary software or customized off the shelf
software that would need to be reprogrammed. The department
understood there would be a cost for the software but
anticipated a new stream of revenue for tax accountants due
to the tax. He shared the concern about administering an
income tax without enough staff. He consulted with Vermont
that had a similar population to Alaska; Vermont officials
thought the number was too high. He delineated that Vermont
had a more complicated tax structure than the one proposed
and their tax officials recommended that fewer than 60
employees were necessary to administer Alaska's income tax.
He envisioned hiring a base staff along with some outside
expertise to guide the division until it was fully staffed.
Representative Thompson asked how much more money it would
cost an individual to have their taxes prepared. He
stressed that a large number of people had their taxes done
by a Certified Public Accountant (CPA) or accounting firm.
Mr. Spanos replied that off-the-shelf systems cost about
the same in many states. An additional $10 to $20
electronic filing fee was typically added on or embedded in
the cost of the software for state's that prohibited the
filing fee. He remarked that business accounting typically
costs more than individual tax preparation.
2:33:07 PM
Representative Pruitt asked about the staffing needs listed
on the fiscal note. He referenced the money spent on the
contractor utilized from DOR vacancies. He wondered whether
the funding request was "above and beyond" the savings from
the vacancy rates and other additional funding. Mr. Alper
responded that the vacancy rates were "relatively high" in
the current year due to the partial hiring freeze, which
slowed the recruitment process. The contract cost $85
thousand and the tax division's budget was $15 million. The
division was losing 8 positions in the FY 18 budget. The
staffing request included all new positions. He hoped that
current DOR employees losing their current positions were
able to fill some of the 60 new positions. He spoke to the
benefits of experienced workers. He pointed to page 4 of
the fiscal note that contained a chart of necessary
positions and drew attention to imaging operators and
office assistants. He explained that the positions were
half-year positions that scanned paper tax returns and did
data entry. The fiscal note assumed that 80 percent to 85
percent of Alaskans filed electronically. Representative
Pruitt inquired whether any additional money left over in
FY 19 would be returned to GF or used for other things in
the division. Mr. Alper responded that he was prudent by
nature and would lapse money back into the general fund.
2:37:12 PM
Vice-Chair Gara related, in response to the previous
discussion, that according to the Institute of Taxation and
Economic Policy (ITEP) from a March 24, 2017 memo (copy on
file) approximately 40 percent of Alaska's lowest wage
earners would pay roughly half of one percent of their
total income and the top 1 percent would pay about 3
percent of their income under the CS version of the
legislation.
Representative Wilson emphasized that she requested numbers
rather than percentages.
Mr. Alper continued to address the fiscal notes. He
reviewed the new Alaska Permanent Fund Corporation (APFC)
zero fiscal note allocated to its Investment Management
Fees. He noted that the bill would not affect its
investment policy therefore the fee structure would remain
the same. Mr. Alper explained that the new PFD fiscal note
reported the amount for dividends in FY 18 under the bill
in the amount of $833 million. He reported that the
legislation altered the existing dividend calculation. In
FY 18 and FY 19, a certain percentage of the Earnings
Reserve Account (ERA) would be drawn and one-third would be
dedicated to dividend distribution. Alternatively, a
minimum dividend amount was set at $1250 if the calculation
was below that amount. Subsequently, beginning in 2020, the
draw was reduced to a percent of market value (POMV).
Representative Wilson pointed to the PFD funds
appropriations listed on the fiscal note. She noted the
$881 million in FY 19 and the drop to $874 in FY 20 and
began to increase in the out-years. She wondered why the
amount fluctuated. Mr. Alper was uncertain why the drop off
occurred and deferred the question.
2:42:27 PM
Co-Chair Seaton referred to the chart on the second page.
The percent of market value draw dropped from 5.25 percent
to 5 percent in FY 20. The drop also reflected that a full
year of income tax was not expected until FY 21.
Representative Wilson asked why there was such a large
disparity from FY 20 to FY 21. Mr. Alper replied that the
state anticipated average earnings on the Permanent Fund of
6.95 percent per year. The larger figure represented the
inherent growth or the "underlying real growth of the
fund." Additionally, a POMV "allowed for self-inflation
proofing of the fund" along with the royalties from oil
production. Representative Wilson thought that the stock
market would be performing well for several years and
expected different "average" figures. Mr. Alper explained
that the legislation provided a larger dividend than what
was included in the governor's budget. The fiscal note
shows an additional $181 million appropriation over the
$652 million included in the governor's request to total
$833 million. The $652 million included in the Governor's
budget covered a dividend of $1000. The $181 million in the
"FY18 Appropriation Requested" column is the additional
amount needed to cover a dividend of $1,250 as proposed by
this legislation.
2:45:35 PM
Mr. Alper moved to the new fiscal note from Permanent Fund
ERA Appropriations allocated to the General Fund. He
offered that the fiscal note reflected the 5.25 percent
POMV amount decreasing to 5 percent in FY 20. In FY 18 the
amount was $2.526 billion and reflected the full draw from
the ERA. The amount was split between two-thirds
appropriated to GF and one-third appropriated to the PFD.
The amount remaining for GF was $181 million. He noted the
small decrease when the POMV dipped to 5 percent in FY 20
to $2.650 billion from $2.669 billion in FY 2019.
Representative Wilson asked how the number would compare if
the bill used a "fifty/fifty" split for the complete draw
from the ERA in FY 19 and only realized earnings were taken
out. Mr. Alper answered that he knew of two different 50/50
bills. The bill utilizing a POMV was the exact same number
but with a different split. He expounded that he did not
remember the number for the one tied to using 50 percent of
the "historic lookback of statutory net earnings." He
offered to provide the information upon Representative
Wilson's request.
2:49:36 PM
Mr. Alper addressed the new Various (for fiscal notes only)
fiscal note allocated to All Branches. He pointed to the
analysis relating to the transfer of "Other" funds to GF
and noted the $54.9 million figure in FY 18 and $62.2
million in FY 19. He explained that the bill contained a
provision that changed certain deposits from mineral
royalty from new oil to the corpus of the PF. The fiscal
note reflected the reduction of royalty deposits to the
permanent fund to the constitutionally mandated 25 percent
with the remainder deposited into GF. The provision meant
that an additional $55 million in additional GF revenue the
following year, which would grow to $75.3 million by FY 23.
He moved to the new Department of Administration fiscal
note allocated to the Office of Administrative Hearings
(OAH) that handled tax appeals. He reported that the
allocation was a duplication of funding from the DOR fiscal
note. The fiscal note changed the funding source from
general funds to interagency receipts. He elucidated that
the OAH would attain jurisdiction over appeals from the
final tax division's informal appeals process as well as
other disputes relating to the new tax. The OAH estimated
that additional staff was necessary. He emphasized that the
cost was covered in the Tax Division's fiscal note and DOA
would send DOR an interagency bill for its services.
Representative Wilson referred to page 2 of the fiscal note
analysis and posed a question regarding trusts. She stated
that a trust was "almost like a person;" assets and
"property and everything else" comprised a trust "entity."
She ascertained that if the trust made money in the state,
regardless of where the trustee lived, the trust would be
taxed under the bill. She asked whether she was correct.
Mr. Alper responded that it was his understanding that if
the earnings were derived from an Alaskan source they would
be taxed.
Mr. Spanos agreed with Mr. Alper's answer.
Co-Chair Seaton clarified that "grantor trusts," which
involved a person as the beneficiary, passed all assets to
an individual and were taxed as an individual. The only
thing under discussion was non-grantor trusts.
Representative Wilson opined that any money removed from
the trust should be taxed versus taxing any earnings the
trust made. She referenced the 400,000 new tax payers and
inquired about the origin of the number. Mr. Alper answered
that the figure was the estimate of the number of
households in the state.
2:55:34 PM
Representative Wilson asked for a breakdown of the number
of out-of-state households represented in the 400,000. Mr.
Spanos replied that an estimated 13 percent of the filers
would be non-resident. Mr. Alper detailed that the number
of Alaskans filing federal taxes were 128,000 joint filers,
184 thousand single filers, 37 thousand head of household
filers and 9 thousand "other" filers adding up to 358,000
income tax filers in Alaska. He furthered that non-
residents were added to total 400,000. He acknowledged that
the figure was a rough estimate, but believed it was
"reasonable." Representative Wilson asked how many of the
42,000 out-of-state were seasonal workers or employed full-
time by the state. Mr. Alper deferred the answer to DOL
data. Representative Wilson deduced that not all of the
358,000 Alaskan taxpayers worked full-time. Mr. Alper
clarified that the tax filers from the 358,000 data he
cited identified themselves as Alaska residents.
Representative Wilson surmised that trusts, estates, and
all S corporations was not included in the 400,000 number.
Mr. Alper agreed with the statement.
Vice-Chair Gara voiced that it would be desirable to "tax
as many out-of-state individuals as possible" within the
constraints of statute. He asked whether a person from
another state would pay taxes on a trust managed in Alaska.
Mr. Spanos answered that the bill carved out an exemption.
He deemed that the intent of the original drafter was to
capture income from trusts to the constitutional limits
that included the corpus of the trust. Assets that would
not be taxed were ones managed from Alaska but were trading
in another state. He added that the amount of the trust's
corpus that was managed from an Alaskan bank would be
taxed.
3:01:06 PM
Representative Thompson asked how educational savings from
PFDs were factored in to the income tax. Mr. Spanos thought
that it might be taxed if the account was part of a non-
grantor trust, but an educational savings account was
"potentially exempt." Representative Thompson spoke to
putting half of the PFD into the college savings account
and wondered what was taxed. Mr. Alper replied that if half
of the dividend was deposited into the educational account
then the amount of the dividend would be cut in half.
Representative Wilson surmised that the interest made off
of an educational savings account would be taxed as soon as
a child was ready to go to school and the same would happen
when it was removed from a trust. Mr. Spanos replied that
whether the interest was taxed depended on whether it was
taxable at the federal level. Therefore, if it was subject
to a federal tax it would be taxed in Alaska and if a
distribution was made from a non-grantor trust, the trust
received a deduction.
Vice-Chair Gara stated that the dividend was not taxed
under the bill, therefore if a dividend was placed into a
trust, the dividend amount would not be taxed. He asked
whether his statement was accurate. Mr. Spanos replied in
the affirmative. He mentioned that only the interest earned
on the dividend would be taxed.
Representative Pruitt remarked that the discussion bounced
between two different topics, 529 accounts and trusts,
which were separate and strayed away from the original
question. He hoped to obtain a correct answer.
Mr. Alper turned to the new zero DOA fiscal note allocated
to the Violent Crimes Compensation Board (VCCB). He
delineated that the VCCB currently received an annual
appropriation from the dividend fund based in part by the
number of individuals who were ineligible to receive a
permanent fund dividend because they were incarcerated
felons.
3:07:16 PM
KATE HUDSON, EXECUTIVE DIRECTOR, VIOLENT CRIMES
COMPENSATION BOARD, JUNEAU (via teleconference), spoke to
the zero fiscal note. She explained that the board received
the dividend appropriation calculated annually from the
Office of Management and Budget (OMB) and the remaining
portion went to the Department of Corrections (DOC). She
understood the current funding method would continue and
any shortfall due to lowering the PFD payout would be
covered through DOC using GF. She voiced that the board's
state funding was entirely derived from the criminal fund
and did not receive any GF.
Vice-Chair Gara asked whether the zero fiscal note was not
affected by the amount of the dividend and would remain
zero. Ms. Hudson answered in the affirmative. The board's
budget had been flat for the past couple of years and may
take a reduction in the current year.
Mr. Alper addressed the new fiscal note from DOC allocated
to Physical Health Care. He deferred to the department for
the explanation.
APRIL WILKERSON, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF CORRECTIONS, explicated that PFD
Criminal Funds were a portion of the funds that supported
the physical healthcare component within the department.
The funds were calculated based on the number of ineligible
applicants who would not receive a PFD due to a felony
conviction and incarceration. The department anticipated
fund changes in FY 18 due to the reduction in the FY 16
PFD. The criminal funds allocated were reduced by $9.1
million and were proposed from another fund source; the
Alaska Capital Income Fund.
3:12:35 PM
Vice-Chair Gara did not understand the fiscal note. He
noted that if the bill passed, the dividend in the current
year would be larger than the past year. He wondered why an
increase was necessary. Ms. Wilkerson responded that the
calculation was a based on the previous fiscal year and the
amount allocated was a year behind. She offered that the FY
18 budget was based on the $1,022 PFD that was reduced from
$2,072 and reduced the PFD amount available by $9.1
million. She furthered that an increase in the PFD to $1250
anticipated in FY 19 reflected an increase into the
criminal fund by $2.8 million and reduced the amount
necessary to $6.289 million that would carry over to FY 20.
She added that the PFD was anticipated to increase further
in FY 21 by $1.3 million and further reducing the Alaska
Capital Fund request to $4.95 million and in FY 22. She
anticipated close to a $400 thousand increase in the PFD
and $410 thousand in FY 23 and FY 25.
Representative Wilson asked whether the Alaska Capital Fund
source had been the same in past years. Ms. Wilkerson
replied in the negative. She stated that in previous years
the department had used GF. Representative Wilson asked
about the purpose of moving the money from one fund to
another when it was not the original purpose of the fund.
Ms. Wilkerson did not know the answer and would provide the
answer for why the funding source was changed when she
investigated the issue. Representative Wilson was concerned
that if the funding remained in the 1171 fund source code
it counted as an undesignated general fund (UGF) spend. She
added that if the funding changed to the 1197 fund source
code for the Alaska Capital Fund the appropriation appeared
as designated general fund (DGF) but was still being
utilized for the original purpose; healthcare. Ms.
Wilkerson replied in the affirmative. Representative Wilson
thought that the funding source change "looked like a shell
game." She thought that the fiscal note looked like a
reduction in UGF but state money was still being spent.
3:16:13 PM
Representative Pruitt asked whether the state filed for
PFD's for felons in order to obtain the money. Ms.
Wilkerson replied that typically DOC, the Department of
Public Safety and the Permanent Fund Dividend Division
collaborated and identified the number of incarcerated
individuals who were ineligible. Representative Pruitt
believed there was about $91 million in the Alaska Capital
Fund account and asked how much was appropriated to the
fund in the current fiscal year. Ms. Wilkerson replied that
she did not know. Representative Pruitt stated that
typically the fund had been used for capital projects. He
wondered why the decision was made to cover the shortfall
with the fund. He stated that it appeared that Capital fund
funding source was utilized instead of UGF to avoid
"growing the budget." He disagreed with using Capital
Budget funds since the Capital budget was drastically
reduced. Ms. Wilkerson replied that she was not the person
to speak to the decision. She would have to provide the
answer to the committee at a later date. Representative
Pruitt understood why the administration did not want the
funds to be classified as UGF, but warned that the
appropriation significantly reduced available capital
budget funds.
3:19:23 PM
Representative Thompson noted that in regards to
incarcerated individuals PFD's, some of the funding was for
a prisoner's health care and a portion of the funds were
appropriated to the Violent Crimes Compensation Board. He
asked whether there was a formula that specified how much
went to each use. Ms. Wilkerson answered that the number of
ineligible individuals identified was calculated based on
the amount of the PFD to determine the amount available.
She noted that $1.4 million was appropriated to the VCCB.
Representative Thompson thought he had recently heard that
the VCCB board's fund presently contained $20 million.
Ms. Hudson clarified that the VCCB fund did not contain $20
million. Representative Thompson remarked that he did not
have any direct knowledge of the actual amount.
Co-Chair Seaton offered that the $9.103.6 million had been
included in the governor's budget from the Alaska Capital
Fund source. He indicated that during the operating budget
process he had requested that committee members look for GF
instead of UGF and make comparisons in order to avoid
"crossovers" when working on the budget. He commented that
following GF in the budget included both sources of funds
and eliminated any confusions or problems with fund
sources. He relayed that the item would be taken up in
conference committee on the operating budget item because
the Senate funded the item through UGF.
Representative Wilson understood that the PFD Criminal Fund
was included under GF and the Alaska Capital Fund was in
the "other" fund category and was not considered UGF or
DGF, which made it appear that GF was decreased in the
budget, "when in reality it was a fund switch."
Representative Pruitt agreed with Co-Chair Seaton and
disagreed with the focus on UGF during the prior fiscal
year. He reminded the committee that much of the money in
the Alaska Capital Fund was "swept" into the fund through
reappropriation money by the Senate a "couple years ago".
He spoke to the sustainability of drawing the criminal fund
amount out of the account without knowing how much was
added every year.
3:24:10 PM
Mr. Alper relayed that the sweep of the funds into the
Alaska Capital Fund was an unusual circumstance. He
indicated that typically each year money was deposited and
expended in the same year. He referred to the Amerada Hess
lawsuit from the 1990s and instructed the committee that
much of the revenue deposited into the fund was from the
Amerada Hess lawsuit. He explained that the judgement from
a dispute over royalties stipulated that a portion of
Permanent Fund earnings were excluded from the dividend
calculation in the amount of approximately $23 million per
year. The Alaska Capital Fund received a total of roughly
$40 million per year with additional earnings from other
state funds.
Co-Chair Seaton asked for the administration's position on
the bill.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
voiced that the administration believed a draw limit was an
important component to include in the bill and that a 5.25
percent draw was sustainable over time without the
reduction to 5 percent. The administration disagreed with
the increase to a $1,200 dividend and deemed that the
increase placed additional burden on the budget that would
have to be achieved with cuts; the administration was more
comfortable with a $1,000 PFD.
HB 115 was HEARD and HELD in committee for further
consideration.
HOUSE BILL NO. 137
"An Act redesignating the Alaska State Council on the
Arts as a public corporation and governmental
instrumentality of the state; defining the powers and
duties of the Alaska State Council on the Arts;
providing exemptions from certain statutes for the
Alaska State Council on the Arts; making conforming
amendments; and providing for an effective date."
3:27:59 PM
KRISTIN KRANENDONK, STAFF, REPRESENTATIVE HARRIET DRUMMOND,
read from prepared remarks.
House Bill 137 quasi-privatizes the Alaska State
Council on the Arts (ASCA) by restructuring it as a
public corporation in order to help the ASCA to
continue its work with self-employed Alaskan artists
and art businesses during these challenging fiscal
times. This new status will allow the ASCA to increase
its ability to leverage funds from non-governmental
contributors and better adapt to the shifting economic
future.
This bill adds Alaska State Council on the Arts
employees to exempt employee status. Currently the
ASCA has 4 full time employees, and Rep Drummond's
office reached out to those employees and they were
all supportive of this change. This section makes
those employees exempt from the State Personnel Act.
The bill adds artists' submission made in response to
an inquiry initiated by the ASCA to the list of
records that are exempt from public inspection. This
does not include artists awarded a commission however.
The bill adds appropriate board member language needed
to create "trustees" since the corporation will be
governed by a board of trustees. And it replaces
language that entitles trustees to be reimbursed for
travel expenses at the same rate as members of other
state boards.
HB137 also adds "literary arts" as a field represented
within the board and replaces "educational" objectives
with "strategic" objections as it relates to the
councils ability to enter into contracts.
Other changes include exemption from the State
Procurement Code, while still providing for formal,
appropriate procurement protocols for ASCA.
Restructuring will keep ASCA's operating budget under
the Executive Budget Act for openness and
transparency. Transition language will allow ASCA's
advisory committees, and the public process will
remain in place as ASCA administers grants, programs,
and services.
Finally there is transition language in the bill that
will also allow Council members to remain on the board
until their term is over and allow current employees
to remain on staff.
The effective date for this legislation is July 1,
2017.
The State Council on the Arts wants to ensure that it
is in a position to expand its important work to serve
all Alaskans. Private funders across the nation are
increasingly approaching ASCA to offer support.
Carefully considered restructuring efforts have the
potential to allow the Council to advance the
opportunity to grow the development base, as well as
reduce its reliance on State funds.
HB137 will improve the ability of the Council to
leverage non-state funding and represents a real
opportunity to realign ASCA to better perform in the
environment which exists in Alaska today.
3:32:13 PM
BEN BROWN, CHAIR, ALASKA STATE COUNCIL ON THE ARTS, agreed
with Ms. Kranendonk's remarks. He elaborated that the bill
represented over a year's efforts by all of the members of
the council and staff, and partners at Rasmussen Foundation
and other foundation partners. He believed the legislation
was carefully crafted.
Co-Chair Foster OPENED public testimony.
ALICE BIOFF, KAWERAK, INC., NOME (via teleconference),
spoke in support of the legislation. She read from a
prepared statement:
Dear Honorable Committee Chair and Committee members,
My name is Alice Bioff, resident of Nome, Alaska,
currently employed at Kawerak, Inc. and an Alaska
State Council on the Arts (ASCA) council member. Thank
you all for the opportunity to testify in support of
HB137. I am testifying today in my capacity as an ASCA
council member. I am a tribal member of the Native
Village of Koyuk, and grew up there and in Nome. My
family and I have lived in Nome for the last 17 years.
For much of that time, I have been employed by
Kawerak, Inc., the regional Native non-profit
consortium of tribes for the Bering Strait region, as
a Business Planning Specialist.
Through our work here at Kawerak, I am honored and
privileged to work with artist entrepreneurs within
our communities. We provide direct technical
assistance offering tools and resources to assist
artists continue their work so that they can sustain
themselves, their families and their communities. It
is through this work that I have seen firsthand how
important it is for these artists who live in
communities with very few resources and
infrastructure, to grow their businesses through
opportunities such as those that become available
through ASCA and others.
Artist Entrepreneurs are economic development drivers
in their communities and the Alaska State Council on
the Arts supports these communities through their work
and advocacy. With their partnerships, resources and
programs, we see a bright future and growth
opportunity to support all artists across the State.
Through the restructuring initiative, we see ASCA
services continued and strengthened to support the
artists through improved ability to react to funding
opportunities and better represent, support and
advance the artists by offering the tools and services
needed to strengthen an already existing and important
economy. This is critical to strengthening and
sustaining our rural communities in this fiscally
challenging time.
HB137 streamlines the process ASCA will use to present
opportunities to artists all over Alaska, including
those artists we have worked with for years here in
the Bering Strait region. From my perspective, this
will be a great benefit for all artists including
those in rural Alaska.
3:36:09 PM
ANDREA NOBLE-PELANT, EXECUTIVE DIRECTOR, ALASKA STATE
COUNCIL ON THE ARTS, EAGLE RIVER (via teleconference),
testified in support of the legislation. She shared that
she was a council member for 11 years. She offered that the
council's purpose was to support and advance Alaska's
creative industries and its cultural infrastructure. She
believed a thriving arts community created a ripple effect
around the state and connected the population. The council
was in existence for 51 years and was ready for
organizational change. She noted that Alaska's creative
industries was growing due to targeted public and private
investment in the state's cultural infrastructure over the
past 10 years, experiencing rapid growth in grants
programs, and public private partnerships. The council
worked on national and international levels on projects,
initiatives, and policies through arts organizations. In
addition, the council provided professional development
throughout the state. She commented that the bill enabled
the council's staff to manage projects in a timely manner
and increased its work across sectors such as
transportation, healthcare, economic development, and
tourism. She mentioned that the council's mission evolved
to "expand access to arts experiences;" art as a process
versus art as a product. The council's programs reached
military service members for treatment of PTSD (Post
Traumatic Stress Disorder) and incarcerated individuals
learning how to create art for post-release success. The
council assisted teachers who wanted to live and teach in
rural communities and provided children and youth
opportunities to learn through arts and culture. She
related that HB 137 allowed the council to be responsive in
implementing projects that affected its performance and the
ability to seek and secure private funding. She emphasized
that the council worked with partners and all of the
revenues from the funders was funneled back into Alaskan
communities in the form of grants, programs, and resources.
3:40:08 PM
Ms. Noble-Pelant provided the list of partners including
the Rasmussen Foundation, the Alaska Arts and Culture
Foundation, Atwood Foundation, National Endowment for the
Arts, Margaret A Cargill Philanthropy, the SERI Foundation,
SeaAlaska Heritage Institute, Alaska Humanities Forum,
Western States Arts Federation, and the American for the
Arts.
Co-Chair Foster CLOSED public testimony.
Representative Wilson asked about required matching funds.
She asked for evidence on whether matching funds had to be
GF. Mr. Brown answered in the affirmative and emphasized
that the provision was laid out in federal code. He termed
it as "black letter law." He relayed that the state of
Kanas eliminated their state match and ultimately lost
their entire federal grant. He reported that the council
discussed ways to increase its earned income that qualified
as a state match. He exemplified a license plate bill from
the previous session that included a provision for the arts
license plates. The council currently had a design contest
for Alaskans to design license plates and then sell them,
although he did not anticipate a large revenue stream from
the venture. However, it was an example of program receipts
that can offset the state matching funds. He maintained
that private match money will not work. Representative
Wilson had asked the question because she thought that some
additional federal dollars were available that the state
was not receiving. Mr. Brown replied that the partnership
agreement was for a three-year period and the amount was
determined by the National Endowment for the Arts. In
addition, the council sought merit-based competitive funds.
He specified that programs like Poetry Out Loud and
Creative Forces did not require matching funds. He assured
the committee that the council had done very well in
attaining funding of all types and that the council "would
never leave a federal dollar on the table."
3:44:47 PM
Representative Pruitt asked whether the council was able to
utilize private funds to receive more federal funds. Mr.
Brown responded that over half of the council's budget was
derived from private foundation money and the rest was
state appropriation and NEA match. Any private money was
used over and above the funding to support its mission.
Representative Kawasaki asked whether the council was at
the maximum federal match. Mr. Brown answered that the
council was at "the right amount." He elucidated that some
states appropriated more than necessary. Representative
Kawasaki asked for verification that the bill would not
jeopardize any of the National Endowment for the Arts
match. Mr. Brown replied that the funds were not in
jeopardy and assured the committee that he confirmed the
matter with the NEA.
Representative Kawasaki asked whether it was typical or
necessary for states to have a council or committee to
receive NEA funding. Mr. Brown answered in the affirmative.
He elaborated that the state had to have some sort of
council containing public members and within the larger
mandate, states did it differently. Alaska would be the
first state with a quasi-private corporation. He reported
that other states were watching Alaska with interest in
adopting the idea. He thought that the bill could set a
positive example for the rest of country.
HB 137 was HEARD and HELD in committee for further
consideration.
Co-Chair Seaton addressed the schedule for the following
day.
ADJOURNMENT
3:49:05 PM
The meeting was adjourned at 3:49 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB137 Supporting Document Brown.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 137 |
| HB137 Letter of Support Kawerak.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 137 |
| HB137 Sectional 3.3.17.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 137 |
| HB137 Sponsor 3.3.17.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 137 |
| HB137 Supporting Document Alaska Public Media.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 137 |
| HB115 Supporting Document - Draw Limit Matrix CS SB 26 (3.29.17 DOR).pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 115 SB 26 |
| HB 115 Fiscal Note Packet.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 115 |
| HB 115 DOC Response to House Finance HB 115 Fiscal Note Questions.pdf |
HFIN 3/30/2017 1:30:00 PM |
HB 115 |