Legislature(2017 - 2018)HOUSE FINANCE 519
10/26/2017 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB4001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB4001 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
October 26, 2017
1:03 p.m.
FOURTH SPECIAL SESSION
1:03:10 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:03 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson (via teleconference)
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Sheldon Fisher, Commissioner, Department of Revenue;
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue.
PRESENT VIA TELECONFERENCE
Representative Tammie Wilson
SUMMARY
HB 4001 EMPLOYMENT TAX
HB 4001 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the meeting agenda.
HOUSE BILL NO. 4001
"An Act imposing a tax on wages and net earnings from
self-employment; relating to the administration and
enforcement of the wages and net earnings from self-
employment tax; and providing for an effective date."
1:04:24 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Capped Payroll
Tax - Bill Introduction HB 4001 by Governor Walker" dated
October 26, 2017 (copy on file). He pointed to the bill
title on slide 2 of the bill. He shared that it was partial
income tax. He moved to slide 4 of the legislation and
provided detail on unrestricted general funds (UGF) and
other projections. He referred to SB 26 that was in
conference committee and would still leave a shortfall of
$0.6 to $0.9 billion. He stated that HB 4001 was to
partially fill that gap.
1:08:09 PM
Mr. Alper moved to slide 5 and addressed that the primary
issue was a reduction in oil revenue. The slide contained a
chart showing UGF oil revenue, the GF budget and oil
surplus from 2010 to 2018. He turned to slide 6 and
discussed that it was the budget per capita adjusted for
inflation and population. Operating budget spending was
currently comparable to spending in the 1990s. The budget
had been cut substantially based on historic levels.
Representative Ortiz asked for a restatement of the
testimony related to inflation and population growth.
Mr. Alper replied that the chart on slide 6 reflected the
budget adjusted for inflation and population. The graph
captured all of the information he listed. He referred to
healthcare and pointed to the growth in healthcare cost in
light blue. The dark blue portion represented the overall
agency budgets (without health and education).
1:13:12 PM
Mr. Alper moved to slide 7 and discussed the Office of
Management and Budget (OMB) 10-year plan:
• Not a policy document- an extrapolation of current
trends
• Updated to include Preliminary Fall revenue forecast
• After the $300+ million increase from FY18-19,
subsequent years mainly reflect inflation plus known
actual liabilities (i.e. debt, retirement funding)
• Status Quo Budget increases from $4.7 billion to
$5.5 billion in FY2027 (+$800 million)
• UGF revenue increases from $2.0 billion to $2.8
billion in FY2027 (+$800 million)
Structural budget deficit is still $2.7 billion in
2027
Mr. Alper turned to slide 8, "OMB 10-year Plan":
• Apparent closing of budget gap in later forecast
years is primarily based on the expectation of
continuing steady Permanent Fund growth
o The SB26 models assume the overall fund
continues to grow due to indirect inflation
proofing, plus deposits of new royalties
o Annual sustainable "POMV" draw therefore
increases to $2.5 - $2.8 billion by FY2027
o Although the budget potentially comes into
balance in 2026, deficits before that date will
drive the CBRF to an unacceptably low level
Mr. Alper the overall fund would continue to grow with a 7
percent growth rate. Additionally, there were new deposits
made annually from royalties. The deficits were looking
smaller because the annual draw would go to $2.5 billion to
$2.8 billion by FY 27. Although the budget potentially
comes into balance in 2026, deficits before that date will
drive the CBRF to an unacceptably low level.
1:16:40 PM
Vice-Chair Gara asked whether slide 6 included all general
funds.
Mr. Alper replied that the slide included unrestricted
general fund (UGF). He remarked that designated general
funds (DGF) were "pretty much a zero sum operation."
Vice-Chair Gara stated that one of his concerns was that
the legislature had delayed revenue for so long that it
would either be necessary to go below the save
Constitutional Budget Reserve (CBR), and implemented tax
would take one year to implement.
Mr. Alper replied in the affirmative related to the tax
implementation. He agreed that the fiscal cliff was rapidly
approaching.
Vice-Chair Gara surmised that the administration would have
to propose over drawing from the Permanent Fund or use more
from the CBR than recommended.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
replied that a threshold should be maintained in the CBR
for safety measures. The options were cutting more or
taking more from the Permanent Fund Earnings Reserve
Account (ERA).
1:19:34 PM
Representative Kawasaki referred to slide 6 and challenged
the assertion that the budget deficit was $2.5 billion. He
referred to deferred maintenance and other costs.
Mr. Alper was not sure whether the correct way to refer to
the needs was "deficit," but he agreed there were numerous
expenditures. All of the capital items brought forward in
the early 1980s were aging and would need rooves, siding,
and upgrades. There was a much higher capital base than the
state had 30 to 40 years earlier.
Representative Kawasaki queried the anticipated GF spend
for the ten years.
Mr. Alper replied that the one-time adjustments from FY 18
to FY 19 was inflation. He stated that the FY 18 was
unusual, because it only had approximately $120 million in
GF. He furthered that there was approximately $110 in
reappropriation. He stated that the real number was closer
to $230 million. He furthered that the Office of Management
and Budget (OMB) ten-year plan utilized the FY 18 budget as
the base and increased it as inflation starting with the
$230 million.
1:23:03 PM
Representative Pruitt referred to the statement that the
CBR would be at an unacceptably low level. He asked for the
level that should not be surpassed.
Mr. Alper replied $2 billion. The state need a reserve in
case of a natural disaster and other.
Representative Pruitt observed in the presentation that the
budget would be balanced by FY 2026. He believed the
public's concern was that once a tax was started that it
would continue on in perpetuity. He wondered why the bill
did not contain a sunset clause.
Mr. Alper replied that if the state had sufficient funds
that would make sense to end the tax, but he did not
believe it was prudent to include it in the bill.
Representative Pruitt thought a sunset would force the
conversation.
Mr. Alper did not believe he was the appropriate person to
answer the question.
Representative Pruitt stated that the state had spent a
significant amount on capital. He wondered about a
conversation regarding whether the state should continue to
own all of the assets. He asked if there was an effort to
look at the substantial amount of assets tied up in
facilities to use elsewhere.
Commissioner Fisher replied that the question of the sunset
was appropriate. He remarked that there were assets in "a
couple of different buckets." Some of those assets were
underutilized, and there was some effort to determine
whether to dispose of some of the assets. He stated that
some of those assets were in locations that did not have a
market to dispose. He furthered that there was tremendous
value in holding some other assets, such as the Atwood
Building. He stated that the Atwood Building was a large
asset and heavily utilized. The advantage of owning that
asset was that the current lease rate was between $75 to
$80 per square foot. He stressed that the building was
completely paid off. He remarked that leasing a space ended
up paying the capital cost.
1:28:55 PM
Representative Pruitt believed the land in Alaska should be
available for land. He noted that there had been pressure
to get land into the hands of Alaskans. He believed it
would bridge the gap for a number of years. He asked if the
administration was willing to get DNR working on the
issues.
Commissioner Fisher would follow up on the question.
Representative Guttenberg asked about the disposal of state
assets. He believed that many of the facilities owned by
the state cost the state more when they were privatized. He
remarked there were many things the state should or should
not be doing.
Commissioner Fisher shared that the savings were achieved
by owning. He did not believe the state received inferior
service when leasing. He could discuss whether it was
beneficial to own or lease.
Representative Thompson pointed to the chart on slide 6 and
asked if the tax credits, the Permanent Fund Dividend, and
GO bonds were included in the graph.
Mr. Alper answered that the red section included debt
service such as GO bonds and oil and gas tax credits. The
wedge had become large in 2010 due to oil and gas tax
credits. The Permanent Fund had never been part of that
graph. He referred to a presentation earlier in the week,
and stated that once there was a Permanent Fund
restructuring bill, the administration may make the
changes.
1:34:43 PM
Mr. Alper advanced to slide 9 and referred to balancing of
the budget by FY 26. He explained that numerous things had
to align to obtain a balanced budget at that time.
For this to work out, several things all need to
happen:
1. Oil production meets the new, more aggressive
preliminary fall forecast scenario
2. Oil prices stabilize in the $60 range, adjusted for
inflation
3. Flat state budgets that can be contained within the
OMB 10-year plan despite deferred maintenance and
other needs
4. Senate version of SB26 with 75 percent / 25 percent
POMV split
5. Permanent Fund grows at a steady 6.95 percent per
year without a major market correction
1:36:56 PM
Representative Ortiz referred to slide 9, item 3. He asked
if it assumed that the capital budget continued to be
funded as in the current year.
Mr. Alper answered replied that the reappropriations were
drawing down some leftover money from the very large
capital budgets from five years prior. He remarked that the
GF capital budget, but inserting the reappropriations and
assuming replications with new GF, the $230 million was the
correct starting point.
Representative Pruitt remarked that the Permanent Fund had
grown at an 8 percent average.
Mr. Alper deferred to Commissioner Fisher.
Commissioner Fisher replied that the Permanent Fund had a
target that grew at a real return of 5 percent.
Vice-Chair Gara referenced slide 9, item 4 related to the
Senate version of SB 26. He asked whether the divided had
to go down to $1,000.
Mr. Alper answered that the Percent of Market Value (POMV)
was the flip side of the $250 was about $175 million into
the GF.
Vice-Chair Gara was trying to determine when the state would
run out of money before the assumptions on slide 9 worked
out. He referred back to slide 4 and noted that there would
still be a $600 million deficit. He thought the CBR would
run out in three years, much sooner than FY 26.
Mr. Alper answered that if everything worked out exactly
right it would balance in FY 26.
Vice-Chair Gara asked about the dividend amount.
Mr. Alper answered the proposal would shorten the time
before an absolute zero
1:42:22 PM
Representative Wilson asked if the management of the
Permanent Fund would change if the legislature began using
it in the operating budget.
Commissioner Fisher stated his understanding of the
question.
Representative Wilson replied that she believed the
Permanent Fund was invested currently in long-term assets.
She thought it would change if the legislature used it as a
fund source.
Commissioner Fisher addressed liquidity of the assets in
the fund. He noted that publicly traded securities could be
sold, but private equity did not share the characteristic.
Representative Wilson asked if the fund would still receive
a high return if the use was shifted.
Commissioner Fisher answered that the Permanent Fund did
anticipate a reduction.
Representative Wilson asked if the $300 million the bill
would bring in would be all necessary because the Permanent
Fund would be used for the remainder.
Commissioner Fisher answered that he had spoken with
numerous leaders of different areas in the state. The
administration's plan would take the gap from $2.6 billion
to $300 million approximately. He acknowledged there were
legislators and members of the public that still believed
the budget needed to be cut. The bill was not a final
solution, but it gave a framework with more certainty of
how the state would move forward. The bill would give
ratings agencies comfort in the state's financial
stability.
1:48:14 PM
Representative Wilson remarked that there was a desire to
lower budget than passed the previous year.
Commissioner Fisher answered that the budget presented and
the OMB. He referred to UGF and DGF had been reduced by
about 20 percent. The administration was looking at other
ways to make reductions like a shared services program,
which included consolidating information technology (IT) in
the state departments. The departments were conducting
efficiency improvements on a regular basis. He believed the
state needed to keep thinking about healthcare. He referred
to talk about a healthcare authority.
Representative Wilson looked forward to seeing a lower
budget.
Co-Chair Foster noted the committee would hear from the
Alaska Permanent Fund Corporation (APFC) the following
week.
Mr. Alper moved to slide 10 and addressed elasticity.
The following items increase or decrease the size of
the future deficits ($millions):
• House Permanent Fund bill (higher dividend) $175
• $10 oil price shift $300
• Federal health care changes $100
• Near term major market correction $300
• Increases to capital budget $50+
• Major disaster response Indeterminate
Representative Grenn pointed to page 9 and 10 and remarked
that they did not include oil credits owed by the state.
Mr. Alper agreed.
1:54:47 PM
Representative Guttenberg noted that the dividend rose if
the population dropped. He asked about the population
projections built into the presentation.
Mr. Alper did not know what had been built into the data by
the Department of Labor and Workforce Development. He
remarked that all of the items would provide a positive
benefit to the state, but not direct revenue to the state.
Mr. Alper turned to slide 11, "Earnings Reserve Account
Volatility":
• The Earnings Reserve Account is the only portion of
the Permanent Fund that may be spent
• It holds the gains and losses of the whole Permanent
Fund; the corpus is always made whole from losses
• In the FY08-09 market crash, the ERA balance fell to
just $420 million
• If markets experienced similar results this year,
there would only be enough funds in the ERA to cover a
single year's deficit
1:58:43 PM
Mr. Alper summarized the first section of the presentation
on slide 12 regarding why a broad-based tax was needed:
• Even a small tax as proposed in HB4001 covers
roughly half the forecasted ongoing deficits
• This buys the state time in case of various
contingencies
• A tax combined with PF restructuring and continued
budget discipline makes a complete fiscal plan
• If we get to where the CBRF is gone in a couple of
years and don't have a revenue measure in place, it
takes over a year to collect a new tax
• At that point, the remaining alternative of
additional unstructured Earnings Reserve draw could
establish a potentially catastrophic long term
precedent
2:00:59 PM
Mr. Alper turned to slide 14 and addressed the tax proposal
summary:
· 1.5 percent tax on wages and self-employment income
· Tax paid by individuals earning income in Alaska; two
income families would pay for each person
· Does not tax investments, retirement income, rental
income, etc.
· Tax is capped at $2,200 or twice the previous year's
PFD, whichever is greater
o Cap applies to incomes over $147,000 / year
· Revenue about $320 million at full implementation
· About 15 percent of revenue will come from
nonresidents
Vice-Chair Gara agreed that if the budget gap was not
solved the economy would shrink and Alaskans would be
harmed. He did not want to pass something that would
negatively impact lower income and middle class families.
He asked about the tax rate under the bill.
Mr. Alper answered that there were 600 Alaskans with an
income over $1 million per year. The bill became a bit
regressive in the 5 percent.
Vice-Chair Gara remarked that at an income of $1 million it
seemed to be a benefit to the wealthiest. He added that
higher income individuals were able to deduct from their
federal taxes, but lower income individuals did not.
2:07:03 PM
Mr. Alper replied that about 30 percent of Alaskans
itemized their tax returns. It was possible to deduct local
income taxes or local sales taxes, but not both.
Vice-Chair Gara felt that the proposal had a negative
impact on lower income people. He felt that there should be
an exemption for the first $25,000 for the extremely poor.
He wondered whether the proposal taxed every level of
income.
Mr. Alper replied that the bill as written taxed the first
dollar earned. He remarked that the origins of the bill
were in the school head tax.
2:10:12 PM
Representative Grenn asked if it was gross or net on the
federal form.
Mr. Alper answered that ideally the administration would
like to see definitions in the bill, but some would have to
be dealt with in regulation. He stressed that the tax would
be deducted from the check as a percentage of wages or
salary, similar to the state's unemployment insurance was
deducted from the checks. He furthered that a self-employed
person did not have the details within the bill.
Representative Grenn wondered whether the person paying the
cap would be less or more than what they would pay with a
statewide 2 percent sales tax.
Mr. Alper referred to impacts of different tax types on
different income levels. A person would probably pay a bit
less under a sales tax.
Representative Grenn requested to see the data.
Representative Pruitt referred to the current tax proposal
before Congress. He asked for the administration to "burn"
everything received from ITEP [Institute on Taxation and
Economic Policy]. He did not want to use information from
East Coast liberals. He wondered what the $320 million was
based on, and the year's tax information.
Mr. Alper replied that the most recent complete IRS data
set was 2015. He shared that the bill was built on the 2014
data. The data set was reverse engineered to update it to
2015.
Representative Pruitt queried the number of people who had
left Alaska since 2015, and what jobs and average salary
had decreased.
Mr. Alper answered that he did not have information about
how many people had left the state. The unemployment rate
was currently about 3 percent higher than it had been when
the current recession started.
Mr. Alper referred to 15 percent from nonresidents. He
asked if the percentage was higher was because the tax
would apply to individuals who would not have paid the tax
under a prior proposed tax structure.
2:15:58 PM
Mr. Alper had not seen numbers of 7 or 8 percent or that
low. He remarked that 12.5 percent was a net from non-
residents. He stated that a certain number of Alaskans had
an income, but earned all their money out of state.
Co-Chair Seaton clarified that the number was 608 people in
Alaska made $1 million per year; it could not be included
in the tax before the committee.
Mr. Alper agreed.
Representative Thompson looked at taxes capped at $2,200
(slide 14). He pointed to a change in the cap to $4,800. He
wondered if the administration had done the calculation.
2:18:50 PM
Mr. Alper answered in the affirmative. He guessed they
would scoop up three-quarters. It did not affect 95 percent
of taxpayers.
Representative Guttenberg asked who collected data on
revenue. He wondered if the information was broken out.
Mr. Alper answered it was not his area of expertise. The
Department of Labor and Workforce Development kept a good
data set at the job classification level. He recommended
hearing from DLWD if the committee wanted the information.
Vice-Chair Gara asked at what level of wealth the tax rate
started going below the 1.5 percent.
Mr. Alper answered $147,333.
Representative Pruitt asked if the $147,333 was taxable.
Mr. Alper answered that it was top line income.
Representative Pruitt spoke to cases with contractors. He
wondered if it would rest on the contractor (e.g. deckhand
or other). He wondered where the onus rested.
Mr. Alper responded that an employer would have to report
on a federal 1099 form.
2:25:58 PM
Mr. Alper spoke to slide 15: "Tax Proposal Summary":
• For most Alaskans the tax is less than the PFD
• Out-of-state residents will pay the highest
effective rate because they do not receive PFDs
Mr. Alper provided a background of how the state got to the
current point of looking at a tax. He explained slide 17:
"Alaska History of Taxes based on Income and Wages":
• Began in 1949 at 10 percent of federal tax liability
• By 1961, the tax was 16 percent of federal tax
liability
• In 1975, Alaska switched from federal tax liability
to its own tax brackets
• Ranged from 3 percent to 14.5 percent on taxable
income
• Alaska repealed personal income tax in 1980 after
oil revenue boom
• "Alaska Fair Tax" (HB303) passed House in 2002. This
was an income tax designed to match the effective tax
rates of a Sales Tax
• Various bills 2015-17 leading to HB115
Mr. Alper discussed the idea of a broad-based tax turning
to slide 18: "Broad Based Tax Analysis":
Since the 2016 session, multiple analyses have been
done that look at the relative impact of different
taxes, cuts, and Permanent Fund restructuring plans:
• Institute of Social and Economic Research at
UAA
• Institute for Taxation and Economic Policy
• Tax Foundation
• Northern Economics
• Brad Keithley
• Department of Revenue internal analyses,
including Chapter 3 of Fall 2016 Revenue Sources
Book
You will likely hear from many of these resources
2:30:06 PM
Mr. Alper specified a number of bills that were introduced
from 2015 - 2017. The list of legislation was revealed on
slide 19: "Income Tax Legislation, 2015-2017":
• Approximate revenue from recent bills
29th Legislature
o House 2015-16 bills; $650 million
o Governor's 2016 bills; $200 million
30th Legislature
o SB12, Bishop "School Head Tax"; $70
million
o HB146, Claman "School Head Tax"; $540
million
o HB115, passed House 2017, $700 million
2:31:04 PM
Mr. Alper continued on slide 20: "HB 4001 is different from
a true income tax":
• Does not tax several key types of income:
o Capital gains
o Retirement earnings
o S-corp distributions
• Much less complex administration and staffing need
• Does not require individual filing for typical wage
earners
2:32:14 PM
Mr. Alper noted that Nevada did not have an income tax. He
mentioned a few other states that did not have an income
tax. However, states had a similar payroll tax.
Mr. Alper looked at slide 21, "HB 4001 is different from a
true income tax":
Nevada is one of the seven states that do not have an
income tax. Nevada does, however, have a similar
payroll tax.
"Nevada's Modified Business Tax (MBT), which is
remitted by employers (not individuals) on
aggregate gross wages (of all employees) above
$50,000 per quarter at a rate of 1.475 percent is
currently the only somewhat comparable statewide
example."
-Jared Walczak, Tax Foundation, "Could a
Payroll Tax Work for Alaska," October 20,
2017
Mr. Alper reviewed slide 22:" Process since Senate voted
down HB115 (5/12/17)":
• June 5, Governor proposes "compromise"
o Included budget, SB26, oil tax credits
o New revenue based on Sen. Bishop's school head
tax bill SB12, for at least $100 million
o Bishop bill actually raised only about $60-$70
million, had had no hearings, and had some
technical issues
• June-July, several informal efforts to build a
viable compromise bill based on SB12 before
adjournment
• Internal administration discussion of multiple
revenue options, and outreach to both legislative
bodies, led to decision to use a similar structure
• Converted from stair-step to flat-rate to avoid high
marginal tax issues at bracket crossovers
• September 22, bill released at time of current
special session call
2:36:44 PM
Vice-Chair Gara remarked that there was an estimate of the
state's deficit. He stated that the bill would raise almost
one-half of the deficit, leaving a significant deficit. He
wondered why only part of the deficit was addressed.
Commissioner Fisher replied that there was a narrowing of
the gap over time, based on the expected growth of the
Permanent Fund. He remarked that the governor wanted to
present a proposal that would be accepted politically.
Mr. Alper moved to slide 23 titled "Thought behind the
"cap".":
• Substantial number of Alaskans ask, in essence,
"why are we collecting a tax with one agency while
paying a dividend with another?"
o Certain people, while opposing a tax, are
prepared to give up their PFD to help operate
government
• Actually eliminating the dividend would be very bad
policy for many Alaskans throughout the state, and it
is highly unlikely to imagine a majority approving a
full elimination
• The structure of the HB 4001 "cap" acknowledges the
concerns of those people- basically taxing the
dividend back from higher income Alaskans
• The hope is, a tax with this structure will be more
broadly acceptable than a full income tax
Representative Pruitt stated that hope was not a method and
the word should never be used. He asked for the
administration to never include it in a presentation.
2:43:13 PM
Mr. Alper agreed that if a person chose to not receive a
dividend it would make everyone else's share higher.
Mr. Alper relayed that one of the pieces necessary to build
was a mechanism for refunds. He provided detail. He moved
to slide 24, "Technical Language in HB 4001":
Bill is about 1/3 the length of HB 115.
Language is adequate to establish, or authorizes
regulations to define, many key issues:
• Defining "self-employment" and "from a source
in the state" plus other key terms
• Interpretations must be consistent with
Multistate Tax Compact
• Incorporates IRS code to a limited degree where
needed, state can require a copy of federal
return
• Process for withholding and remitting tax by
employers
• Filing of reports for payments to self-employed
individuals and contract employees
• Individual returns by those required to do so,
mainly the self-employed
• Refunds for overpayment
2:46:43 PM
Representative Kawasaki asked about the penalty for not
filing taxes.
Mr. Alper did not believe there was a penalty for not
filing in the bill. He stated that there was a penalty
within the regulation. He deferred to Mr. Spanos. He stated
that there was some standard penalty language in the
general tax statutes, which would likely apply. He stated
that, barring any other direction, the general tax
authorities would be used for penalties.
Co-Chair Seaton referred to line 3 of the self-employment.
He remarked that the line was only from a source within the
state. He wondered how it would be delineated for a
resident or non-resident.
Mr. Alper replied that an income tax was a tax on all the
income, and a credit was back for tax paid in other states.
He stated that the bill was written that the tax was only
paid on what was earned in Alaska, whether one was a
resident or non-resident. He stated that without a 1099
form in a small business, there would be a self-reporting
requirement with an audit follow through. He hoped that the
definitions in the bill would give tools to assist in what
was counted as self-employed income. He deferred to Mr.
Spanos.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, stated that the bill only taxed
income made within the state. He stressed that a resident
who earned income outside of Alaska would not be taxed on
that income. He remarked that the self-employed would point
to the multi-state tax compact.
Co-Chair Seaton asked for verification it was on net income
and not self-employment.
Mr. Spanos replied in the affirmative.
Vice-Chair Gara asked if the distribution was counted as
self-employment income under the bill.
Mr. Alper replied in the affirmative.
Mr. Spanos answered that the bill referenced a section of
the Internal Revenue Code - he would have to research it
and follow up.
2:52:54 PM
Representative Wilson looked at self-employment and
schedule C. She stated that if she was a sole proprietor
with no actual income from the business, would she go to
line 31 with the net profit and loss to utilize as the
income.
Mr. Alper answered in the affirmative.
Mr. Spanos concurred with Mr. Alper's reply.
Representative Wilson did not believe a person could take
deductions off of self-employed income under the
legislation.
Mr. Spanos agreed, if a person had a loss, the bill would
allow the loss.
2:54:49 PM
Mr. Alper advanced to slide 26, "Revenue Impact":
• DOR estimates $160 million in FY2019 due to the tax
taking effect in January 2019*
• This amount is from withholding / employer payments
• No tax returns filed until April 2020
*(Assumes 1/1/19 effective date as proposed)
• DOR estimates $320 million in FY2020 based on
modeling using aggregated federal income data for
Alaska residents
Mr. Alper moved to slide 27 titled "Revenue Details":
Revenue estimates are based on 2015 IRS Data
• About 440,000 total resident taxpayers, revenue
$280-$290 million
68,000 below $10,000 income
62,000 between $10 and $20,000
161,000 between $20 and $50,000
107,000 between $50 and $100,000
38,000 between $100 and $250,000
4,000 above $250,000
• Net nonresident (after subtracting Alaskans who
earn all their income outside) 12.5 percent,
revenue $40 million
• Without the cap, total revenue would be $10 to
$20 million higher (foregone from high income
individuals)
2:57:56 PM
Representative Pruitt asked how to deal with nonresident
individuals.
Mr. Alper answered that the bill included a definition and
regulations would flush the issue out. He detailed that
from nonresidents it was a bit easier when they were wage
employees.
Representative Pruitt provided a scenario where a company
was located in Alaska but did business outside of the
state. He asked if the income was considered derived from
the state if the business was physically in Alaska.
Mr. Spanos replied that state's usually taxed residents on
all of their income, and residents and nonresidents would
be taxed the same. He furthered that for a wage earner it
would be physical presence and wages would be taxed.
3:02:02 PM
Co-Chair Seaton asked if Mr. Spanos was talking about
property, not rents.
Mr. Spanos answered that the property would not be taxable.
Mr. Alper noted that it was a parallel structure. The
consideration would be what percentage of income was
considered Alaskan for tax purposes.
Representative Pruitt referred to individuals earning money
in another state, but who lived in Alaska. He wondered if
it depended on whether the individual paid tax in another
state.
Mr. Alper responded that the individual would only be taxed
if the work was in Alaska.
3:04:35 PM
Co-Chair Seaton asked about the difference between a
taxpayer and a tax filer. He asked how the bill treated
joint filers. He asked if distributions were broken out
50/50.
Mr. Alper answered that every person was considered a
filer, there was no joint filer. It was an individual tax
only; there was no mechanism in the bill to create a joint
tax.
Co-Chair Seaton wondered if both spouses had the $2,200
cap.
Mr. Alper answered that the taxes would be paid in the dual
income household.
Co-Chair Seaton referred to partner distributions or self-
employment tax. He wondered if it was only assigned to one
of the household members.
Mr. Alper answered that he did not know. He deferred to Mr.
Spanos.
Mr. Spanos restated his understanding of the question.
Co-Chair Seaton replied in the affirmative and asked about
a single cap.
Mr. Spanos answered he had not researched the issue, but
believed that a partnership could choose to distribute
whatever amount it wanted.
3:10:10 PM
Mr. Alper believed it meant there were circumstances where
a couple would have to pay two caps.
Co-Chair Seaton stressed that he was attempting to
understand how the joint filing would occur.
Mr. Alper relayed that the questions were easy for a
payroll or wage tax. He stated that the broadening a
footprint into self-employment required the special
provisions.
Co-Chair Seaton believed it was important to have a
delineation showing how the joint filer impacted the
proposed tax.
Mr. Spanos responded that the joint filing definition in
the federal code, and noted that there was no definition
for a married couple in the bill, so each employed
individual would owe their own tax. In order to calculate
your own returns, they had to know their individual
earnings.
Representative Guttenberg used a scenario where Oregon had
an income tax. He asked if Oregon currently was taxed on
the entire income. He remarked that the employer would
remove the tax in Alaska.
Mr. Alper agreed. He stated that a resident of a state that
had an income tax, who earned income in Alaska, would pay
the tax to Oregon on all their income. He stated that
living in Oregon and working in California initiated the
credit.
3:18:51 PM
Vice-Chair Gara understood the difficulty of implementing
the tax immediately. He asked about the modest payroll tax
and wondered if it would be possible to implement.
Mr. Alper answered that he was really talking about a
voluntary taxation if it occurred before the effective
date. He would not want to implement the tax in the middle
of a calendar year and believed they were stuck waiting
until April 2019.
Vice-Chair Gara did not mean to implement the tax prior to
the bill's effective date. He meant implementing it prior
to dealing with regulations in the department. He asked if
it would be possible to ask the effective date to be
January 1.
3:22:11 PM
Mr. Alper answered there was no staff currently attached to
the bill; the department would have to hire the staff. He
could not imagine getting anything functional between
Thanksgiving and New Year's.
Mr. Alper moved to slide 28 titled "Fiscal note
implementation cost":
• Implementing an individual income tax in 14 months
will be a significant logistical challenge
o Need to draft regulations
o Need to design, develop, and test technology to
administer tax system for over 400,000 taxpayers
• Estimated $300,000 supplemental appropriation
request for a contractor to work with DOR on an
implementation plan
• Estimated $10,000,000 one-time capital appropriation
to build income tax into our current tax revenue
system
o Includes withholding, filing, and refunds
• Gradual ramp-up of staffing; eventual annual
management cost estimate is $5.2 million with 40
employees
• Total cost over six-year fiscal note period is about
2.5 percent of projected revenue.
3:25:34 PM
Mr. Alper advanced to slide 29 and continued to address the
fiscal note implementation cost.
The Department of Revenue's Fiscal Note is somewhat
conservative (meaning too high, we hope)
• Assumes stand-alone system built within the Tax
Division
• Items that need to be pinned down (partial list):
o How much can we limit individual reporting
needs vs. relying on employer filing?
o Process for self-employment filing system
o Degree of electronic vs. paper filing
o Potential coordination with Department of Labor
(Employment Security Tax). This would have
substantial challenges due to federal funding
Mr. Alper provided additional detail on slide 29. He hoped
to do the work with 30 or less people. In comparison the
full income tax bill that had passed the House called for
60 employees.
3:27:41 PM
Mr. Alper looked at slide 31, "Impact of Recession on
Alaska's Economy":
Per the Alaska Department of Labor, since the peak:
• Overall economic activity in the state down 17
percent (much of this due to the reduction in the
value of every barrel of oil)
• Total job losses 11,900 positions (3.3 percent)
• State government job losses 2,700 positions
(>10 percent)
• State facility closures throughout the state
3:29:30 PM
Vice-Chair Gara stated that the DLWD had told committee
members that the lost jobs were 13,500 in the last two
years. He asked Mr. Alper to confirm the number.
Mr. Alper replied that he would provide that information.
He stressed that there was an inherent seasonality.
Mr. Alper turned to slide 32 titled "ISER - Job Impact of
Different Options." Each of the options would cost jobs in
varying degrees. He moved to slide 33 and addressed
multiple tax options that would each raise $500 million. It
started to taper out because the highest earning
individuals tended to get their income from things other
than wages.
3:34:17 PM
Mr. Alper addressed the final slide titled "Comparable Tax
Burden." The chart had been produced by Institute of Social
and Economic Research (ISER). He detailed that Alaska
mostly collected select sales taxes such as alcohol and
other. The average Alaskan paid $500 per year to the state;
the average state was about $2,700 and the highest were
over $4,000. If the bill passed it would mean Alaska's
total taxation would be around $1,000 and Alaska would
still remain the lowest tax regime. He did not believe it
would be material enough to make Alaskans move.
Representative Grenn referred to the last slide. He
referred to the state's high property taxes and cost of
living. He wondered if ISER had a comparative study
including local taxation.
Mr. Alper replied he believed so; it would be worth
layering into the presentation. Alaska was also unique in
its over 400 municipal sales taxes; the weighted average
was about 1.7 percent because Anchorage did not have a
sales tax.
3:38:13 PM
Representative Pruitt referred to the earlier discussion
about some people not wanting to take the Permanent Fund.
He wondered if there was a way to come up with a way to use
the money for state use.
Mr. Alper replied that it was a legal question. He stated
that if a person chose to take the dividend and donate it
to the state that person could do that.
Representative Pruitt wondered if there was a way for a
person to choose not to claim their dividend. He stated
that it came up all of the time. He believed there should
be a way to provide the opportunity for individuals wanting
to give their PFD. He did not want to penalize others in
the process.
Commissioner Fisher would look into the issue.
Vice-Chair Gara stated he had asked the question for two
years. He believed Legislative Legal Services agreed that
if the dividend was made an offer for people to either
accept or deny, it would mean it was not income.
Commissioner Fisher would look into the issue.
Mr. Alper added that APFC would testify the following week
and could possibly weigh in on the issue.
Commissioner Fisher would follow up.
Co-Chair Foster addressed the schedule for the following
day.
ADJOURNMENT
3:43:48 PM
The meeting was adjourned at 3:43 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 4001 Sectional Analysis 10.25.17.pdf |
HFIN 10/26/2017 1:00:00 PM |
HB4001 |
| DOR TAX present HB4001 payroll tax 10-26-17 final.pdf |
HFIN 10/26/2017 1:00:00 PM |
HB4001 |
| HB 4001 Sponsor Statement.pdf |
HFIN 10/26/2017 1:00:00 PM |
HB4001 |
| DNR Response to HFIN 102617 Land Sales Memo.pdf |
HFIN 10/26/2017 1:00:00 PM |