Legislature(2017 - 2018)HOUSE FINANCE 519
11/08/2017 01:00 PM House FINANCE
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| Audio | Topic |
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| Start | |
| HB4001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB4001 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
November 8, 2017
1:04 p.m.
1:04:53 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:04 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
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue; Representative Dave Talerico;
Representative Andy Josephson; Representative Geran Tarr.
SUMMARY
HB 4001 EMPLOYMENT TAX
HB 4001 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster addressed 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."
1:05:46 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE
(DOR), addressed a PowerPoint presentation titled "Capped
Payroll Tax - Responses to Questions; HB 4001 by Governor
Walker" dated November 8, 2017 (copy on file). He was
present primarily to answer questions that arose during his
presentation with Commissioner Sheldon Fisher on October
26. He referenced the revenue forecast Commissioner Fisher
had presented with DOR chief economist Dan Stickel. He
noted that DOR had responded to committee questions from
that meeting with a letter addressed to the committee co-
chairs dated November 2 (copy on file).
Mr. Alper began on slide 2 with a table of contents. He
planned to address questions pertaining to labor force,
relative impact and progressive-regressive issues, the
combination of state and municipal taxes and where the
state ranked nationally, and technical questions on profit
distribution and tax implementation. He anticipated he
would be joined by his colleague who could answer technical
questions.
1:08:17 PM
Mr. Alper moved to slide 4 related to the letter dated
November 2, 2017, which answered four questions. He
addressed the oil and gas tax credit appropriation formula
(10 or 15 percent; $175 million for FY 19) and relayed that
based on statute the most recent spring revenue forecast
applied, which was the most recent official price forecast
prior to the passage of the budget. He referenced the
transition of motor fuel tax from unrestricted general fund
(UGF) to designated general fund (DGF). He detailed that
the issue first reached the committee's attention the
previous session with the administration's motor fuel tax
bill, which had not yet passed. He furthered that the
Legislative Finance Division (LFD) had decided it may be a
more appropriate use of the fund given existing statutory
language and the way it was used; therefore, LFD had made
an internal determination it would be considered DGF
regardless of what happened with any new revenue bills. The
Office of Management and Budget, DOR, and LFD were all in
agreement that going forward the motor fuel tax should be
considered DGF
Mr. Alper spoke to the third question pertaining to
negative revenue from the oil and gas corporate income tax.
He explained that it primarily came from the time lag
between estimated tax payments. He stated that the tax year
was a calendar year for the tax. In 2015 companies were
paying estimated taxes after the first, second, and third
quarter of 2015, but by the time they paid their taxes and
trued up, it was the end of calendar year 2016 (October was
the payment due date). He furthered that FY 17 was when any
refunds for overpayments of 2015 taxes would have been paid
back. He expounded that because there were relatively high
estimated payments in 2014 and 2015 (based on the lower
prices not working their way through the system yet), DOR
ended up paying back substantial refunds.
Mr. Alper specified that additionally, Legislative Audit
had determined that certain additional revenue coming in
that went to the General Fund, should have been considered
Constitutional Budget Reserve (CBR) revenue - it had been
the result of an audit or administrative proceeding.
Subsequently, an internal transfer had been made from the
General Fund to the CBR, which had shown up in the year it
was made (FY 17) as negative General Fund revenue, although
practically speaking it was revenue neutral.
Mr. Alper continued to address slide 4. The table showed
how negative revenue balances had occurred in FY 16 and FY
17. The fourth question related to the impact of $1 on the
price of oil. At current oil prices in the $40s, $50s, and
$60s per barrel range, $1 in the price of oil was roughly
$30 million UGF over the course of one year. For example,
if the price was $10 higher than anticipated, it was
possible to estimate building $300 million into thoughts on
the state's projected deficit.
1:11:49 PM
Co-Chair Foster recognized Representatives Dave Talerico
and Andy Josephson in the audience.
Representative Pruitt asked if the $30 million was tax and
royalty revenue. He asked for detail.
Mr. Alper responded that the $30 million was all
unrestricted revenue - it included production tax and the
unrestricted portion of oil and gas royalties (the half to
three-quarters not dedicated to the Permanent Fund); if
Permanent Fund money was added back in, the number would be
$35 million to $37 million. He noted that portion belonged
to the corpus of the Permanent Fund and was not spendable.
Representative Guttenberg stated that the $1 rise in price
did not account for fluctuations, mid-year, or partial
year. He believed it was as if the prices went up $1 on
January 1 and remained there until December 31. He asked
for verification that the scenario represented a simplistic
approach to illustrate the impact.
Mr. Alper answered in the affirmative. The scenario assumed
the $1 shift for the entire year. At the lower price range,
it assumed the production tax change was based on the 4
percent gross minimum tax. At higher prices it became more
complicated - once producers were able to get into the net
profit structure, the number would increase closer to $80
million per $1 at higher oil prices. The department of
revenue produced a document after every forecast showing
the detail that it could provide to the committee.
1:14:01 PM
Co-Chair Seaton spoke to question 1 on slide 4. He read an
excerpt from the answer to question 1 in DOR's November 2
letter to the committee:
However, the statute is not entirely clear whether the
10 or 15 percent should be applied to tax before or
after application of credits. The alternate mechanism,
calculating the percentage after application of
credits, would result in smaller annual
appropriations. Based on the preliminary fall
forecast, the $175 million for tax credits would be
reduced to about $46 million.
Co-Chair Seaton asked if there was any further legal
clarification on the subject. He wondered if there were two
alternative mechanisms that were viable.
Mr. Alper answered that DOR had not asked for a formal
legal opinion. The issue had not been germane until the
current year. The way the department had interpreted the
statutory language going back to the FY 16 budget cycle -
when the state first contemplated using the funding formula
as opposed to the previous open-ended language - statute
specified 10 or 15 percent of the amount received from AS
43.55.011. He elaborated it was the production tax - 35
percent of the net calculation. The department interpreted
it to mean the tax calculation without any of the credits
(including credits against liabilities, primarily the per
barrel sliding scale credit under AS 43.55.024(j)). Based
on the statute it was a larger number the state was taking
15 percent of, which accounted for the $30 million in the
FY 17 appropriation, the $77 million FY 18 appropriation,
and the $175 million forecast. If the amount was tied to
the amount received from AS 43.55.011, meaning accounting
for the subtraction of the credits, it would be the smaller
number.
Mr. Alper continued that the per barrel credit had been
very low for the past couple of years due to the lower
price in oil. The difference between the two calculations
may have been $10 million. Now suddenly, if the alternative
calculation was used - meaning use of the amount received
after the subtraction - the 15 percent calculation derived
at $46 million. The appropriation language was a guideline
to the legislature and the legislature would ultimately
appropriate what it felt was suitable in next year's
budget. The department's intention was to point out there
was another interpretation to the language.
1:17:03 PM
Mr. Alper moved to slide 6 that included a line graph
showing FY 10 to FY 18 state revenue and expenditures
(without the Permanent Fund Dividend (PFD)). The slide
demonstrated how General Fund revenues had declined
beginning with the peak in FY 12 and how expenditures had
declined to react to the decrease in revenue. He detailed
that although expenditures had dropped 44 percent from the
peak in FY 13, the revenue decline of 80 percent had led to
the structural deficit going forward. The situation was the
reason for the proposed revenue bill. The expectation was
the bulk of the deficit would be met by some form of
Permanent Fund restructuring and HB 4001 would be the last
piece towards reaching a structurally sustainable balanced
budget in future years.
Mr. Alper addressed what the bill would do on slide 7. The
bill included a 1.5 percent flat rate tax on wages and
self-employment income; it was a subset of what people
generally think of as income. He elaborated that the bill
did not tax investments, retirement income, dividends,
interest, and other related items. The tax would be paid by
individuals earning income in Alaska and did not
distinguish between resident and nonresident. He noted that
if a household contained more than one working person, each
would pay separately. He specified that individuals with a
job would generally not file - employers would take the 1.5
percent from paychecks just as federal social security
taxes were withheld. The payment would be remitted [to the
state] directly from the employer, which would be
sufficient for DOR. The department would only receive
direct individual filings from self-employed people.
Mr. Alper continued to explain the bill on slide 7. A cap
had been added to the tax to the greater of $2,200 adjusted
for inflation or twice the previous year's PFD, whichever
is greater. He detailed that at slightly over $147,000 a
1.5 percent tax equaled $2,200. At lower income levels it
would be a 1.5 percent tax and at higher incomes it would
be the capped tax - the cap would impact about 5 percent of
earners. The foregone revenue resulting from the cap was
around $10 million to $20 million. He explained that the
$320 million bill would become $330 million or $340 million
if the cap were moved and the same basic structure was
maintained.
1:20:09 PM
Vice-Chair Gara spoke to some of his concerns that the bill
would tax middle and lower income individuals as opposed to
wealthier people who had a lower tax rate. He addressed
that the bill did not tax investment income. He referenced
statements by Warren Buffett that because he made his money
off investments he paid a lower tax rate than his
secretary. Vice-Chair Gara remarked that investment income
typically pertained to much wealthier people who received
dividends and capital gains. He thought it was a second
area wealthier people were being treated more favorably
than lower and middle-income people. He asked about the
reasoning behind the decisions.
Mr. Alper responded that the federal income tax rate on
capital gains was lower than the income tax rate on general
income - this accounted for Mr. Buffett's observation he
was paying at a lower rate than his secretary. Mr. Alper
noted that in his presentation two weeks earlier he had
discussed some of the administration's thinking behind the
cap. He detailed the cap was a way of distinguishing the
tax from a true income tax. The person who was highly
productive and earned a significant amount of money was not
penalized for their additional income. He detailed it was
part of the pushback from the Senate that was strongly
opposed to an income tax. The bill's structure (although
based on wages) fell short of being a true income tax due
to the cap. He agreed that by eliminating capital gains and
similar unearned income, it tended to make the tax lower on
the higher income individuals.
Mr. Alper continued that he would address an upcoming slide
showing the effective tax rates on different income levels.
A similar analysis of a true income tax was much more
progressive - there was a higher take at higher rates -
largely because of the inclusion of capital gains. The
bill's tax structure was more flat - the 1.5 percent held
across the board and effective rates fell at high levels in
part due to the exclusion of unearned income and in part
due to the cap.
Vice-Chair Gara understood the bill structure was an effort
to bring members of the Senate on board. He stated that
under federal law Warren Buffett would pay a lower tax rate
and under HB 4001 he would pay no tax. Vice-Chair Gara
disputed the idea that wealthier people were more
productive. He noted that nurses and laborers were just as
productive as someone making a large income.
1:23:59 PM
Mr. Alper answered there was a philosophy held by many that
an income tax was fundamentally wrong, and they may prefer
taxing on consumption. A full income tax took its highest
amount from people who earned the most. He explained the
bill represented a compromise because it did not appear
possible to pass such a tax and because the administration
strongly believed a viable revenue measure was necessary to
ensure the operation of a viable government into the
future.
Vice-Chair Gara understood. He explained he was not pushing
an income tax and was also aiming for something the
legislature could agree on.
Representative Ortiz asked if lifting the tax cap or
including capital gains in the tax would mean retiree
pensions would also have to be included in the tax.
Mr. Alper answered that the bill could be written in any
way. He detailed that the bill language could limit the
inclusion to capital gains, interest, retirement, or
dividends. He noted that the PFD was not income under the
bill and would not be taxed; if the broad category of
dividends was included, it would mean the inclusion of the
PFD. He was reluctant to mention the Institute on Taxation
and Economic Policy (ITEP) based on a reaction by
Representative Pruitt a couple of weeks earlier. The
organization conducted state level analysis nationwide and
had done some work for the committee; it had a series of
charts showing the effective tax rates and a comparison
between income tax, sales tax, and a head tax. The
organization had also done an analysis of a head tax with
the inclusion of capital gains that was mildly progressive.
He knew members of the committee had contemplated similar
structures. The administration's overarching preference was
for the agreement on a fiscal solution in the current
special session.
1:26:50 PM
Representative Ortiz asked how much additional revenue
would be generated if capital gains were included in the
bill.
Mr. Alper answered that he did not know the number, but he
guessed another $50 million or so without the inclusion of
a cap. He noted the information was available in the model.
He mentioned how it fell out in scale to the other income
factors and that it was limited to a relatively small
subset of the population. He furthered that if a cap was
maintained, most people living off capital gains would
still pay at the $2,200 and there may not be a substantial
amount of additional revenue generated.
Representative Wilson asked about an analysis regarding a
single mother of three working at a minimum wage job who
the state had already taken over $4,000 from due to the cut
to the PFD. She believed under the scenario the tax would
be an income tax if it was the only money the family had
coming in.
Mr. Alper answered it was a tax on income but did not meet
the strict definition of income tax because it only taxed
certain portions of income. He agreed that under the
scenario provided by Representative Wilson the tax would be
1.5 percent of the individual's income. He stated that
reasonable people disagreed on how to characterize the
reduction in the PFD.
Representative Wilson reasoned that a cut to the PFD was a
loss to the individual's income. She stated it was possible
to argue about terminology, but the tax still resulted in a
loss in income. She reasoned it was an income tax under the
scenario she had provided. She noted it was the same in a
middle-class family that had no other income put away. She
asked how the administration justified the percentage an
individual would pay to government compared to a person
making $100,000 who had been able to put money into IRAs
and other savings. She stated the loss would be much less
for higher wage earners. She wondered why the bill would
hit the lower and middle-class individuals at a much higher
level.
1:29:44 PM
Mr. Alper explained that the bill had evolved from the
school head tax bills. The old school head tax that had
been in place since territorial times through the late
1970s was a flat rate of the first check earned and it had
gone towards the school system. There had been a couple of
different variants on the bill brought forward in the past
couple of years as a potential revenue measure. He
elaborated that Representative Matt Claman had introduced a
bill in the House and Senator Click Bishop's bill in the
Senate had been used in many ways as the model for HB 4001.
He detailed that the definitions in those bills included
wages and self-employment income, meaning it was a payroll
tax versus an income tax. The purpose was to "scoop a
little bit" from regular labor - it was a simpler bill and
did not go as deep into the economy. Senator Bishop's bill
had a series of stair steps. He elaborated that one income
bracket paid $100, the next income level paid $200, with a
cap at $500.
Mr. Alper continued that the issue with the stair step was
what happened at the transition where a very high marginal
tax rate occurred. By changing it from a stair step to a
flat percentage, the net effect was the same, but the weird
transitions when people stepped from one bracket to another
were eliminated. The next decision was how big to make the
tax. He estimated that the percentage would be closer to
0.25 to 0.5 percent because Senator Bishop's bill would
have raised $70 million, whereas Representative Claman's
bill would be closer to 3 percent because it had raised
over $500 million. The administration had selected $300
million as a revenue target, which required a 1.5 percent
tax. He reiterated that the foundation of the bill came
from the school head tax bill, not the income tax bill.
Representative Wilson replied that she did not care where
the bill structure came from. She was concerned about
hitting lower and middle-class households harder. She
stated it was necessary to factor the PFD cut into the
equation because it impacted income going into residents'
households. She understood the logic of a flat rate because
it was easier; however, teenagers would pay, whereas,
people living off other revenue would pay nothing. She
spoke about individuals trying to get off welfare and
stated they would be hit harder. She thought there had to
have been something in the modeling that made the
administration okay with hitting the lower and middle-class
harder. She was trying to determine where the philosophy
came from.
Mr. Alper answered that the bill was viewed in a vacuum and
not as combined with changes to the PFD. As a standalone
bill, it was truly a flat tax to 95 percent of the
population - everyone would pay the same 1.5 percent. For
the most part the people in that 95 percent, probably with
the exception of retired people (retirement income was
exempted), everyone would pay the same piece of their
income. The regressivity kicked in at the higher end. He
continued that if someone was aiming to meld a tax with a
PFD reduction in a way that levelized the impact across the
board, a progressive income tax exempting some of the
lowest income people would be the cleanest method. He noted
that the bill passed by the House had roughly accomplished
that - it had exempted the first $20,000 in income and had
stepped up to a higher rate. As an overlay with PFD cuts it
had come out fairly close to a flat combined tax impact.
The bill had not been acceptable to the legislature at
large. The administration was not trying to reopen that
debate. The current bill contained a flat tax as a
standalone item that seemed to be a reasonable solution.
The alternative - a sales tax worked in the other direction
and had an even greater impact on the lowest income people
and less impact on the higher income people. The current
bill's impact fell somewhere in between an income and a
sales tax.
1:34:35 PM
Representative Wilson believed Mr. Alper had made her
argument. She was concerned the administration was looking
at the concept in a vacuum. She noted that Anchorage was
increasing its gas tax and had a different property tax
level than other areas of the state. She noted that some
parts of the state had no tax because they were not in a
borough. She believed that when the state began looking at
options in a vacuum it would hit people hard during a
recession. She wondered if the impact could mean some
people would determine it was not worth going to work at a
minimum wage job. She understood that the other option had
not passed the legislature. She thought perhaps the
philosophy was to try the current bill because nothing else
had worked. She remarked that Alaska was the lowest taxing
state, but only when talking about certain taxes; it did
not account for other taxes and the high cost of living.
She had grave concerns over impacts the bill would have.
She remarked on a comment by Pat Pitney [Director, Office
of Management and Budget, Office of the Governor] that the
administration was only looking at increases to the budget,
not decreases.
Mr. Alper shared that later in the presentation there were
a number of slides pertaining to municipal taxation levels.
He communicated that the issue had arisen in his previous
presentation to the committee. He believed seeing Alaska's
city taxes layered with state taxes compared to other
states was illuminating.
Representative Tilton referenced Mr. Alper's testimony that
it was possible to include other modules in the tax
including capital gains, investment income, and other. She
thought there was an associated cost of increasing
government. She asked for an estimate.
Mr. Alper answered that the fiscal note to HB 115, which
had passed the House in May had included about 60
additional staff, which may have been on the low side. He
noted that DOR may have needed a bit more staff for a
complicated statewide income tax. The current bill included
40 staff in the fiscal note and he believed the estimate
was on the high side because most of the population would
not have to file. The paperwork load was dramatically
reduced because employers would file on behalf of their
employees. He estimated the department could probably make
due with 30 additional staff. If the complexity of the tax
increased to something more like an income tax, DOR would
need additional staff somewhere in between.
Mr. Alper identified the cap as the biggest variable - if
no one was paying more than $2,000 there was not much
utility in having an entire team of auditors at the
individual level to ensure everyone was paying the right
amount (the role of the auditors tended to be to go after
the larger numbers). If the tax contained no cap it would
result in high payers, which would add more people to the
mix (it would also add more revenue). The cost to the
administration represented a tiny fraction of the revenue
that would come in. Hiring 40 new state workers and the
cost to build new software would be 2.5 percent of the
bill's revenue.
1:38:28 PM
Mr. Alper turned to slide 8 and continued to provide a bill
summary. The bill was projected to bring in about $320
million in revenue; approximately 15 percent of the revenue
would come from nonresidents (people working in Alaska who
earn wages or with self-employment income in Alaska). In
the case of wage earners, the tax would be remitted by
employers just like resident wage earners. For self-
employed individuals there was a state equivalent of the
federal 1099 form (contract employment form) that employers
would be required to send to the state, so it was aware of
who was earning money. He elaborated that it may require a
bit of effort chasing small business owners, but
eventually, the department believed it would get everyone
on the tax rolls.
Mr. Alper furthered that the bill would require a $10
million one-time cost to procure software, programming, and
basic startup needs of administering a new tax. The
projected operating cost was $5.2 million for 40 new
employees; DOR hoped to do the work with fewer than 40 new
employees, which would drop the cost of running the tax to
about $4 million per year. He reiterated his earlier
testimony that about 2.5 percent of projected revenue would
go to administration over the six-years in the fiscal note
period.
Co-Chair Seaton asked if the department anticipated that
identification of self-employed would be by business
licenses - anyone with a business license would receive an
inquiry.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, answered there were a couple of
different methods to identify who was self-employed. One
would be a business license and the other was the Internal
Revenue Service (IRS). He detailed that the IRS would share
information with the state and the department would have
the ability to see who had filed with self-employment
income under an Alaska address. Nonresidents working part
of their business in Alaska would be more difficult - the
state could get the information if they had a business
license, but if someone was doing business in Alaska
without a license it became more difficult. Typically, in
other states people called to determine if someone had paid
a tax. The state could not respond to the question, but it
could look into the question.
Mr. Alper moved to slide 10 pertaining to labor force and
population. He reported that based on information provided
by the Department of Labor and Workforce Development
(DLWD), the state had not suffered a population decline.
The state's population growth had been very small at less
than 1 percent over the past four years. As of July 2016,
the estimated population was slightly under 740,000 people.
He shared that 2017 numbers would be available in January
[2018]. Currently, DLWD forecasted modest growth through
2045. There had only been three years since statehood with
negative population growth, after the completion of the
pipeline when numerous temporary migratory laborers left
the state. Another decline had been in the 1980s during the
large oil price decline. Nonresident wages were about 16
percent - the number was updated from the 15 percent figure
used by the administration pertaining to the bill. He
explained it was also necessary to subtract people with
Alaskan addresses who earn all their income out of state.
Mr. Alper continued to address slide 10. The total
statewide job loss was 11,600 (3.2 percent) through
September 2017. He reported that the number of people
employed by the state as of the previous month was down
2,800 from the peak (12 percent reduction).
1:43:32 PM
Representative Wilson extrapolated that 2,800 government
employees had been lost and the private sector had lost
8,800.
Mr. Alper saw no reason the numbers reported on the slide
should not be additive. He agreed that her summation seemed
correct.
Vice-Chair Gara stated that the committee had received
information from DLWD three months earlier that over the
last two years the state had lost closer to 14,000 private
and public-sector jobs. He asked if a difference in time
periods accounted for the difference in the numbers.
Mr. Alper answered that DOR had not been able to identify
the source of the 13,000 number. He reported that the
numbers had been relatively steady in the past several
months. The 11,600 was the most current job loss number
from DLWD.
Mr. Alper turned to slide 12 titled "ITEP analyzed multiple
tax options that each would raise $500 million." The slide
included a chart from an April 2017 ITEP report. He noted
that the 1.5 percent tax was the baseline. He remarked the
seven bars did not represent equal quadrants of the
population; the first four bars were the income level
quintiles (zero to $20,000, $20,000 to $40,000, $40,000 to
$60,000, and $60,000 to $80,000). The top 20 percent of the
analysis broke up into three subgroups ($81,000 to $95,000,
$96,000 to $99,000, and $100,000). The portion of the bar
above the crosshatch showed what the share of income would
be without a cap, whereas the crosshatch accounted for the
cap. The people in the top two levels would be paying less
than what they would have without a cap.
Mr. Alper explained that to get into the top 5 percent of
household income in Alaska, income was about $210,000. The
analysis assumed 1.5 working people per joint filer in a
household and kept the income around the $140,000 cutoff
point for the cap. There was a partial drawback of the
group's effective tax rate from 1.5 to around 1 percent.
There were some individuals earning more than $365,000 and
over $1 million - the rate would be variable depending on
how high their income level was, but the effective tax rate
dropped down some. He focused on the bottom 95 percent of
income earners where there was relative flatness to mild
progressivity (1.2 percent effective tax rate for the
lowest earners to a 1.8 percent tax rate at the 80 to 95
percentile of people). The ITEP analysis tried to come up
with $500 million tax schemes for Alaska, which was where
the 2.43 percent payroll tax figure had come from (slide
12). He noted that the 2.43 percent tax was arbitrary, and
it would be an unusual legislative solution to pick a
number that precise.
1:47:22 PM
Vice-Chair Gara asked if the bars on slide 12 only showed
payroll tax income. He wondered if the regressivity on
benefit to the wealthier sector be higher if their
investment income (that was not being taxed) was counted.
Mr. Alper answered that the chart presumed what Vice-Chair
Gara had stated. He detailed that because it was a wage tax
and the higher income people tended to have more unearned
income, it was the reason the 1.5 percent and 0.7 percent
bars were included on the chart. He furthered it was a wage
tax on all income; if it was 2.4 percent of all income and
three-quarters of a person's income was unearned, it would
be about one-quarter of the rate. He furthered it was where
the 0.7 percent bar came from and the cap reduced the bar
further.
Representative Guttenberg pointed out that the ITEP report
was from April 2017. However, the most recent analytical
data on DLWD's website was from 2015. He observed there was
a lag on information regarding job loss and other.
Mr. Alper believed the DLWD employment numbers were only a
couple of months old. The department received numbers at
least quarterly from employers through the employment
security tax. He was uncertain about the department's other
data sources.
Representative Guttenberg responded that DLWD could have
more current numbers, but the recent information was not on
the department's website. He stated that the nonresident
workforce in the oil and gas industry was at an all time
high of 36.4 percent, which represented over $700 million
in lost income to the state. There was no more recent data
on the specific webpage.
Mr. Alper responded that since the peak the industry had
lost about 5,000 jobs in Alaska. He referred to
Representative Wilson's mention of a loss of 8,800 private
sector jobs. He explained that the 5,000 jobs did not
represent two-thirds of the 8,800 because many of those
5,000 were nonresidents who were no longer coming to Alaska
to work. He continued that because of the industry's high
nonresident workforce, the impact of its job losses on the
state tended to be a bit overstated.
Representative Guttenberg stated that one of his concerns
was about who was getting laid off in terms of Alaskans or
nonresidents. He stated that unfortunately it appeared that
Alaskans were getting laid off at a higher rate. He
reasoned it could just reflect subcontractors because there
was not a breakdown between the three major communities
(North Slope, Kenai, and Valdez). As far as he could tell
there was a disparity on who was getting laid off and it
was not working in the favor of Alaskans.
1:51:17 PM
Mr. Alper advanced to slide 14 and showed a bar chart of
the comparable tax burden by state. The chart showed state-
level taxation (all taxes paid by individuals to a state
including sales and income taxes, license fees, etcetera).
The yellow portion of the bars titled "select sales taxes"
represented taxes on motor fuel, alcoholic beverages, and
other related items. The black portion of Alaska's bar
represented the $320 million from the proposed capped
payroll tax in HB 4001. He directed attention to New
Hampshire were outliers compared to the rest of the county
in terms of their low taxes. Florida was the third lowest
state, but its taxes were quite a bit higher than those in
Alaska and New Hampshire. The proposed tax would bring
Alaska's taxes above New Hampshire.
Mr. Alper moved to slide 15 and addressed a bar chart
showing the comparable municipal tax burden. He referenced
questions about local government taxation being high in
Alaska. The light blue segment of the bars represented
property tax, which did not typically exist at the state-
level. The slide factored in property taxes, sales taxes,
license fees, and other. He pointed to Alaska's position on
the chart - the average Alaskan was paying $2,300 in
municipal taxes; the bulk was property tax. New Hampshire
had higher municipal taxes and appeared farther to the
right on the chart. He detailed that New Hampshire managed
to survive with a relatively small state government because
they had relatively large local governments.
Mr. Alper pointed out that in Alaska about $600 per capita
of the $2,300 was not really an individual tax, it was the
oil and gas property tax collected by the state and shared
with municipalities (approximately $450 million). He
continued that it was an oil and gas industry tax, which
was not really paid by locals, but it was difficult to
parse it out from the dataset of municipal property taxes.
Other oil and gas states had something similar, but not to
the scale of the tax in Alaska. If approximately $600 per
capita came out of the property tax, Alaska's municipal tax
burden would put Alaska closer to the middle of the states
(indicated with a green arrow on the chart).
Mr. Alper agreed that Alaskan had a substantial property
tax burden, which was higher due to higher property values
and incomes, but it was not out of scale with the rest of
the country. He communicated that much of the data used for
the chart had come from the District of Columbia that had
the highest local government taxes in the country (shown on
the far right of the chart).
Representative Wilson addressed the oil and gas property
component on slide 15. As an example, she stated if a
person had a property tax of 13 mills that 7 mills went to
the state. She asked when the statute had last been
considered as a possibility for revenue. She wondered if
there was another oil and gas property [tax] pertaining to
the North Slope (outside the value of the pipeline).
Mr. Alper answered that the idea of sharing the oil and gas
property tax with the local government at their own mill
rate was part of the oil and gas property statute (AS
43.56); it was more or less unchanged since the 1970s,
although there were issues regarding the tax cap and
treatment of debt that modified things - there had been a
few minor changes made to the statute. He continued that
Trans-Alaska Pipeline System (TAPS) assessments were
considered in court for many years; there had been a
settlement a year or two back where the state, producers,
and local governments had determined TAPS would be worth $8
billion for property tax purposes. He added that it was a
five-year settlement, meaning the state would not have to
revisit the issue for some time. The total property tax
portfolio was around $28 billion (the majority of the
additional $20 billion was in the North Slope Borough and
included pads, wells, rigs, warehouses, trucks, and other;
other locations included were Kenai and Valdez). The state
received a full 20 mills for portions of TAPS that ran
through unorganized boroughs. The North Slope property tax
rate for its own property was 18 mills - 90 percent of the
collected taxes in North Slope were shared with the
borough. He continued that over $300 million per year went
to the North Slope Borough for its share of the oil and gas
property tax. He noted that all those factors distorted the
dataset on slide 15.
Representative Wilson asked if DOR had considered whether
the method in statute since the 1970s was still the fair
way to split the taxes. She asked if the department had
considered looking at the issue as it was considering
various revenue options.
Mr. Alper replied it was not up to DOR to decide. The
department's job was to collect and administer the taxes.
He furthered that if the legislature or the governor wanted
to revisit the sharing of oil and gas property taxes it
would be a big conversation that would require significant
work. He noted there would be some vested interests with
strong opinions on the matter.
Representative Wilson appreciated that the subject was
administrative and not for DOR.
Mr. Alper added that the oil and gas property tax that went
to the different jurisdictions was public knowledge and was
published annually in the DOR Revenue Sources Book. He
detailed the tax was 20 mills and $560 million was
collected (2 percent); about $120 million was kept by the
state and $440 million was divided between the various
municipalities.
1:58:36 PM
Mr. Alper moved to slide 16 and addressed the state and
local comparable tax burden. The purple arrow to the
pointing to the far left on the chart represented Alaska
as-is and the second purple arrow to the right of the first
showed Alaska with $320 million revenue from the proposed
capped payroll tax. With combined state and municipal taxes
Alabama and Tennessee both paid lower taxes than Alaska,
which moved to the tenth lowest state. He elaborated that
if the $440 million oil and gas property tax was backed
out, the state would be the lowest to the fourth lowest
taxed state (Alabama, Tennessee, and Florida would be the
lowest). He stated it was difficult to determine exactly
how much discount should be taken for the oil and gas
property tax. He pointed out that New Hampshire was
slightly below the national average with combined state and
local taxes; its higher municipal taxes put the state close
to the average taxation level.
Representative Guttenberg discussed that other states had
counties, but Alaska did not. He remarked that Alaska's
constitutional convention had outlawed counties in the
state. He spoke to adding the Permanent Fund to the
combined state and local tax burdens. He remarked that no
other state had a similar fund, which made the comparison
difficult. He remarked that adding the Permanent Fund would
significantly change the picture. He understood it was not
a tax burden, but it was a benefit to living in Alaska, as
were the state's tax levels and services provided.
2:01:39 PM
Mr. Alper clarified that the term local included county-
type government (slides 15 and 16). He did not know the
reasoning behind the decision to use the word "borough"
rather than "county" or what the differences were between
Alaska's boroughs, and counties in other states. He
addressed the PFD and reasoned that on one hand it was
possible to say that all Alaskans were receiving an $1,000
dividend, which could be considered a negative tax. He
explained that the inclusion of the PFD would put Alaska
dramatically below other states. Others argued that the PFD
was not a negative tax, but entitlement or underlying
income for residents and any reduction to the PFD should be
considered a tax that should make Alaska's tax bar
increase. The administration was not accepting either
scenario and was simply saying a tax was a tax and the PFD
was a calculation the people received - there was no
"supposed to" it just is what it is, which was a decision
the courts had made several months back as well.
Representative Guttenberg responded that the
characterization of the PFD as an entitlement was strongly
debatable. He made further remarks about the historic
nature of the conversations. He reiterated that no other
state had a similar fund.
Vice-Chair Gara considered individual tax burdens in
Alaska. He stated that the oil and gas property tax was not
paid by individuals, but largely by businesses. He asked
about a scenario that put Alaska's taxes at the lowest in
the nation (where the oil and gas property tax was not
included).
Mr. Alper answered that the light blue segment of the bars
on slide 15 represented property tax. The chart did not
distinguish between commercial and residential. Ultimately
everything was paid by an individual, but the chart
included office buildings and all property tax; only some
fraction of the amount was borne by individuals and the
state did not have the data to carve out the information.
In addition to the underlying increase to the property tax
from commercial property, came the increase in Alaska from
a large amount of commercial property that was out of scale
with the state's population base and other economic
activity (oil and gas property tax).
Mr. Alper moved to slide 16 and directed attention to the
left purple arrow pointing at Alaska current law. He
explained if the oil and gas portion of the property tax
was backed out of the light blue segment of the bar, Alaska
would be the lowest taxing state. The right purple arrow
showed Alaska current law with HB 4001 layered on top. The
right green arrow reflected Alaska current law with the oil
and gas property tax backed out and the new wage tax
layered on top. The difference between the two green arrows
was the addition of the $320 million tax.
2:06:14 PM
Co-Chair Seaton spoke to the difference between the purple
and green arrows on slide 16. He asked why there was no
black segment (HB 4001 estimated payroll tax) on either of
the bars reflecting Alaska's taxes without oil and gas
property tax.
Mr. Alper clarified there was no bar for Alaska without the
property tax. The green arrows were pointing in between
existing bars. He furthered that a bar would need to be
added to the left of Alabama (reflecting how Alaska would
look with the property tax correction) and a bar in between
Florida and South Carolina (reflecting how Alaska would
look with the property tax collection and the addition of
the new tax).
Mr. Alper moved to slide 17 and addressed a state
comparison of the combined tax burden based on the largest
cities per state. He reported that Anchorage was different
than 107 other communities in the state because it had no
sales tax. When considering the state and local combined
tax burden, Anchorage was the lowest taxed jurisdiction in
the country. He noted that there was not a material amount
of oil and gas property tax collected in Anchorage;
therefore, no adjustments or corrections were necessary.
When considering property taxes, vehicle registration fees,
and other, the average Anchorage resident paid
approximately $1,800 in state and local tax burden - less
than the largest cities in all other states. Bridgeport,
Connecticut had the largest taxes at about $7,000, followed
by Newark, New Jersey, and Detroit, Michigan. The
comparison used a cohort of the largest cities in all
states. With the HB 4001 proposal, Anchorage would move to
the second lowest rank and Cheyenne, Wyoming would become
the lowest taxed city on the list. He pointed out that the
chart used a $50,000 income analysis.
Mr. Alper moved to slide 18 reflecting an average income of
$100,000. Anchorage remained the lowest taxed city when
compared to the peer group of states. He pointed to the red
bars to the right of the slide representing state income
taxes, which tended to bring taxes up significantly. The
dark blue portion of the bars reflected state and local
sales taxes - there was no sales tax in Anchorage. He
explained that adding a 1.5 percent wage tax on households
with $100,000 income would move Anchorage to the third
lowest taxed city (Cheyenne, Wyoming, and Sioux Falls,
South Dakota would rank lowest and second lowest).
2:09:24 PM
Representative Wilson remarked that Anchorage also had more
affordable energy than most of the state. She wondered how
a community like Dillingham that had property and sales
taxes would fit within the overall picture. She thought
most of the other communities in Alaska would be much
higher up on the scale.
Mr. Alper returned to slide 15 to answer the question.
There was a presumption of the weighted average sales tax,
which was 1.7 percent in Alaska. He clarified that no one
was actually paying 1.7 percent - the number was an
average. He suggested that if Anchorage was removed from
the mix, the number on the chart would be higher across the
board. He explained that the dark blue portion of the bar
reflecting property tax would get bigger. Consequently, the
non-Anchorage areas would probably be higher than
Anchorage.
Representative Wilson thought the numbers would also be
skewed because there were parts of the state without
property or sales taxes. She wondered if the charts only
factored in organized areas in the state. Alternatively,
she wondered if the data included the entire state.
Mr. Alper answered that the charts included the total
aggregate tax collected divided by the total population.
Individuals living in untaxed areas would bring down the
average.
2:11:31 PM
Representative Wilson thought the graph was not helpful
because she believed areas without taxation should be
excluded (those areas represented a large portion of
Alaska). Additionally, using Anchorage skewed the numbers
because there were other areas with sales and property tax
(e.g. North Pole) with higher energy costs. She asked to
get a better idea what the chart would look like with the
removal of Anchorage and areas that did not have any taxes.
She thought it would be a more accurate portrayal of what
the residents would pay.
Mr. Alper responded that her suggestion would take quite a
bit of effort to parse the information out at the municipal
level. He explained that Representative Wilson was talking
about two different things. He elaborated that Fairbanks
and Dillingham (high energy costs notwithstanding) were
organized municipalities paying property taxes, which fell
into the calculations. Although people in unorganized areas
without property taxes may cover a substantial part of the
map, they accounted for about 10 percent of the state's
population. He furthered that 90 percent of Alaskans had
the type of taxation of those living in urban areas. He
acknowledged the 10 percent may skew things a bit, but it
was not a game breaker.
Representative Wilson recalled a former classmate who never
understood that three or four zeros brought down an average
significantly. She stated thought that combining areas
without taxation and Anchorage with its low taxation made
it more difficult. She did not like the chart that tried to
make it appear the state would not be taxing much. She
believed the components she was pointing out made the chart
almost irrelevant.
Mr. Alper responded that Alaska was different in many ways.
He believed the state's Congressional delegation struggled
to explain to peers what was different about Alaska. He
noted challenges of logistics and higher energy costs. He
added that Alaska also had higher incomes. There was only
so much that could be corrected for and every state had its
own unusual features. The best the department could do was
come up with averages and caveat them to the best of its
ability. He continued that Alaskans did pay lower taxes
than people in other locations; the state had been able to
rely on the oil industry to cover the vast majority of
government operations for four decades and it would not be
possible into the future. He furthered that the price of
oil no longer supported the state's population and
governmental needs. He continued that layering a tax on
residents would hurt, but it would not be the destroyer of
the economy as one may think, because Alaska was mostly
below average on the scale compared to other states. He
underscored that no one wanted to tax for the sake of
taxing; the goal was adding a tax in order to provide
essential services to Alaskans.
2:15:50 PM
Representative Wilson spoke to the importance of
legislators having the most accurate information to go home
with because the issue was about how the tax would impact
Alaskans. She stated the issue was not only about taxation.
She spoke to the option of reducing government - the state
had a population of slightly over 700,000 with a government
larger than most other states. She stated that even with a
tax, the current government was too big to support. She
wanted to stick to what the charts did or did not show in
order for people to have a better understanding of whether
the information was reflective of the area they live in.
Representative Thompson realized the biggest population
section of the state was the Railbelt. He asked if it was
fair to say that upwards of 80 percent of the taxes
collected on HB 4001 would come from the Railbelt.
Mr. Alper replied that he believed so, but he did not have
the data on hand. Roughly 80 percent of the state's
population was located in the Railbelt region; therefore,
roughly 80 percent of the taxes would come from that area.
Vice-Chair Gara remarked that the state was rearranging the
chairs on the Titanic as it sank. He remarked that the
governor had been public that he saw the state sinking. He
remarked that the governor had not proposed the bill for
fun. He furthered that after $3.5 billion in cuts, there
was evidence that continued cuts would deepen the
recession. He referenced the $2.5 billion budget gap and
explained the governor was trying to right the state and
prevent a deeper recession. He asked if his remarks were
fair. He reasoned the governor was not being illogical
about his proposal, even if the legislature did not agree
with him on everything.
Mr. Alper believed there was a consistent message from the
administration and LFD about the facts. The budget had been
reduced, revenue had declined, the state had deficits, and
savings were declining. There was an expectation that
government would continue to do certain things; more could
always be cut, but the easy cuts were gone. He reasoned it
was a worthwhile conversation to find a way to bring in
another couple hundred million dollars. He remarked that
finding another $1 billion would make Alaska a very
different state and one that he speculated most legislators
would not want to administer.
Mr. Alper continued and spoke to the goal of reducing the
deficit as much as possible with the materials at hand,
followed by looking to the Permanent Fund. He stated that
the fund was a wonderful asset and was a centerpiece of the
state's ability to live a successful future if the fund was
treated right. He spoke to the importance of using the fund
sustainably, wisely, and within its own limitations -
meaning there was a finite amount that could be taken out
per year. The committee had more or less agreed to that
number. There was also the factor of the appropriate split
of the amount between the government and the people in the
form of the PFD, which there was still debate over. After
all of those actions were taken a gap in the hundreds of
millions of dollars would still exist. He referenced Ms.
Pitney's testimony from the prior day of $600 million to
$900 million. He explained that the gap could be addressed
in three or four ways: 1) cuts (which may or may not be
possible), 2) the implementation of a new tax (such as HB
4001), 3) the elimination of the PFD (which he did not
believe was advisable), or 4) extra money could be spent
from the Permanent Fund annually in addition to the
sustainable amount (which could lead to catastrophic long-
term outcomes).
Mr. Alper communicated it was the administration's position
that a small tax covering part of the deficit and cuts were
probably the best way forward. The most important thing was
to stay within the boundaries of a sustainable draw from
the Permanent Fund. He furthered that the fund would most
likely not have the ability to balance the budget on its
own combined with existing revenues in years to come;
therefore, another option was necessary. The bill was about
that additional option.
2:21:07 PM
Mr. Alper asked his colleague to address the remaining
slides.
Mr. Spanos addressed slide 20 pertaining to partnership
distributions:
· This bill would tax a partner's distributive share of
the partnership's net taxable income
· Does not matter whether or not a partnership actually
pays a partner a distribution
· Partner share is reported to him/her on Schedule K-1
of federal Form 1065
· If both spouses are partners, they will each receive a
separate Sch. K-1 reporting their individual share -
there is no such thing as a joint K-1
· If they file jointly, K-1s would be combined on their
federal Form 1040
· Federal 1040 is not used to prepare a state tax return
under this bill. Each spouse would use their
individual Sch. K-1 to prepare their separate state
returns
Mr. Spanos elaborated on the slide. He referenced a prior
question by Co-Chair Seaton asking how a married couple who
were partners in a partnership reporting income on a 1040
would report the information to the state. He explained
that each individual would receive a Schedule K-1; there
was no such thing as a joint Schedule K-1.
2:23:17 PM
Co-Chair Seaton stated that distributions from partnerships
would be taxed under the bill. He asked if a distribution
from a sub S corporation would be the same.
Mr. Spanos replied that the distributive share would be
taxed under the bill, but the actual distribution would
have been taxed already; there would be no additional tax
on the distribution. He explained that the distributive
share reported on the K-1 would be taxed under the bill.
There was no change for S corporations, which under current
law were exempt from corporate tax. He elaborated there was
no individual tax, which would normally be taxed as
passthrough income in another state with income tax.
Co-Chair Seaton asked for verification that there would be
tax on the distributive share of a profit from an S
corporation.
Mr. Spanos replied that the distributive share of a
partnership would be taxed because partnerships fell under
self-employed income under the bill's definition. S
corporations were a corporation just like a C corporation
and were not taxed under the bill because they were not
defined as self-employment income.
Co-Chair Seaton asked for verification that it was merely a
matter of definition of a distributive share that was or
could be in the bill.
Mr. Spanos answered that the definition used in the bill
came from the Internal Revenue Code where partnership
income was defined as self-employment income. Ownership in
an S corporation was viewed as investment - the owner was
viewed as an investor, not a partner in a corporation;
therefore, the distributive share did not flow to the
investor the same way as a partnership distributive share.
The bill could be rewritten to include S corporation
passthrough income, but it would be a bit more complicated.
2:26:14 PM
Vice-Chair Gara shared that he was a part owner of a small
LLC. He explained that what was actually distributed was
not all of the company's profits (the management decided
what to distribute). He asked if the distributive share
would be a person's share of the profits whether they were
distributed or not.
Mr. Spanos answered in the affirmative. He elaborated that
the distributive share was the portion of the income
representing a person's ownership in the partnership or LLC
and their portion of expenses.
Vice-Chair Gara asked if his LLC decided it wanted to avoid
taxes by not distributing the companies profits and it
distributed zero, there would still be a distributive share
even without a distribution.
Mr. Spanos agreed.
Co-Chair Seaton asked if LLCs would be taxed as
partnerships. Mr. Spanos stated it depended how an entity
chose to be taxed federally. For federal tax purposes an
LLC could choose to be taxed as an S corporation or a
partnership. If an entity chose to be taxed as a
partnership federally, the partners would receive a K-1;
however, if it chose to be taxed as an S corporation they
would not.
Co-Chair Seaton asked if the bill's definition that would
tax LLCs as partnerships was problematic or prohibitive.
Mr. Spanos answered that the question would be about how a
distributive share would be calculated because a K-1 would
not be received. He reiterated his earlier statement that
taxing an S corporation could be done in the bill, but it
would be more complicated.
Co-Chair Seaton did not want to create holes with the bill.
He asked if the bill could specify that an S corporation
could choose whether its income would be taxed as corporate
income tax under the state or under a distributive share
partnership. Under either scenario it would mean S
corporations would fall into one of the state's tax systems
and would be taxed in Alaska like C corporations.
2:29:49 PM
Mr. Spanos answered that the bill could be structured that
way, but if an LLC chose to be taxed as a partnership for
state purposes, yet it was taxed as an S corporation for
federal purposes, it would be very complicated to determine
how much the entity would owe because it would not receive
a K-1. He noted that it would be possible to specify that
an S corporation would be taxed as a C corporation, which
would be simple because the language was already in
statute. He furthered that S corporations were already
required to file with the state as a corporation, but
currently they were exempt from a tax.
Co-Chair Seaton asked whether there was anything preventing
an S corporation from generating a K-1 form for the state
(whether it was submitted to the federal government or not)
if the corporation wanted to be taxed under the provision
in the bill.
Mr. Spanos answered that nothing would prevent them, but
the tax structure for an S corporation was different. He
was sure a CPA could figure out how to prepare documents as
if the entity was an S corporation and as if it were a
partnership. He explained that federal returns were audited
by the IRS, which DOR relied on for broader coverage. He
elaborated that if an entity was preparing its own
documents, DOR would need in-house experts for partnership
K-1 preparation, which was doable, but more complicated.
2:31:47 PM
Mr. Alper addressed the PFD tax status and voluntarily
donating their PFD on slide 21:
· From a federal tax perspective, what matters is if
someone is issued a PFD
· All recipients get a 1099 which is also sent to the
IRS
· PFD is a dividend (Sch. B) for federal tax purposes.
Dividends are taxed at filer's regular tax rate
· For federal purposes, if someone doesn't want to be
taxed on their PFD, they would need to not file for
(or receive) it
· Alternatively, someone could make a tax deductible
charitable donation to the state of their PFD
· However, that would only make a taxable difference if
they itemized their deductions (Sch. A) on their
federal tax return
· Plausible work-around, establishing a GF designation
for the share of the state population that does not
apply for a PFD
· No way to "donate" an individual's dividend without it
first being received and considered taxable income
Mr. Alper elaborated on the slide. He explained that if a
person chose to donate their PFD and wanted to receive a
tax deduction for the donation, the person had to actually
receive their PFD (it would have to be income and a
deduction). He stated that did not want to accept their
dividend they could choose not to apply. The department had
considered possible workarounds where if a person chose not
to apply it would trigger a donation to the state. The
closest the department had come was to take the number of
Alaskans who applied for their PFD and the number who did
not apply; the department could set aside a revenue flow
for individuals who did not apply, but there would be no
donation associated with the action. It would merely be a
mechanism to account for individuals who chose not to apply
or were not eligible. The dividend was classified as
Schedule B and was federally taxable at the regular rate.
The donations of dividends were deductible, but only if
itemized. He noted that approximately 30 percent of
Alaskans itemized.
2:33:21 PM
Representative Ortiz asked if the state established a
workaround, the state would have information about who
qualified for a dividend versus who actually applied.
Alternatively, he wondered if Mr. Alper was talking about
basing the calculation on a total number of Alaskans who
may or may not qualify.
Mr. Alper answered that eligibility determinations were a
key issue. There was no way to involve donations or write-
offs without going through an eligibility determination, so
someone knew they were getting something before they gave
it away (at that point it would be income). For individuals
who did not apply, the concept he had mentioned would be a
blanket calculation of the rest of the population. The
presentation listed Alaska's population at slightly below
740,000 and approximately 670,000 applied for the dividend
in the current year. He believed about 20,000 had been
disqualified, but it was a separate issue. about 70,000
Alaskans did not apply for one reason or another. He
speculated at reasons.
Representative Ortiz asked if the impact of a workaround
would potentially mean a higher dividend for other people.
He reasoned that the higher dividend would go away if the
workaround was applied.
Mr. Alper replied that it depended on the starting point.
He explained the current dividend distribution process -
the legislature made an appropriation, which in the past
had been a lump sum. He noted that the past year was
unusual because it had been a reverse engineered lump sum
to equal $1,000. He used $1 billion as an example amount
going into the fund. Currently the number was divided by
the number of eligible applicants. If the non-applicants
were built in to the calculation it would reduce dividends
because it would be divided by a lower number and a portion
would be carved out to go into the appropriation. He
clarified he was not providing a policy proposal, but a
theoretical exercise. Alternatively, an amount could be
appropriated to dividends and in addition there would be a
separate number based on individuals who did not apply that
could be appropriated to the General Fund on a pro-rata
level.
2:37:19 PM
Representative Tilton stated that if a person did not apply
for their dividend it impacted other things like a person's
eligibility for fishing licenses and other. She believed
there was an array of issues the state would need to figure
out how to deal with.
Mr. Alper answered that eligibility for the PFD was seen as
de facto proof of Alaska residency for certain things like
fishing licenses; however, he did not believe the lack of
receiving a dividend was necessarily proof of
ineligibility. He was certain a person could go to the
Department of Fish and Game with their mortgage statement,
electric bill, driver's license, or other in order to prove
residency. The PFD was one of many mechanisms to prove
residency.
Representative Guttenberg stated that he went through the
conversation annually with a couple of people. The
individuals were lifelong Alaskans and had received the PFD
every year they were eligible, but they no longer wanted to
receive it. Instead, they did not want to have to apply for
it and wanted the money to either stay in the General Fund
or the principal of the Permanent Fund, or to donate it to
a school or the borough. He observed that the issue was
difficult for many Alaskans and the problem was unique to
the state. He believed keeping things simple worked.
Mr. Alper imagined another theoretical workaround where a
resident checked a box specifying they were electing not to
apply for the PFD and they would like to donate it to the
General Fund or school district. He explained that it would
still be necessary to prove the individual's eligibility.
He questioned how the IRS would treat the situation if the
eligibility process was bypassed and an individual was
given a de facto dividend (a share of the total). He
guessed that the IRS would need to consider it income,
meaning the benefit the Alaskan was trying to gain from not
receiving the dividend would be lost. He highlighted a
scenario of a person who itemized and was in the top
bracket (39 percent). If the person received a $1,000
dividend, the donation of the dividend would save the
individual only at a 40 percent rate and would end up even
at best and probably owing a bit of tax on the difference.
2:41:20 PM
Mr. Alper was happy to address additional questions.
Co-Chair Seaton remarked there had been discussion on
parameters of the cap, looking at S corporation or
partnership distributions. Another issue that had been
mentioned was the prospect of not increasing the actual
rate, but if the voters approved a bond issue, there could
be an automatic mechanism to amortize the repayment of the
bonds through a temporary increase in the tax in the bill.
If there was a general obligation bond it would mean the
legislature was not sitting there trying to determine what
cuts to make or other options to pay for the amortized
payments. He wondered whether the issue had been considered
by the administration. He asked if the calculation
authority for a temporary increase could be put in DOR's
lap.
Mr. Alper answered that he had spoken with the state's debt
manager Deven Mitchell [Executive Director, Alaska
Municipal Bond Bank Authority, Department of Revenue], but
he did not have a legal opinion on the subject, so he was
unable to say anything concrete. He answered that the
scenario was plausible; it would involve delegating a rate-
setting authority to DOR. He furthered the method was seen
at the municipal level frequently. He provided examples. He
furthered that voters would approve the authorization and
DOR would have the ability to set the rate higher and
change the withholding tables in subsequent years. There
was nothing to make it inherently impossible; it was a bit
complicated and no one else was using the method. He noted
that Juneau had a sales tax that voters approved every
several years, which supported a specific list of capital
projects. Deferring "this sort of thing" to voter approval
in order to change the tax rate was not unheard of. If the
proposal became real, DOR would reach out to the Department
of Law to ensure there were no holes.
Mr. Alper relayed that DOR was already trying to come up
with language if there was the desire by the committee to
include an amendment in the bill. Practically speaking it
would not work well within the cap; it should be included
outside the cap. He explained it was much harder to predict
who was and was not going to be paying at that number and
it was hard to predict the revenue. He summarized that the
department could try to make it work, but it did not have
enough information at present to specify how it would be
done.
2:45:24 PM
Co-Chair Seaton stated that another idea floating around
was a rebate or exemption for income below the federal
government's $10,300 or other. He asked if it would be
difficult for the department to issue a refund if a person
had paid the 1.5 percent tax but was below the federal
government income level.
Mr. Alper answered there were a couple of different ways to
do it. He detailed that to not tax the first "x" dollars of
income was more difficult because especially at lower
income levels many people had multiple jobs throughout the
year and they ended up "tripping over the minimum" and the
state would have to go after the individuals to pay taxes.
Administratively, it would be much easier to pay a flat
rebate to people who come below a certain income level,
although it would have unfairness right at the edge. He
explained that the individual making $100 than the cutoff
would not receive a rebate, while the person making below
the cutoff would; it would mean the creation of a stairstep
in the tax rate. Alternatively, if a rebate of $150 was
given to everyone off the first $10,000, it would be the
simplest administratively, but it would be expensive.
2:47:38 PM
Mr. Spanos agreed that it could be done. The major concern
that most states had with refunds was fraud, especially
with some of the larger data breaches (if someone stole a
person's information they could file for a refund claim
under that person's name). There was an administrative
burden on verifying the person was who they claimed to be
before the refund was sent. He explained the method was
simpler than putting the burden on an employer to verify
someone had already paid the tax somewhere else or that
they were below a given income level. He furthered that it
could be done and DOR could give employers the ability to
register employees its system, but it would put the burden
on the employer. The department believed that having the
taxpayer file directly with it and having a refund sent was
manageable.
Co-Chair Seaton asked about the fiscal note. He wondered if
the intention was to have a capital and operating fiscal
note if the bill passed.
Mr. Alper answered that if the bill passed during the
current special session and there was no accompanying
appropriation, the state did not need to start spending the
money in the next few months. The department could wait for
the next budget cycle or ideally a supplemental budget that
would pass early in the coming regular session. For
operating and staff needs the department would reach out to
a contractor for was in the hundreds of thousands of
dollars. The department would find a way to locate the
funds elsewhere and would then backfill it later in the
year. He addressed a capital appropriation and explained
the contractor would take time to gear up for it anyway -
as long as the contractor knew the state would have the
money in the coming year, there should not be a problem.
2:50:05 PM
Vice-Chair Gara surmised the items under discussion were
feasible. He reasoned that other states and the federal
government exempted certain amounts of income. He spoke to
the concept of stair stepping and provided a scenario where
the state wanted to exempt the first $20,000 of income or
to exempt anyone earning $20,000 or less. He supposed a
person could specify they wanted less withheld on their
employer withholding form and if they underestimated they
could pay the tax at the end of the year. He asked for
verification that it was all feasible.
Mr. Spanos replied that it was feasible. He noted that an
issue when contemplating the method was that an individual
with multiple jobs that would easily exceed the line could
not pay the tax; if the individual was a nonresident it was
nearly impossible to track it down and get the money back.
For residents, the state had a dataset showing the person
was a resident and it should receive W-2 forms from
employers, which would allow DOR to determine the
individual exceeded the limit and to send them a bill or
ask them to file a return. He spoke to the expense of
chasing down filers and sending out paper documents. From a
wage tax perspective, it was not typically a voluntary
compliance issue because the tax was withheld from wages.
However, with self-employed individuals it was a voluntary
return that needed to be filed. What Vice-Chair Gara was
proposing was that an individual not meeting the income
level would have to file their own return if they exceeded
the specified income level. The department suspected that
under the scenario many people would not file and DOR would
have to seek out individuals.
Vice-Chair Gara assumed there were other states that
exempted income for lower income people. He asked for the
issue to be kept in mind because it was a concern for some.
Mr. Alper answered that the bill that the House had passed
[the prior session] had exempted income below a given
level. He confirmed that the concept was not unusual. Some
form of a standard deduction was standard operating
procedure in income taxes. The key was it exempted
everyone, which could be built into the withholding tables
and standard formulas. He furthered that if the state
wanted to exempt the first $20,000, close to one-third of
all the income fell off the tax roll; therefore, if the
state wanted to raise the same money proposed by the bill
it would mean raising the rates. Nonetheless, it would be
easy to implement. However, exempting those earning less
than $20,000 became more complicated; a cleaner way to do
it would be by refund rather than by a tax.
Vice-Chair Gara asked if administering the refund process
would be feasible for DOR.
Mr. Alper answered that the key issue was fraud. When
dealing with potentially hundreds of thousands of
transactions, many systems automated the process. There had
been a problem with Russian hackers applying for refunds on
behalf of thousands of citizens and getting electronic wire
transfers in the hundreds of thousands to millions of
dollars before anyone caught what was happening because
everything was automated. He explained that was they type
of thing the state needed to protect itself from.
Representative Wilson asked when amendments on the bill
would be due.
Co-Chair Seaton replied that a date had not yet been
determined.
Representative Wilson remarked that she did not want to
overload Legislative Legal Services.
Co-Chair Seaton stated that it would be helpful for
committee members to bring the ideas forward for
discussion. At present they were still considering which
ideas were feasible and what there was agreement on.
HB 4001 was HEARD and HELD in committee for further
consideration.
Co-Chair Seaton addressed the schedule for the following
day.
ADJOURNMENT
2:56:13 PM
The meeting was adjourned at 2:56 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 4001 DOR TAX 2nd present payroll tax 11-8-17 final.pdf |
HFIN 11/8/2017 1:00:00 PM |
HB4001 |