Legislature(2021 - 2022)ADAMS 519
09/13/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB189 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 189 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
THIRD SPECIAL SESSION
September 13, 2021
1:34 p.m.
1:34:24 PM
CALL TO ORDER
Co-Chair Merrick called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
Representative Bryce Edgmon
ALSO PRESENT
Representative Ivy Spohnholz, Chair, House Ways and Means
Committee; Rose Foley, Staff, Representative Ivy Spohnholz.
PRESENT VIA TELECONFERENCE
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue
SUMMARY
HB 189 EMPLOYMENT TAX FOR EDUCATION
HB 189 was HEARD and HELD in committee for
further consideration.
Co-Chair Merrick reviewed the agenda for the meeting.
HOUSE BILL NO. 189
"An Act imposing an education tax on net earnings from
self-employment and wages; relating to the
administration and enforcement of the education tax;
and providing for an effective date."
1:35:12 PM
REPRESENTATIVE IVY SPOHNHOLZ, CHAIR, HOUSE WAYS AND MEANS
COMMITTEE, introduced the bill that would reestablish an
education payroll tax. She detailed that the State of
Alaska had a constitutional obligation as provided by
Article VII, Section 1 to provide and maintain a system of
public schools open for all children in the state. She
explained that the tax would seek to raise a small portion
of the overall funding needed to meet the constitutional
obligation. She informed the committee that Alaska had a
form of an education tax from 1919 until 1980 when it was
repealed. The tax in HB 189 was estimated to generate $64
million to $66 million annually, with 20.8 percent of
taxpayers as nonresidents. She stated that the bill did not
come close to solving the state's fiscal situation;
however, it could be part of a broad compromise fiscal
plan. She thought the legislature was closer to a solution
than many people understood.
Representative Spohnholz shared that the House Ways and
Means Committee had heard from the Legislative Finance
Division on September 1 that if there was a dividend
formula of 25 percent of the percent of market value
(POMV), the fiscal gap would be about $347 million in FY 23
and barring a major market correction, it would begin to
move into the black in FY 25. She stated it was possible to
balance the budget with a small series of tweaks to state
laws and HB 189 could be a piece of the bargain. The tax
would cost approximately $572,600 to administer for the
creation of five new positions with an administrative cost
of less than 1 percent. She shared that her staff was
available to provide a sectional analysis if desired.
ROSE FOLEY, STAFF, REPRESENTATIVE IVY SPOHNHOLZ, reviewed
the sectional analysis (copy on file):
Section 1 adds a new chapter to AS 43 creating an
Education Tax.
Sec. 43.45.011 authorizes the Department of
Revenue to collect an education tax on wages and
self-employment earnings from a source in Alaska.
The amount of tax due is based on an individual's
income and established in statute.
Sec. 43.45.021 directs employers to withhold one-
half of the estimated tax due from each of an
employee's third and fourth regular payrolls of
the year and to maintain records of the
withholdings. The employer is required to
withhold the tax from the employee unless the
employee can prove they have already paid the tax
due for the calendar year.
Sec. 43.45.031 stipulates that a self-employed
individual will remit the tax required under AS
43.45.011.
Sec. 43.45.041 provides a mechanism for a
taxpayer to request a refund if an overpayment is
made.
Sec. 43.45.051 requires a person to report to the
Department of Revenue any payments made to a
self-employed individual if reporting of that
payment is required by the Internal Revenue
Service.
Sec. 43.45.061 directs proceeds from this tax to
the public education fund within the general
fund.
Sec. 43.45.099 provides definitions for key terms
in this chapter.
Section 2 is uncodified law allowing the Department of
Revenue to adopt regulations to implement this act.
Section 3 provides an immediate effective date for
Section 2, the adoption of regulations.
Section 4 provides an effective date of January 1,
2022 for the Education Tax.
1:39:43 PM
Co-Chair Merrick asked for verification the tax had
previously existed from 1919 to 1980.
Representative Spohnholz answered affirmatively.
Co-Chair Merrick asked why the tax had been repealed in
1980.
Representative Spohnholz replied that the tax had been
repealed when Trans-Alaska Pipeline System (TAPS) and oil
taxes came online. She stated that like many different
revenue measures, the tax had been repealed.
Co-Chair Foster recognized Representative Spohnholz's
testimony that the state was constitutionally required to
provide for education. He referenced her statement that
funds [generated by the proposed tax] would be deposited
into the Public School Trust Fund. He asked for
verification the funds would be designated not dedicated.
He was trying to understand if the funds would be
sweepable.
Representative Spohnholz responded it was her understanding
it would be a designated fund. She deferred the question to
Legislative Legal Services.
Representative Rasmussen asked why the bill used the word
"workers" instead of "household."
Representative Spohnholz answered that the point was for
every worker to be able to contribute. She noted that some
households had more than one worker.
Vice-Chair Ortiz stated that AS 43.450.301 stipulated that
a self-employed individual would remit the tax. He asked
how it would look in the real world. He asked what the
process would be for a self-employed individual to make
their contribution.
Representative Spohnholz deferred the question to the
Department of Revenue (DOR).
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE (via teleconference),
answered that DOR had a tax revenue management system where
individuals could register and pay the tax. He stated there
was also an opportunity where DOR would potentially
coordinate with the Department of Labor and Workforce
Development (DLWD) to work through the existing DLWD
system.
1:42:50 PM
Representative Wool referenced Mr. Stickel's statement that
people could register to pay through DOR. He stated the
payroll tax would come out of paychecks. He assumed the
employer had some responsibility for filing for employees.
He thought the tax would be deducted annually from an
employee's paycheck. He asked if Mr. Stickel was indicating
employers could pay the tax through the DOR system.
Mr. Stickel answered that the bill would tax wages and
salaries in addition to self-employment earnings. He
explained that for an employee earning wages and salaries
through an employer, the employer would withhold the wages,
similar to how it worked for federal income tax, state
unemployment tax, or Medicare tax. He elaborated that the
employer would be responsible for remitting the tax to DOR.
The tax would be fairly hassle-free for many workers; the
bill specified the tax would be taken out of third and
fourth paychecks of the year to be remitted to DOR. He
explained that self-employed individuals would be
responsible for remitting the tax directly to DOR. There
would also be an opportunity for an individual to register
with the department for refunds if they had multiple jobs
and ended up paying more tax than they would under the
bracketed structure.
Representative Wool provided an example of a person working
at a restaurant and also driving for Uber. He thought the
funds would likely come out of the individual's restaurant
employee check instead of from their self-employment
income. He asked if people would pay the tax based on the
honor system if they were only self-employed.
Mr. Stickel responded that the tax would be withheld from
wages and salaries by the employer. He stated that if the
second income source pushed the individual into another tax
bracket, they would be responsible for paying tax on that
portion. He added that DOR would have the powers of audit
and enforcement of the tax as it did with any other taxes.
1:46:30 PM
Representative Wool referenced Mr. Stickel's statement
about DOR's auditing powers. He reasoned that without a
state income tax it was not possible to know what people
earned in the State of Alaska other than through federal
income tax, which he did not believe was disclosed. He
thought the state would not really know if someone had
another job other than through the honor system unless DOR
had some reason to audit the person.
Mr. Stickel answered that the department had the ability to
access confidential information submitted through DLWD or
through federal income tax for audit and enforcement
purposes. He stated it was something the department could
and would likely use to implement the tax.
Representative Rasmussen asked if the decision to take the
tax in the third and fourth paychecks, which she believed
could fall into the same month, was based on the
department's request. She asked for detail.
Representative Spohnholz answered that the third and fourth
paychecks had been selected because they [the bill
sponsors] did not want the funds to come from the first and
second paychecks of the year immediately following the
holidays when many people tended to be cash-poor. The idea
was delaying to the third and fourth paychecks gave people
more opportunity to catch up on their cash flow.
Representative Rasmussen asked if there was an increased
cost if the funds were taken out of employees' paychecks
monthly. She stated that for an individual earning $120,000
per year, $600 coming out of a paycheck in one month may be
a substantial portion of their mortgage and may have a
bigger financial impact.
Representative Spohnholz deferred to the department.
Mr. Stickel replied that from an administrative standpoint
there would be slightly more burden to having 12 payments
per employee rather than 2. He thought the difference would
be fairly minor. He noted it would change the timing of the
revenue impact for the first year of implementation given
that the first year assumed the state would receive all of
the withholdings in FY 22. He explained that spreading the
withholdings out over 12 months meant the FY 22 number
would be a bit lower.
Representative Rasmussen asked if it would be any easier
for DOR if it was a flat tax where every Alaskan
contributed the same amount of money, more like a user fee
instead of a progressive income tax proposal.
Mr. Stickel that it started to get into a policy question
that he was not comfortable speaking to. He stated there
would likely be some administrative efficiencies to having
a set rate per individual.
1:50:59 PM
Representative Spohnholz replied to the questions from
Representative Rasmussen. She explained the tax had
initially been modeled on the original 1919 legislation.
She explained that in 1919, the tax had been a flat and
taxpayers had all paid the same amount. She believed the
tax had come out of individuals' first paycheck. The bill
modified the timing of the payment to give people respite
in January. She stated she was agnostic on the particular
issue, and she was amenable if it was the committee's will
to spread the payments out over 12 months. She addressed
the question about the progressivity of the tax and stated
it was quite modest. She detailed that the 1919 tax had
been $50 per person. She reiterated that the bill contained
modest progressivity. She remarked that it was certainly
not equal when considering the percentage of income coming
from a person earning $30,000 per year versus someone
earning $120,000 per year; it had been a policy call made
in the House Ways and Means Committee.
Representative Rasmussen asked if the bill considered net
or gross tax. She stated someone making $30,000 per year
paid substantially less in federal income tax than a person
making $120,000 per year. She added that a person earning
$120,000 per year was likely paying substantially higher
property taxes, which funded a large portion of education
in Anchorage. She thought it seemed to be a growing burden
on the upper and middle class Alaskans where there were no
additional services and help available.
Representative Spohnholz replied that the bill contained a
gross tax. She clarified it was a payroll tax, not an
income tax. She stated a payroll tax was different than an
income tax that tended to be offset based on deductions and
other expenses.
Ms. Foley added that the bill contained a tax on wages
under the federal definition in 26 USC 34.01. She noted
that Alaska had a highly seasonal workforce and spreading
the payment out over 12 months could create difficulties in
collection for seasonal employees who may not work 12
months a year.
Representative Josephson referenced Representative
Spohnholz's earlier testimony about how the tax could help
with the overall bigger picture. He relayed that he had
proposed a motor fuel tax, which he knew would offset some
general funds; however, he had not thought of it in terms
of the need for a big fiscal reform package. He referenced
a 50/50 plan [where the POMV draw was divided between
government services and the dividend] and highlighted that
the legislative Fiscal Policy Working Group talked about a
minimum of $500 million in revenue. He remarked that if it
were a sales tax, the state could get by with $440 million
in sales tax and use HB 189 to compliment it [as part of a
larger fiscal plan]. He asked how in a 75/25 plan, in
combination with other revenue, the bill could be used
without the need for a larger tax.
Representative Spohnholz replied that on September 1 the
House Ways and Means Committee had heard from the
Legislative Finance Division that with a 50/50 split of the
POMV, there would be a fiscal gap of about $1.2 billion in
FY 23. She detailed that reducing the dividend portion to
33 percent would result in a gap of about $614 million. She
elaborated that allocating 25 percent of the POMV to
dividends would result in a fiscal gap of $346.7 million in
FY 23. Under a 75/25 split the budget began to move into
the black by FY 25. She shared that on September 9 in the
House Ways and Means Committee, she had proposed a
comprehensive fiscal plan that included an update to the
dividend formula using a 75/25 split, the employment tax
for education in the form of HB 189, oil and gas per barrel
tax credit reform in the form of the House Ways and Means
Committee bill HB 3007, and Representative Josephson's HB
104 [motor fuel tax]. She reported that combining the four
measures would result in a surplus of $322 million in FY
24, which would enable the state to start addressing its
capital deferred maintenance backlog.
1:56:57 PM
Vice-Chair Ortiz asked for verification that under the
75/25 scenario the state would have a balanced budget in
the black by FY 24.
Representative Spohnholz replied that by FY 25 the state
would be generating surpluses.
Vice-Chair Ortiz asked if under the scenario the
legislature could put a termination date on some revenue
measures to get through. He surmised the taxes could go
away and the state could move forward with a balanced
budget.
Representative Spohnholz agreed that the legislature could
put a sunset date on some of the revenue measures. For
example, there could be a two-year sunset date on the oil
and gas per barrel tax credit bill. The state would have a
balanced budget in FY 24 and would functionally be
producing surpluses after that time. She explained it would
allow the state to make strategic investments in things
like universal optional Pre-K, the capital budget, and
other.
Representative LeBon asked how the $64 million to $65
million broke down into the different groupings. He
believed he found the answer on page 2 of the fiscal note
analysis. He referenced the number of taxpayers in each
group and the dollar amount. He was working out the math.
Co-Chair Merrick noted that DOR would review the fiscal
note after the committee had finished with questions.
1:59:14 PM
Representative Thompson provided an example of a military
person living in the dorms on base. He asked if the
individual would be taxed. He how military personnel would
be impacted.
Mr. Stickel answered that DOR had assumed federal employees
would be subject to the tax similar to the way they would
be subject to an income tax.
Ms. Foley added that the federal definition for tax on
wages specified "that term shall not include renumeration
paid for active service performed in a month for which such
employee is entitled to the benefits of Section 112
relating to certain combat zone compensation of members of
the Armed Forces of the United States to the extent
renumeration for such service is excludable from gross
income under such section."
Representative Wool stated that pre-1980 the state had the
head tax and an income tax. He asked how much revenue each
of the taxes had raised. He observed that the bill would
raise $64 million. He recognized the number was much higher
than the head tax in 1979. He thought it had been a flat
rate of $10 per worker. He noted there had been fewer
workers and a low fee. He did not know what the income tax
had generated at the time.
Representative Spohnholz answered that she would follow up
with the information.
Representative Wool asked what oil price assumptions had
been used in the legislation, especially relative to
revenue to the state. He remarked that the per barrel
credit numbers were very dependent on oil price. He
referenced an oil glut and price drop during COVID. He
highlighted that no one was saying the situation would not
occur again. He noted the volatility of the oil market.
Representative Spohnholz replied that the bill used DOR's
assumptions; the assumption for the current year was $71
per barrel. She believed the House Finance Committee had
heard presentations from DOR on oil price projections.
2:02:57 PM
Co-Chair Merrick asked Mr. Stickel to review the fiscal
note.
Mr. Stickel shared that the fiscal note had been published
on May 6, 2021 for the prior version of the bill. The
department had an updated fiscal note in progress for the
current bill version. He reported the revenue impact from
the new bill version would be very similar to the previous
estimate. The department had anticipated $65 million to $66
million in annual revenue from the legislation upon full
implementation. The estimate assumed about 406,000 wage
earners and self-employed workers as the resident taxpayer
base. The assumption included a 20 percent increase to the
number or about 81,000 nonresidents in the taxpayer base.
The department had coordinated with DLWD to refine some of
the assumptions used for the original bill. The current
assumption was that nonresidents would increase the
taxpayer base by about 15 percent or about 60,900. The
slightly reduced number of taxpayers combined with the new
bracket structure gave a preliminary revenue estimate of
$64 million to $65 million for the current bill version.
Mr. Stickel stated the department assumed there would be 75
percent of a full year's worth of revenue in FY 22 given
that the tax would take effect midway through the fiscal
year. He explained that most employees with salaries and
wage income would end up paying their full annual tax
within FY 22 (likely in February or March of 2022). He
noted there were some seasonal employees who would not pay
taxes until FY 23 for the 2022 calendar year. Additionally,
some self-employed individuals would not pay until later in
the year. The fiscal note showed a $6 million capital
request reflecting an estimate for contracting with the
department's contractor FAST Enterprises for a new module
to DOR's tax revenue management system. The department was
requesting five new ongoing positions with a funding cost
of about $572,600 per year. The new positions would
implement and audit the new tax. He reported that the
implementation costs had not changed for the new version of
the bill.
Representative Spohnholz thanked the committee for the
questions during the meeting. She stated that the bill was
not a standalone comprehensive fiscal plan, but it was a
piece of the larger puzzle as the legislature worked to
find ways to fund its constitutional obligations, balance
the budget, and create fiscal certainty for Alaskans.
HB 189 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
2:07:47 PM
The meeting was adjourned at 2:07 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 189 Sectional Analysis version W.pdf |
HFIN 9/13/2021 1:30:00 PM |
HB 189 |
| HB 189 Sponsor Statement version W.pdf |
HFIN 9/13/2021 1:30:00 PM |
HB 189 |
| HB 189 Summary of Changes version I to version W.pdf |
HFIN 9/13/2021 1:30:00 PM |
HB 189 |
| HB 189 Education Payroll Tax Presentation HFin 9-13-21.pdf |
HFIN 9/13/2021 1:30:00 PM |
HB 189 |