Legislature(2019 - 2020)SENATE FINANCE 532

02/01/2019 09:00 AM FINANCE

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Audio Topic
09:02:24 AM Start
09:03:47 AM Presentation: Indirect Expenditures
10:12:19 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Indirect Expenditures by TELECONFERENCED
Alexei Painter, Legislative Fiscal Analyst &
Dan Stickel, Ky Clark, & Ed King, Department of
Revenue
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 1, 2019                                                                                           
                         9:02 a.m.                                                                                              
                                                                                                                                
9:02:24 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lyman Hoffman                                                                                                           
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Cathy  Giessel; Senator  Mia Costello;  Dan Stickel,                                                                    
Chief  Economist,  Economic  Research Group,  Tax  Division,                                                                    
Department of  Revenue; Ky  Clark, Economist,  Department of                                                                    
Revenue;  Alexei   Painter,  Analyst,   Legislative  Finance                                                                    
Division.                                                                                                                       
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENATION: INDIRECT EXPENDITURES                                                                                              
                                                                                                                                
^PRESENTATION: INDIRECT EXPENDITURES                                                                                          
                                                                                                                                
9:03:47 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman discussed the agenda.                                                                                          
                                                                                                                                
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT OF  REVENUE,  introduced himself,  and                                                                    
informed that the project  manager for indirect expenditures                                                                    
was  a subject  matter expert  and would  be discussing  the                                                                    
presentation.                                                                                                                   
                                                                                                                                
KY  CLARK,  ECONOMIST,  DEPARTMENT  OF  REVENUE,  introduced                                                                    
himself and  discussed his  background. He  had been  in the                                                                    
position for two years. He had a degree in economics.                                                                           
                                                                                                                                
Mr.  Clark discussed  the  presentation  "Overview of  DORs                                                                     
Indirect Expenditure Report,  Report for FY 2013  - FY 2017"                                                                    
(copy on file).                                                                                                                 
                                                                                                                                
9:05:27 AM                                                                                                                    
                                                                                                                                
Mr. Clark moved to slide 2, " Overview":                                                                                        
                                                                                                                                
         Indirect Expenditure Report Legislation Overview                                                                    
         DOR Indirect Expenditure Report                                                                                     
         Considerations/Recommendations                                                                                      
                                                                                                                                
Mr.  Clark reminded  that the  Legislative Finance  Division                                                                    
also produced  a report of the  same name. He would  give an                                                                    
overview of the Department of Revenue's (DOR) report.                                                                           
                                                                                                                                
9:06:25 AM                                                                                                                    
                                                                                                                                
Mr.  Clark  showed  slide 3,  "Indirect  Expenditure  Report                                                                    
Legislation Overview."                                                                                                          
                                                                                                                                
9:06:30 AM                                                                                                                    
                                                                                                                                
Mr.  Clark  showed  slide 4,  "Indirect  Expenditure  Report                                                                    
Overview":                                                                                                                      
                                                                                                                                
         Passed in 2014 and signed on July 7, 2014 (House                                                                    
          Bill 306)                                                                                                             
         Requires DOR to submit a report to the                                                                              
          Legislature biennially on July 1 detailing                                                                            
          indirect expenditures of all agencies in the                                                                          
          State (AS 43.05.095)                                                                                                  
         Requires the Legislative Finance Division to                                                                        
          provide  a  report  to   the  Legislature  on  the                                                                    
          indirect expenditures  of certain  agencies before                                                                    
          the  start of  Legislative  Session following  the                                                                    
          release of DOR's biennial report                                                                                      
         The 1st DOR Indirect Expenditure Report was                                                                         
          released the day after the bill was signed, July                                                                      
          8, 2014                                                                                                               
         The 2nd DOR Indirect Expenditure Report was                                                                         
          released July 1, 2016                                                                                                 
         The 3rd DOR Indirect Expenditure Report was                                                                         
          released July 1, 2018                                                                                                 
                                                                                                                                
9:07:41 AM                                                                                                                    
                                                                                                                                
Mr. Clark reviewed slide 5, " Indirect Expenditures                                                                             
Defined":                                                                                                                       
                                                                                                                                
     Indirect  expenditure:  Any  foregone  revenue  by  the                                                                    
     state designed to encourage an  activity to benefit the                                                                    
     public in  the form of a  credit, exemption, deduction,                                                                    
     deferral,  discount, exclusion,  or other  differential                                                                    
     allowance.                                                                                                                 
                                                                                                                                
     As defined by AS 43.05.095(d):                                                                                             
         An express provision of state law that results in                                                                   
          foregone revenue for the state by providing:                                                                          
         A tax credit or other credit                                                                                        
         An exemption, but does not include federal tax                                                                      
          exemptions adopted by reference in AS 43.20.021                                                                       
         A discount                                                                                                          
         A deduction, but does not include costs incurred                                                                    
          in  the  ordinary  course  of  business  that  are                                                                    
          deducted in  the calculation of  a tax  under this                                                                    
          title or  in the calculation  of a royalty  or net                                                                    
          profit share  payment for a lease  issued under AS                                                                    
          38                                                                                                                    
         A differential allowance                                                                                            
                                                                                                                                
Mr. Clark gave  an example of an indirect  expenditure and a                                                                    
tax  credit   for  the  fisheries  business   tax.  He  gave                                                                    
additional   examples  of   indirect  expenditures   through                                                                    
exemption of fees. He mentioned  discounted fees for hunting                                                                    
and fishing licenses for certain user groups.                                                                                   
                                                                                                                                
9:10:47 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman clarified that the Sheldon Jackson Museum                                                                      
was owned by the Alaska State Museum.                                                                                           
                                                                                                                                
Mr.  Clark  continued  to  address slide  5  and  gave  more                                                                    
examples  of fee  deductions.  Municipal  and federal  taxes                                                                    
could be  deducted from the  state gambling tax. He  gave an                                                                    
example  of   a  differential  allowance  and   described  a                                                                    
resident in an  Alaska Pioneer Home through  which the state                                                                    
paid the  differential amount over  that which  the resident                                                                    
could pay.                                                                                                                      
                                                                                                                                
9:12:27 AM                                                                                                                    
                                                                                                                                
Mr.  Clark  discussed  slide 6,  "DOR  Indirect  Expenditure                                                                    
Report":                                                                                                                        
                                                                                                                                
         Released July 1, 2018 by DOR                                                                                        
             o The  DOR  Indirect   Expenditure  Report  was                                                                    
               revised on August 14, 2018 to reflect the                                                                        
               repeal of one indirect expenditure through                                                                       
               HB 398 (pg. 164)                                                                                                 
             o Provides    details     on    260    indirect                                                                    
               expenditures across 11 departments and                                                                           
               agencies,     including     78     provisions                                                                    
               administered by DOR                                                                                              
                                                                                                                                
9:13:24 AM                                                                                                                    
                                                                                                                                
Mr.  Clark   showed  slide  7,  "DOR   Indirect  Expenditure                                                                    
Report."                                                                                                                        
                                                                                                                                
Mr. Clark displayed slide 8, "Methodology":                                                                                     
                                                                                                                                
     Examples of provisions not meeting definition of                                                                           
     "Indirect Expenditure":                                                                                                    
      Alaska Housing Finance Corporation (AHFC)                                                                              
          o Identified one potential indirect expenditure;                                                                      
             reduced loan rates. But,  it was part  of their                                                                    
             normal  operations   and   not   "required   by                                                                    
             statute." Statutorily, AHFC can set the rates.                                                                     
                                                                                                                                
         Department of Commerce, Community, and Economic                                                                     
          Development (DCCED):                                                                                                  
          o Has certain licensing fees, which are set by                                                                        
             statute  to  cover  program  costs,  that  were                                                                    
             reduced for residents vs. non-residents. It was                                                                    
             determined not to be  foregone revenue, because                                                                    
             the  fee  differential  doesn't   affect  total                                                                    
             revenue.                                                                                                           
                                                                                                                                
      University of Alaska (UA):                                                                                             
          o Addressed tuition waivers to employees and                                                                          
             dependents; they are a part of the employee's                                                                      
             benefit package, so are not considered foregone                                                                    
             revenue.                                                                                                           
          o Non-resident vs. Resident tuition; UA is not                                                                        
             discounting the resident tuition rate, rather                                                                      
             the out-of-state student is paying a non-                                                                          
             resident surcharge (so no foregone revenue).                                                                       
                                                                                                                                
9:15:26 AM                                                                                                                    
                                                                                                                                
Mr. Clark looked at slide 9, "Reported Information":                                                                            
                                                                                                                                
     Each department was required to report the following                                                                       
     information:                                                                                                               
         The name of the indirect expenditure                                                                                
         A brief description                                                                                                 
         The statutory authority                                                                                             
         The repeal date, if applicable                                                                                      
         The intent of the legislature in enacting the                                                                       
          statute authorizing the indirect expenditure                                                                          
         The public purpose served by the indirect                                                                           
          expenditure                                                                                                           
         The estimated revenue impact of the indirect                                                                        
          expenditure for the previous five fiscal years                                                                        
          (excluding the fiscal year immediately preceding                                                                      
          the date the report is due)                                                                                           
         The estimated cost to administer the indirect                                                                       
          expenditure, if applicable                                                                                            
         The number of beneficiaries of the indirect                                                                         
          expenditure and who benefits                                                                                          
                                                                                                                                
9:16:20 AM                                                                                                                    
                                                                                                                                
Mr.         Clark         displayed        slide         10,                                                                    
"Recommendations/Considerations."                                                                                               
                                                                                                                                
Mr.   Clark   discussed   the    material   on   slide   11,                                                                    
"Recommendations/Considerations":                                                                                               
                                                                                                                                
     DOR identified several areas for the committee to                                                                          
     consider:                                                                                                                  
         House Bill 155 from 2015-2016                                                                                       
         House Bills 399 & 409 from 2017-2018                                                                                
         House Bill 398 from 2017-2018                                                                                       
         Review of recommendations produced by the                                                                           
          Legislative Finance Division                                                                                          
         Indirect Expenditures were reviewed in both                                                                         
          January 2015 and January 2017                                                                                         
         Fee Setting Authority                                                                                               
                                                                                                                                
Mr. Clark noted that HB 155 attempted to make changes to                                                                        
different taxes within the Department of Revenue. He noted                                                                      
that all the bills had to do with excise taxes.                                                                                 
Co-Chair Stedman asked if the bills listed on the slide had                                                                     
been enacted.                                                                                                                   
                                                                                                                                
9:17:41 AM                                                                                                                    
                                                                                                                                
Mr. Clark reviewed slide 12, " House Bill 155 from 2015-                                                                        
2016":                                                                                                                          
                                                                                                                                
    The following indirect expenditures were addressed                                                                          
     in a proposed bill:                                                                                                        
         Tobacco Products Tax                                                                                                
             o Gives a four-tenths of one percent deduction                                                                     
               to cover the expense of account and filing                                                                       
              the return for the tobacco tax                                                                                    
            o FY 2015 revenue impact of $54,053                                                                                 
         Cigarette Tax                                                                                                       
             o Gives a discount of up to $50,000 as                                                                             
               compensation for affixing stamps to packs of                                                                     
               cigarettes                                                                                                       
             o FY 2015 revenue impact of $360,326                                                                               
         Motor Fuel Tax                                                                                                      
             o Gives a timely filing credits of 1% of the                                                                       
               total monthly tax due to a maximum of $100                                                                       
            o FY 2015 revenue impact of $62,590                                                                                 
         Large Passenger Vessel Gambling Tax Deduction                                                                       
             o Allows a deduction of federal and municipal                                                                      
               taxes paid from gambling gross income                                                                            
             o Revenue impact is unknown                                                                                        
                                                                                                                                
Co-Chair Stedman asked if the bills being discussed had                                                                         
been passed or were deceased.                                                                                                   
                                                                                                                                
Mr. Clark stated that the listed bills on slide 12 had not                                                                      
been passed.                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asserted that  the committee did  not want                                                                    
to hear about deceased bills.                                                                                                   
                                                                                                                                
Mr.  Stickel recalled  that the  previous year,  members had                                                                    
requested a  list of  areas in  which the  legislature could                                                                    
contemplate  ways  to   change  indirect  expenditures.  The                                                                    
department  had  highlighted  previous legislation  for  the                                                                    
committee to consider as an  example of a starting point for                                                                    
changes.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman  reiterated  that the  committee  was  not                                                                    
interested in deceased bills.                                                                                                   
                                                                                                                                
Mr. Stickel noted that the  presentation provided example of                                                                    
four previous pieces  of legislation to serve  as an example                                                                    
of past proposals. The fourth example had been enacted.                                                                         
                                                                                                                                
Co-Chair  Stedman  asked  the   testifiers  to  discuss  the                                                                    
department's recommendations  and items that were  ready for                                                                    
review.                                                                                                                         
                                                                                                                                
9:19:32 AM                                                                                                                    
                                                                                                                                
Mr. Clark  affirmed that most  of the  indirect expenditures                                                                    
listed had been recommended by  review or termination by the                                                                    
Legislative Finance Division (LFD).                                                                                             
                                                                                                                                
9:20:03 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof  looked forward at slide  16 and recalled                                                                    
reading reports  and recommendations  and thought  there was                                                                    
greater interest  at present. She  thought it  was important                                                                    
to consider the environment at  present. She wondered if the                                                                    
department  had   specific  recommendations  based   on  the                                                                    
current fiscal climate.                                                                                                         
                                                                                                                                
Mr.  Stickel  stated  that  the  department's  role  in  the                                                                    
indirect  expenditure  report  was  to  compile  information                                                                    
rather than  make policy recommendations. He  noted that the                                                                    
department  compiled information,  which it  turned over  to                                                                    
LFD to  make policy  recommendations for  different indirect                                                                    
expenditures based on the report.                                                                                               
                                                                                                                                
Co-Chair  Stedman understood  that the  administration could                                                                    
submit  bills if  it  felt  there was  a  change needed.  He                                                                    
gleaned that Mr. Stickel was  suggesting that the department                                                                    
had no recommendations at present.                                                                                              
                                                                                                                                
Mr. Stickel clarified  that he was not prepared  to speak to                                                                    
policy at present, but there  was another chief economist in                                                                    
the room that might be able to do so.                                                                                           
                                                                                                                                
9:22:02 AM                                                                                                                    
                                                                                                                                
Senator Micciche thought slide 15  discussed a bill that had                                                                    
been passed. He asked about the effect of the bill.                                                                             
                                                                                                                                
Co-Chair Stedman asked  if the agency had a  position on the                                                                    
information and  stated that  the committee  did not  need a                                                                    
legislative history.  He asked  if the testifiers  wanted to                                                                    
discuss the  mechanics of  the indirect  expenditures listed                                                                    
on slide 12.                                                                                                                    
                                                                                                                                
9:23:09 AM                                                                                                                    
                                                                                                                                
Mr. Clark went  back to slide 12. He reiterated  that he and                                                                    
Mr.  Stickel  did  not  have  a  position  but  thought  the                                                                    
information  on  the  slides  was for  the  benefit  of  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Co-Chair Stedman asked Mr. Clark  to discuss the function of                                                                    
the taxes listed on slide 12.                                                                                                   
                                                                                                                                
Mr.  Stickel  discussed  the particularities  of  the  taxes                                                                    
listed on  slide 12. He  specified that  there was a  $2 per                                                                    
pack of cigarettes tax on  sales of cigarettes in the state.                                                                    
The  Motor Fuels  Tax was  a  per-gallon tax  of most  motor                                                                    
fuels sold  in the state. The  highway rate was 8  cents per                                                                    
gallon, and  there were other  rates for different  types of                                                                    
motor fuel.  The Large Passenger  Vessel Gambling Tax  was a                                                                    
tax  on the  share on  net  profits from  gambling in  state                                                                    
waters on cruise ships.                                                                                                         
                                                                                                                                
9:25:52 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:26:01 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Stedman  recalled  a  slide with  a  list  of  the                                                                    
largest indirect  expenditures that  was not showing  in the                                                                    
slide deck.                                                                                                                     
                                                                                                                                
Mr. Stickel answered in the affirmative.                                                                                        
                                                                                                                                
Co-Chair  Stedman  asked  the   testifiers  to  discuss  the                                                                    
information and provide the committee with a copy.                                                                              
                                                                                                                                
Mr. Stickel  discussed an  additional slide  entitled "Large                                                                    
Indirect Expenditures" (copy on file):                                                                                          
                                                                                                                                
       Oil & Gas Tax Credits (FY17 = $686 million)                                                                           
         Mining License Tax - Depletion Deduction (FY16 =                                                                    
          $29 million)                                                                                                          
         Insurance: all programs - Deduction from premiums                                                                   
          written for claims paid (DCCED*)(FY17 = $18                                                                           
          million)                                                                                                              
         Royalty Modification - Ooguruk  Unit (FY17  =$18                                                                    
          million)                                                                                                              
         Sport Fishing, Hunting & Trapping Senior Discount                                                                   
          (FY 18 = $14 million)                                                                                                 
         Commercial Passenger Vessel Taxes - Tax Reduction                                                                   
          for Local Levies (FY17 = $13 million)                                                                                 
         Motor Fuel Tax - Foreign Flight Exemption (FY17 =                                                                   
          $8.8 million)                                                                                                         
         Discounted Interest Rates - SRF  Municipal Loans                                                                    
          (FY17 = $6.3 million)                                                                                                 
         Insurance: all  programs   -   Lower  Tax   Rate                                                                    
          (DCCED*)(FY17 = $5 million)                                                                                           
         Multiple Tax Programs -  Film Production  Credit                                                                    
          (FY17 = $5 million; credit phasing out under                                                                          
          current law)                                                                                                          
         Permanent Registration for  8-Year-Old  Vehicles                                                                    
          (FY17 = $4.6 million)                                                                                                 
                                                                                                                                
Mr. Stickel informed  that the oil and gas  tax credits were                                                                    
the largest  indirect expenditure  and were integral  to the                                                                    
tax  calculation  itself.  He  mentioned that  the  City  of                                                                    
Juneau had a  local head tax on cruise  ship passengers, the                                                                    
amount of which could be  deducted against the state tax. He                                                                    
noted  that Juneau  and  Ketchikan both  had  the levies  in                                                                    
place when  the state enacted  the tax and both  cities were                                                                    
grandfathered  into the  ability  to deduct  it against  the                                                                    
state tax.                                                                                                                      
                                                                                                                                
9:29:44 AM                                                                                                                    
                                                                                                                                
Mr.  Stickel advanced  to  slide 13,  "House  Bill 399  from                                                                    
2017-2018":                                                                                                                     
                                                                                                                                
    The following indirect expenditures were addressed                                                                          
     in a proposed bill:                                                                                                        
                                                                                                                                
         Federal Tax Credits                                                                                                 
             o Under  Alaska's  adoption   of  the  Internal                                                                    
               Revenue Code, taxpayers can claim most                                                                           
               federal incentive credits                                                                                        
             o FY  2014  revenue  impact of  $1,578,843  (FY                                                                    
               2016: $1,936,758)                                                                                                
         Foreign Royalty Exclusion                                                                                           
             o Excludes  80%   of  foreign   royalties  from                                                                    
               apportionable income                                                                                             
             o FY  2014  revenue  impact of  $1,408,557  (FY                                                                    
               2016: $1,382,229)                                                                                                
         Reduced Tax Rate on Capital Gains                                                                                   
             o Long  term  capital  gains  are  taxed  at  a                                                                    
               maximum rate of 4.5%, while other income is                                                                      
              taxed at a maximum rate of 9.4%                                                                                   
             o FY  2014  revenue  impact of  $1,551,095  (FY                                                                    
               2016: $1,802,151)                                                                                                
         Exemption from tax under Stranded Gas Development                                                                   
          Act                                                                                                                   
             o Corporations that  are a party to  a contract                                                                    
               under  the Stranded  Gas Development  Act are                                                                    
               exempt  from  corporate   income  tax  filing                                                                    
               requirements, if  the agreement  provides for                                                                    
               a payment in lieu of tax                                                                                         
             o Revenue  impact   is  $0;   no  beneficiaries                                                                    
               because there is no contract                                                                                     
                                                                                                                                
Mr. Stickel explained that the slide looked at several                                                                          
indirect expenditures against the state's corporate income                                                                      
tax as potential considerations.                                                                                                
                                                                                                                                
9:31:07 AM                                                                                                                    
                                                                                                                                
Mr. Stickel reviewed slide 14, "House Bill 409 from 2017-                                                                       
2018":                                                                                                                          
                                                                                                                                
     The following indirect expenditures were addressed in                                                                      
     a proposed bill:                                                                                                           
         State Identification Cards for Senior Citizens                                                                      
             o Waives    identification   card    fees   for                                                                    
               applicants that are 60 years or older                                                                            
             o FY 2017 revenue impact of $198,630                                                                               
         Motor Vehicle License Plates and Registrations                                                                      
          Fees for Amateur Radio Users                                                                                          
             o Waives registration fees for certain amateur                                                                     
               radio users                                                                                                      
            o FY 2017 revenue impact of $4,400                                                                                  
         Motor Vehicle License Plates and Registrations                                                                      
          Fees for Municipal Governments and Charitable                                                                         
          Organizations                                                                                                         
             o Discounts vehicle registration fees from                                                                         
               $100 to  $10 for vehicles owned  by municipal                                                                    
               governments,    charitable   or    non-profit                                                                    
               organizations,               church/religious                                                                    
               organizations   and  Alaska   Tribal  Village                                                                    
               Councils                                                                                                         
             o FY 2017 revenue impact of $532,125                                                                               
         Permanent Registration for 8-Year-Old Vehicles                                                                      
             o Allows permanent registration for vehicles 8                                                                     
               years or older in  unorganized boroughs or in                                                                    
               communities that have  passed an ordinance to                                                                    
               allow permanent registration                                                                                     
             o FY 2017 revenue impact of $4,664,100                                                                             
                                                                                                                                
Mr. Stickel explained that slide 14 addressed several                                                                           
indirect expenditures within the Division of Motor Vehicles                                                                     
(DMV).                                                                                                                          
                                                                                                                                
9:31:49 AM                                                                                                                    
                                                                                                                                
Mr. Stickel looked at slide 15, "House Bill 398 from 2017-                                                                      
2018":                                                                                                                          
                                                                                                                                
     The following indirect expenditure was eliminated in a                                                                     
     passed bill:                                                                                                               
         Utilities Exempted from Water's Edge Combination                                                                    
          Reporting                                                                                                             
             o Income from public utilities including                                                                           
               telephone  services  is exempt  from  water's                                                                    
               edge   combination  reporting   requirements.                                                                    
               These companies  can instead pay tax  only on                                                                    
               Alaska net  income, based  on separate-entity                                                                    
               reporting                                                                                                        
             o Revenue impact is unknown because relevant                                                                       
               information is not collected                                                                                     
         HB 398 fiscal note:                                                                                                 
          "Within the last 10 years some public utilities                                                                       
          have started using their own methods of                                                                               
          allocating  and  apportioning  income  to  Alaska.                                                                    
          These methods  are less than favorable  to Alaska?                                                                    
          we  are  unable  to  provide an  estimate  of  the                                                                    
          additional     potential     revenue    due     to                                                                    
          confidentiality  concerns.  However,  we  estimate                                                                    
          that   there  will   be  a   material  amount   of                                                                    
          additional  revenue  collected,  between  $100,000                                                                    
          and  $5,000,000,  if   this  legislation  were  to                                                                    
          pass."                                                                                                                
                                                                                                                                
Mr.  Stickel  noted  that  slide 15  addressed  a  piece  of                                                                    
legislation  that  made a  change  to  corporate income  tax                                                                    
calculation  for utility  companies. Prior  to the  previous                                                                    
year,  a  utility company  could  pay  corporate income  tax                                                                    
based only on its  Alaska subsidiaries income apportioned to                                                                    
Alaska.  Most other  companies  were made  to  pay based  on                                                                    
Water's Edge Combination Reporting.                                                                                             
                                                                                                                                
9:33:06 AM                                                                                                                    
                                                                                                                                
Co-Chair  von  Imhof  recalled working  on  the  legislation                                                                    
listed on the slide.                                                                                                            
                                                                                                                                
9:33:43 AM                                                                                                                    
                                                                                                                                
Mr.  Stickel  moved  to   slide  16,  "Recommendations  from                                                                    
Legislative Finance":                                                                                                           
                                                                                                                                
              There  are    recommendations    made    by                                                                    
               Legislative Finance Division in both their                                                                       
               2015 & 2017 Indirect Expenditure Reports                                                                         
              2015 Report                                                                                                    
                  o Recommended 17  indirect expenditures be                                                                    
                    terminated                                                                                                  
                  o Recommended 33  indirect expenditures be                                                                    
                    reconsidered                                                                                                
                  o Recommended 24  indirect expenditures be                                                                    
                    reviewed                                                                                                    
                  o Recommended 37  indirect expenditures be                                                                    
                    continued                                                                                                   
              2017 Report                                                                                                    
                  o Recommended  2 indirect  expenditures be                                                                    
                    terminated                                                                                                  
                  o Recommended 13  indirect expenditures be                                                                    
                    reconsidered                                                                                                
                  o Recommended  3 indirect  expenditures be                                                                    
                    reviewed                                                                                                    
                  o Recommended 48 indirect expenditures be                                                                     
                    continued                                                                                                   
                                                                                                                                
9:34:17 AM                                                                                                                    
                                                                                                                                
Mr. Stickel showed slide 17, "Fee Setting Authority":                                                                           
                                                                                                                                
     Legislature has granted fee setting authority to                                                                           
     certain agencies, for example:                                                                                             
         Department  of    Transportation   and    Public                                                                    
          Facilities                                                                                                            
             o Alaska Marine Highway (AMHS): foregone                                                                           
               revenue related to AMHS discounts amounted                                                                       
              to over $4.7 million in FY 2015                                                                                   
         University of Alaska                                                                                                
             o Scholarship awarding authority                                                                                   
             o Western Undergraduate Exchange                                                                                   
             o Senior Citizen Tuition Waiver                                                                                    
         Discounts offered by agencies with fee setting                                                                      
          authority   may    not   qualify    as   "indirect                                                                    
          expenditures" since they are not an "express                                                                          
          provision of state law"                                                                                               
         Office of Management and Budget (OMB) produces                                                                      
          annual Fee Report                                                                                                     
             o Details    department   and    agency   fees,                                                                    
               including name and purpose                                                                                       
             o Details authorizing statute or regulation                                                                        
               and the amount of the fee.                                                                                       
                                                                                                                                
Mr. Stickel noted  that there could be  discounts allowed by                                                                    
agencies when  there was not  actually an  express provision                                                                    
in state  law. He  thought that the  combination of  the OMB                                                                    
Fee Report  and the departments Indirect  Expenditure Report                                                                    
was  a comprehensive  view  of  potential differentials  and                                                                    
allowances being offered throughout state government.                                                                           
                                                                                                                                
9:35:37 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof  asked if with the  ability and authority                                                                    
to   grant  fees,   she  assumed   that  the   corresponding                                                                    
responsibility of evaluating the  fees would also lie within                                                                    
the agencies.  She asked  if there  was a  recommendation or                                                                    
discussion  of evaluating  whether the  fee structures  were                                                                    
working.                                                                                                                        
                                                                                                                                
Mr. Stickel stated  that the report was  a large spreadsheet                                                                    
with a great  deal of information. He was sure  that OMB was                                                                    
considering  the fees  and  would be  happy  to discuss  the                                                                    
information with the committee.                                                                                                 
                                                                                                                                
Co-Chair Stedman  affirmed that the committee  would discuss                                                                    
the subject with OMB.                                                                                                           
                                                                                                                                
Co-Chair  Stedman  wanted  to   ensure  that  the  committee                                                                    
understood  that   the  head  tax  issue   was  an  indirect                                                                    
expenditure. He  thanked the testifiers  from DOR.  He noted                                                                    
that the committee would consider recommendations from OMB.                                                                     
                                                                                                                                
9:38:17 AM                                                                                                                    
                                                                                                                                
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
introduced   himself  and   discussed  his   background.  He                                                                    
recounted that he had previously worked for DOR.                                                                                
                                                                                                                                
Mr.  Painter   discussed  the  presentation,   "Overview  of                                                                    
Legislative Finance  Division Indirect  Expenditure Reports"                                                                    
(copy  on  file).  He  noted that  there  was  two  Indirect                                                                    
Expenditure Reports: one compiled by  DOR with data from all                                                                    
state  agencies,  and one  from  LFD.  The LFD  report  made                                                                    
recommendations to  the legislature based on  the DOR report                                                                    
data.  On the  first  day of  the  legislative session,  LFD                                                                    
submitted a  report that looked  at provisions  within state                                                                    
agencies.                                                                                                                       
                                                                                                                                
9:40:25 AM                                                                                                                    
                                                                                                                                
Mr.  Painter looked  at slide  2, "LFD  Indirect Expenditure                                                                    
Reports":                                                                                                                       
                                                                                                                                
         Make recommendations to legislature based on data                                                                   
          from DOR                                                                                                              
         Look at several agencies each report, on a six-                                                                     
          year cycle                                                                                                            
         Past recommendations may be based on outdated                                                                       
          information, so use with caution                                                                                      
                                                                                                                                
9:40:34 AM                                                                                                                    
                                                                                                                                
Mr. Painter discussed slide 3, "Agencies in 23015 Report":                                                                      
                                                                                                                                
         Commerce, Community and Economic Development                                                                        
         Fish and Game                                                                                                       
         Health and Social Services                                                                                          
         Labor and Workforce Development                                                                                     
         Revenue                                                                                                             
                                                                                                                                
9:40:51 AM                                                                                                                    
                                                                                                                                
Mr.   Painter    showed   slide   4,   "Summary    of   2015                                                                    
Recommendations":                                                                                                               
                                                                                                                                
    Terminate: 17 provisions                                                                                                 
        o Total known revenue impact of $5 million (in                                                                          
          FY14)                                                                                                                 
       o Three provisions had unknown revenue impact                                                                            
    Modify or review: 59 provisions                                                                                          
    Continue: 37 provisions                                                                                                  
    No recommendation: 25 provisions                                                                                         
                                                                                                                                
Mr.  Painter noted  that some  of the  provisions that  were                                                                    
recommended  to be  terminated remained  on  the books.  The                                                                    
slide also showed  a pie chart. He noted that  the number of                                                                    
recommendations to  review or modify  provisions was  due to                                                                    
the fact that  several areas of the tax code  or fees had to                                                                    
be revisited, due  to the fact that the  legislature had not                                                                    
examined the information in decades.  He used the example of                                                                    
the ADFG  fee structure, which  had not been  modified since                                                                    
the 1980s.  He noted  that the legislature  had subsequently                                                                    
reviewed and revised the ADFG fees.                                                                                             
                                                                                                                                
9:42:38 AM                                                                                                                    
                                                                                                                                
Mr. Painter reviewed slide 5, "2015 Report Key Points":                                                                         
                                                                                                                                
         Future DOR reports added revenue estimates for                                                                      
          several provisions that had an unknown impact                                                                         
          when the first LFD report was prepared                                                                                
       LFD did not review oil and gas tax credits                                                                            
                                                                                                                                
          Legislative Actions                                                                                                   
         HB 247   (SLA   2016)   repealed   an   obsolete                                                                    
          exploration incentive                                                                                                 
         HB 97 (SLA 2018) repealed an unused credit for                                                                      
          donations to the Fire Standards Council                                                                               
         HB 398 (SLA 2018) repealed a Corporate Income Tax                                                                   
          provision related to water's edge reporting                                                                           
                                                                                                                                
Mr. Painter  emphasized that  LFD had  not reviewed  oil and                                                                    
gas tax credits. There had been  a referendum on the oil and                                                                    
gas  tax systems,  and  LFD  had not  had  data  on how  the                                                                    
systems were  performing with  modifications. He  added that                                                                    
subsequent DOR  reports added a  lot more  revenue estimates                                                                    
than in the past.                                                                                                               
                                                                                                                                
9:43:42 AM                                                                                                                    
                                                                                                                                
Mr. Painter discussed slide 6, "Agencies in 2017 Report":                                                                       
                                                                                                                                
    Administration                                                                                                           
    Education and Early Development                                                                                          
    Environmental Conservation                                                                                               
    Natural Resources                                                                                                        
    Transportation                                                                                                           
    Judiciary                                                                                                                
    Plus review of the Education Tax Credit, which was                                                                       
     scheduled to sunset at the end of 2018.                                                                                    
                                                                                                                                
9:44:18 AM                                                                                                                    
                                                                                                                                
Co-Chair  von Imhof  asked  what was  done  with the  Alaska                                                                    
Education Tax  Credit. She recalled  a robust  discussion on                                                                    
the topic.                                                                                                                      
                                                                                                                                
Mr. Painter  noted the  HB 233 had  extended the  credit but                                                                    
made some  modifications. The  bill had  reduced the  cap on                                                                    
the credit per  company from $5 million to $1  million.  The                                                                    
bill also reduced the rate  of the credit. The committee had                                                                    
passed a committee substitute  that became enacted. Starting                                                                    
in 2021,  the rate  would be  50 percent  for all  levels of                                                                    
expenditure. The  change was in  line with  a recommendation                                                                    
that LFD made in its 2017 report.                                                                                               
                                                                                                                                
9:46:00 AM                                                                                                                    
                                                                                                                                
Mr.   Painter   moved  to   slide   7,   "Summary  of   2017                                                                    
Recommendations":                                                                                                               
                                                                                                                                
         Terminate: 2 provisions                                                                                             
             o Unknown revenue impact                                                                                           
         Modify or review: 13 provisions                                                                                     
         Continue: 56 provisions                                                                                             
         No recommendation: 6 provisions                                                                                     
                                                                                                                                
Mr.  Painter   expanded  that  many  of   the  modifications                                                                    
pertained  to   fee  differentials  or  exemptions   in  the                                                                    
Department of Environmental Conservation.  It was found that                                                                    
in most cases the actual cost  of conducting a fee study and                                                                    
implementing regulations  to capture  the fee  would largely                                                                    
outweigh  the  revenue the  state  would  get from  the  few                                                                    
entities that would pay the fees.                                                                                               
                                                                                                                                
9:47:15 AM                                                                                                                    
                                                                                                                                
Mr. Painter addressed slide 8, "2017 Report Key Points":                                                                        
                                                                                                                                
         Some items do not have revenue generation as a                                                                      
          goal ("fix-it" tickets)                                                                                               
         Others have authority to set fee structure                                                                          
          (Marine Highway)                                                                                                      
         Remainder are mostly routine (senior discounts,                                                                     
         fee waivers for disabled veterans, etc.)                                                                               
                                                                                                                                
          Legislative Actions                                                                                                   
         HB 233 (SLA 2018) extended the Education Tax                                                                        
          Credit and made some changes recommended by LFD                                                                       
          report to limit credit                                                                                                
                                                                                                                                
Mr.  Painter discussed  why the  2017 report  was biased  in                                                                    
favor on continuation.  He used the example  of the reversal                                                                    
of a  traffic ticket in  the event of a  repaired headlight.                                                                    
It was found  that the goal of such a  ticket was to enhance                                                                    
public safety rather than to generate income for the state.                                                                     
                                                                                                                                
Mr.  Painter  identified   that  senior  citizen  deductions                                                                    
varied in age definition across  state law, and LFD saw some                                                                    
value in standardizing the definition of "senior."                                                                              
                                                                                                                                
9:49:13 AM                                                                                                                    
                                                                                                                                
Mr. Painter showed slide 9, "2019 Report":                                                                                      
                                                                                                                                
      No agencies covered  ones not listed in statute                                                                        
        have reported no indirect expenditures                                                                                  
                                                                                                                                
    LFD reviewed five provisions scheduled to sunset                                                                         
                                                                                                                                
Mr. Painter noted that the  2019 report was short in length.                                                                    
He  noted  that  LFD  had  chosen to  do  a  review  of  the                                                                    
provisions  that were  scheduled  to  sunset. Because  there                                                                    
were  no  other  agencies  to review,  LFD  went  deeper  in                                                                    
evaluation one credit.                                                                                                          
                                                                                                                                
9:50:30 AM                                                                                                                    
                                                                                                                                
Mr. Painter showed  slide 10, "2019 Report,"  which showed a                                                                    
table  with the  summary of  recommendations. He  noted that                                                                    
LFD had recommended  the sunset of the SHARP  II program, as                                                                    
it had not met expectations.                                                                                                    
                                                                                                                                
9:50:54 AM                                                                                                                    
                                                                                                                                
Senator  Wilson  discussed  development  of  the  SHARP  III                                                                    
program and potential tax credits.                                                                                              
                                                                                                                                
Co-Chair Stedman asked for a definition of the acronym.                                                                         
                                                                                                                                
Mr. Painter did not recall what the acronym signified.                                                                          
                                                                                                                                
Senator Wilson stated  that the SHARP program  was a payment                                                                    
program  that  allowed  reduced  loan  payments  to  certain                                                                    
healthcare  providers to  help  recruit  and retain  primary                                                                    
care providers in rural areas.                                                                                                  
                                                                                                                                
9:52:27 AM                                                                                                                    
                                                                                                                                
Mr. Painter  continued to  discuss slide  10. He  noted that                                                                    
the division had reviewed the  In-State Refinery Tax Credit.                                                                    
// He addressed the LNG Storage Facility Credit //                                                                              
                                                                                                                                
9:53:19 AM                                                                                                                    
                                                                                                                                
Senator Bishop stated he disagreed with //                                                                                      
                                                                                                                                
Mr. Painter thought it was  possible the credit needed to be                                                                    
modified. He thought it appeared as though the current //                                                                       
                                                                                                                                
Senator Bishop stated //                                                                                                        
                                                                                                                                
9:53:56 AM                                                                                                                    
                                                                                                                                
Mr.  Painter  discussed  the   Salmon  and  Herring  Product                                                                    
Development  Credit  as  listed  on  the  table.  He  //  HE                                                                    
explained  that  LFD  had  wanted   to  examine  //  Due  to                                                                    
confidentiality   constraints,  LFD   had  been   unable  to                                                                    
determine how  much of the  credit was used for  herring. He                                                                    
asserted  that confidentiality  rules should  be revised  by                                                                    
the legislature if it desired  LFD to examine the details of                                                                    
the credit's effectiveness.                                                                                                     
                                                                                                                                
Mr. Painter  continued discussing the credit,  and suggested                                                                    
that // One  of the reauthorizations had  added ice machines                                                                    
//                                                                                                                              
                                                                                                                                
Co-Chair  Stedman  recalled  that  the  salmon  and  herring                                                                    
credit was put into effect when the legislature                                                                                 
                                                                                                                                
Mr. Painter thought  the original version of  the credit was                                                                    
older                                                                                                                           
                                                                                                                                
9:56:42 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:59:18 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Senator Wilson disclosed that //                                                                                                
                                                                                                                                
Senator  Micciche   disclosed  the   he  was   a  commercial                                                                    
fisherman that  sold to companies  that may or may  not take                                                                    
advantage //                                                                                                                    
                                                                                                                                
Mr.  Painter  explained   that  SHARP  signified  Supporting                                                                    
Health Access (through loan) Repayment Program.                                                                                 
                                                                                                                                
Mr.  Painter  addressed   the  Community  Development  Quota                                                                    
Credit  as  listed  on  slide  10.  //  He  noted  that  LFD                                                                    
recommended that  a scheduled sunset  was not needed  as the                                                                    
credit did not affect state finances.                                                                                           
                                                                                                                                
10:01:30 AM                                                                                                                   
                                                                                                                                
Senator Micciche wanted to understand the //                                                                                    
                                                                                                                                
Mr.  Painter stated  he  would address  the  question //  He                                                                    
thought  it was  an important  consideration //  He expanded                                                                    
that  the division  had considered  how the  tax credit  had                                                                    
affected the economy and broader  economic impacts. In other                                                                    
states that  completed similar reviews,  more work  was done                                                                    
on understanding broader //                                                                                                     
                                                                                                                                
10:03:00 AM                                                                                                                   
                                                                                                                                
Senator Micciche  wondered if LFD planned  to conduct random                                                                    
evaluation of a portion of credits as //                                                                                        
                                                                                                                                
Co-Chair Stedman asked if Senator  Micciche was asking for a                                                                    
random analysis // He thought that //                                                                                           
                                                                                                                                
10:04:08 AM                                                                                                                   
                                                                                                                                
Mr. Painter looked at slide 11, "Looking Forward":                                                                              
                                                                                                                                
    Cycle restarts in 2021 with a review of the same                                                                         
     agencies as the 2015 report                                                                                                
    Pew recommendation to Alaska: "Selectively studying                                                                      
     major incentives in greater depth might lead to more                                                                       
     detailed evaluations."                                                                                                     
    Exempt routine provisions from review? (Maine and                                                                        
     Washington state)                                                                                                          
    Only review a few selected provisions per year?                                                                          
     (Minnesota, Indiana)                                                                                                       
                                                                                                                                
                                                                                                                                
Mr.  Painter   thought  that  //   He  referenced   the  Pew                                                                    
Charitable  Trust,  which had  recommended  that  // It  was                                                                    
thought that  the state  could perhaps  benefit from  // The                                                                    
division  was looking  for  direction  from the  legislature                                                                    
with regard to  // He noted that there  were provisions that                                                                    
// He suggested that removing  the provisions would not save                                                                    
much time, but would rather //                                                                                                  
                                                                                                                                
Mr.  Painter   continued  discussing  //  In   Indiana,  the                                                                    
equivalent of LFD had made  the selection // He preferred to                                                                    
get recommendations  from the legislature  on what  areas to                                                                    
provide  more  in-depth  review  and  perhaps  revision.  He                                                                    
indicated that  // Since LFD  had done an initial  review of                                                                    
all the provisions, he thought there was value //                                                                               
                                                                                                                                
Co-Chair  Stedman thought  the review  would be  low on  the                                                                    
priority  list   considering  the   //  He   referenced  the                                                                    
confidentiality constraints and // He //                                                                                        
                                                                                                                                
10:07:42 AM                                                                                                                   
                                                                                                                                
Mr.   Painter  commented   that   other   states  that   had                                                                    
confidentiality concerns // He thought it was                                                                                   
                                                                                                                                
Co-Chair   Stedman   thought   disclosure  was   good   when                                                                    
concerning public finances. He thought //                                                                                       
                                                                                                                                
Co-Chair Stedman thanked the department and LFD for //                                                                          
                                                                                                                                
Co-Chair Stedman discussed the agenda for the following                                                                         
week. He reminded that the budget had a release date //                                                                         
                                                                                                                                
He was concerned about // He wanted the members to ponder                                                                       
the larger budget components. He //                                                                                             
                                                                                                                                
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:12:19 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:12 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
020119 DOR Indirect Expenditure Report Presentation.pdf SFIN 2/1/2019 9:00:00 AM
Indirect Expenditure Report
020119 LFD Indirect Expenditure Report Overview SFC.pdf SFIN 2/1/2019 9:00:00 AM
Indirect Expenditure Report
020119 DOR Slide.pdf SFIN 2/1/2019 9:00:00 AM
Indirect Expenditures