Legislature(2015 - 2016)BELTZ 105 (TSBldg)

03/15/2016 01:30 PM LABOR & COMMERCE

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Audio Topic
01:31:18 PM Start
01:31:40 PM SB111
01:39:12 PM Economic Impacts of Alaska Fiscal Options - Draft Conclusions
03:15:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: TELECONFERENCED
"Economic Impacts of Alaska Fiscal Options -
Draft Conclusions" by Professor Gunnar Knapp
Institute of Social & Economic Research
+ Bills Previously Heard/Scheduled: TELECONFERENCED
-- Public Testimony --
+= SB 111 LIMIT FLAME RETARDANT ITEMS/FURNITURE TELECONFERENCED
Moved CSSB 111(L&C) Out of Committee
                    ALASKA STATE LEGISLATURE                                                                                  
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
                         March 15, 2016                                                                                         
                           1:31 p.m.                                                                                            
                                                                                                                                
                                                                                                                              
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Mia Costello, Chair                                                                                                     
Senator Cathy Giessel, Vice Chair                                                                                               
Senator Kevin Meyer                                                                                                             
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Johnny Ellis                                                                                                            
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Dan Ortiz                                                                                                        
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 111                                                                                                             
"An Act relating to flame retardants and to the manufacture,                                                                    
distribution, and sale of products containing flame retardants;                                                                 
and providing for an effective date."                                                                                           
                                                                                                                              
     - MOVED CSSB 111(L&C) OUT OF COMMITTEE                                                                                     
                                                                                                                                
ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS - DRAFT CONCLUSIONS                                                                   
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 111                                                                                                                  
SHORT TITLE: LIMIT FLAME RETARDANT ITEMS/FURNITURE                                                                              
SPONSOR(s): SENATOR(s) WIELECHOWSKI                                                                                             
                                                                                                                                
04/16/15       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/16/15       (S)       L&C, JUD                                                                                               
01/28/16       (S)       L&C AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
01/28/16       (S)       Heard & Held                                                                                           
01/28/16       (S)       MINUTE (L&C)                                                                                           
03/15/16       (S)       L&C AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
NANCY BALE, Member                                                                                                              
Alaska School Nurses Association                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Testified in support of SB 111.                                                                           
                                                                                                                                
WESTON EILER, Staff                                                                                                             
Senate Labor and Commerce Committee and                                                                                         
Senator Mia Costello                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Described the changes  in the proposed CS for                                                             
SB 111.                                                                                                                         
                                                                                                                                
SENATOR BILL WIELECHOWSKI                                                                                                       
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Sponsor of SB 111.                                                                                        
                                                                                                                                
GUNNAR KNAPP, Director                                                                                                          
Institute of Social and Economic Research (ISER)                                                                                
University of Alaska - Anchorage                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Summarized the  conclusions of  ISER's draft                                                             
report "Economic Impacts of Alaska Fiscal Options."                                                                             
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                              
1:31:18 PM                                                                                                                    
CHAIR MIA COSTELLO called the  Senate Labor and Commerce Standing                                                             
Committee meeting to  order at 1:31 p.m.  Present  at the call to                                                               
order were Senators Giessel, Meyer, and Chair Costello.                                                                         
                                                                                                                                
          SB 111-LIMIT FLAME RETARDANT ITEMS/FURNITURE                                                                      
                                                                                                                                
1:31:40 PM                                                                                                                    
CHAIR COSTELLO  announced the  consideration of  SB 111.  This is                                                               
the second hearing and there is a committee substitute (CS).                                                                    
                                                                                                                                
1:32:33 PM                                                                                                                    
NANCY BALE,  Member, Alaska School Nurses  Association, testified                                                               
in support of SB 111.  She maintained that Alaska's joining other                                                               
states  that   have  passed   legislation  pertaining   to  flame                                                               
retardants will  protect young children  and their  families from                                                               
harmful chemicals. She encouraged the committee to pass SB 111.                                                                 
                                                                                                                                
1:33:49 PM                                                                                                                    
CHAIR COSTELLO closed public testimony.                                                                                         
                                                                                                                                
1:34:02 PM                                                                                                                    
SENATOR GIESSEL  moved to adopt  the CS  for SB 111,  labeled 29-                                                               
LS0518\P, as the working document.                                                                                              
                                                                                                                                
CHAIR COSTELLO objected for discussion purposes.                                                                                
                                                                                                                                
1:34:27 PM                                                                                                                    
WESTON  EILER,  Staff, Senator  Mia  Costello,  Senate Labor  and                                                               
Commerce  Committee,  Alaska  State  Legislature,  described  the                                                               
changes in  the proposed new  CS. The first  change is on  page 2                                                               
where a new subsection is added on  lines 23 - 26 that deals with                                                               
an exemption for motorized vehicles designed to be used by kids.                                                                
                                                                                                                                
The second change is to the  violation section on page 3, lines 2                                                               
-  4. Fines  in  the original  version  of the  bill  were to  be                                                               
enforced by  the Department of  Labor and  Workforce Development,                                                               
but now will be enforced by the Department of Law.                                                                              
                                                                                                                                
CHAIR  COSTELLO  removed her  objection  and  finding no  further                                                               
objection, version P was before the committee.                                                                                  
                                                                                                                                
1:36:15 PM                                                                                                                    
SENATOR  MEYER asked  for  an example  of  an off-road  motorized                                                               
vehicle used by kids, included in subsection (b).                                                                               
                                                                                                                                
MR. EILER  said the industry  brought this forward. It  refers to                                                               
dirt bikes and small off-road vehicles.                                                                                         
                                                                                                                                
SENATOR GIESSEL moved to report the CS for SB 111, labeled 29-                                                                  
LS0518\P,  from  committee  with individual  recommendations  and                                                               
attached zero fiscal note.                                                                                                      
                                                                                                                                
1:37:06 PM                                                                                                                    
CHAIR COSTELLO  announced that without objection,  CSSB 111 (L&C)                                                               
is  reported   from  the  Senate  Labor   and  Commerce  Standing                                                               
Committee.                                                                                                                      
                                                                                                                                
SENATOR BILL  WIELECHOWSKI, Alaska State Legislature,  sponsor of                                                               
SB 111, thanked the committee for hearing and passing the bill.                                                                 
                                                                                                                                
1:37:34 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
^Economic Impacts of Alaska Fiscal Options - Draft Conclusions                                                                  
 Economic Impacts of Alaska Fiscal Options - Draft Conclusions                                                              
                                                                                                                                
1:39:12 PM                                                                                                                    
CHAIR  COSTELLO reconvened  the  meeting and  announced the  next                                                               
order of  business would be  a presentation by Gunnar  Knapp with                                                               
the  Institute of  Social and  Economic  Research, University  of                                                               
Alaska,  Anchorage.  He will  present  his  analysis of  the  tax                                                               
proposals before the legislature.                                                                                               
                                                                                                                                
1:39:37 PM                                                                                                                    
SENATOR STEVENS joined the committee.                                                                                           
                                                                                                                                
1:40:39 PM                                                                                                                    
GUNNAR  KNAPP,   Director,  Institute  of  Social   and  Economic                                                               
Research  (ISER),   University  of  Alaska  -   Anchorage  (UAA),                                                               
summarized  the  conclusions  of ISER's  draft  report  "Economic                                                               
Impacts  of Alaska  Fiscal Options."  He noted  the report  is on                                                               
their  website and  ISER is  inviting comments.  There are  small                                                               
changes to this  addition but not substantively.  He reviewed the                                                               
presentation outline starting with  the study background, revenue                                                               
impacts of  taxes and dividend  cuts, short-run  economic impacts                                                               
of  fiscal options,  regional differences  in  impacts of  fiscal                                                               
options,  total economic  impacts  of reducing  the deficit,  and                                                               
other economic impacts of fiscal options.                                                                                       
                                                                                                                                
1:42:48 PM                                                                                                                    
DR. KNAPP reviewed the selected fiscal options they studied:                                                                    
                                                                                                                                
•Revenue impacts of taxes and dividend cuts                                                                                     
     -What share would non-residents pay?                                                                                       
     -What share would be offset by lower federal taxes?                                                                        
     -What would be the relative impacts on different income                                                                    
     groups?                                                                                                                    
•Short run economic impacts of spending cuts, taxes and dividend                                                                
cuts. Per hundred million of deficit reduction:                                                                                 
     -What would be the impacts on Alaskans' incomes?                                                                           
     -What would be the impacts on Alaska jobs?                                                                                 
•Regional economic impacts                                                                                                      
     -How would the impacts of different options vary between                                                                   
     regions?                                                                                                                   
•Total economic impacts of reducing the deficit                                                                                 
     -What would the total short-run impacts on income and jobs                                                                 
     of reducing the deficit by different amounts?                                                                              
                                                                                                                                
He presented  slide 7  with a  table of  the fiscal  options they                                                               
studied:                                                                                                                        
                                                                                                                                
Spending  cut:  workers  -  Spending  cut  achieved  entirely  by                                                               
reducing state workforce                                                                                                        
                                                                                                                                
Spending cut: broad-based - Spending  cut achieved by broad range                                                               
of cuts to state spending                                                                                                       
                                                                                                                                
Spending  cut: capital  - Spending  cut achieved  by cutting  the                                                               
capital budget                                                                                                                  
                                                                                                                                
Spending cut:  pay - Spending  cut achieved entirely  by reducing                                                               
pay of state workers                                                                                                            
                                                                                                                                
Income tax:  progressive - Constant percentage  of federal income                                                               
tax liability                                                                                                                   
                                                                                                                                
Income  tax: flat  rate  - Constant  percent  of federal  taxable                                                               
income                                                                                                                          
                                                                                                                                
Sales tax:  more exclusions -  Sales tax excluding food  at home,                                                               
shelter, health care and education                                                                                              
                                                                                                                                
Sales tax:  fewer exclusions  - Sales  tax excluding  only health                                                               
care and education                                                                                                              
                                                                                                                                
Property tax: - Statewide tax  on real and personal property with                                                               
exclusions for property taxes paid to local governments                                                                         
                                                                                                                                
Dividend cut:  - Reducing  dividends and  using PF  earnings that                                                               
would have gone to dividends for general fund spending                                                                          
                                                                                                                                
Saving less:  - Reducing  savings of  PF earnings  that currently                                                               
are saved  in the PF  principal (inflation proofing) or  added to                                                               
the PF  earnings reserves, and  using the money for  general fund                                                               
spending                                                                                                                        
                                                                                                                                
Excise tax: motor fuels - Increase in state motor fuels tax                                                                     
                                                                                                                                
Excise tax: alcohol - Increase in state alcoholic beverages tax                                                                 
                                                                                                                                
Excise tax: tobacco* - Increase in state tobacco tax                                                                            
                                                                                                                                
1:46:11 PM                                                                                                                    
He  noted they  studied only  some of  Alaska's potential  fiscal                                                               
options.                                                                                                                        
                                                                                                                                
•We studied:                                                                                                                    
     -Options that are part of the broad political discussion                                                                   
     -Options we had time, funding and expertise to analyze                                                                     
                                                                                                                                
•We didn't study                                                                                                                
     -Complex options requiring detailed industry-specific                                                                      
     expertise                                                                                                                  
          •Changes to oil credits or oil taxes                                                                                  
          •Changes to other resource industry taxes                                                                             
     -Changes to how the state delivers services                                                                                
          •K12 education, University of Alaska, Medicaid, etc.                                                                  
     -"Re-plumbing" of state finances (SB114, SB128, etc.)                                                                      
                                                                                                                                
1:47:19 PM                                                                                                                    
SENATOR GIESSEL asked who funded the study.                                                                                     
                                                                                                                                
DR. KNAPP  replied the  total funding  was $60,000;  $30,000 came                                                               
from the  Department of  Revenue and $30,000  from the  Office of                                                               
Management and Budget.                                                                                                          
                                                                                                                                
SENATOR GIESSEL asked if the administration requested the study.                                                                
                                                                                                                                
DR. KNAPP answered yes.                                                                                                         
                                                                                                                                
SENATOR GIESSEL  asked if the  administration provided  ISER with                                                               
what to include in the study.                                                                                                   
                                                                                                                                
DR.  KNAPP said  no; the  authors  designed the  study and  topic                                                               
areas entirely.                                                                                                                 
                                                                                                                                
He  emphasized  that they  studied  only  some of  the  potential                                                               
economic impacts of the fiscal option:                                                                                          
                                                                                                                                
We studied:                                                                                                                     
     -Revenue impacts                                                                                                           
                                                                                                                                
     -Short-run economic impacts                                                                                                
                                                                                                                                
     -Total short-run economic impacts on Alaska economy                                                                        
                                                                                                                                
We didn't study:                                                                                                                
     -Long-run & indirect impacts                                                                                               
                                                                                                                                
What we could study was limited by:                                                                                             
     -Data                                                                                                                      
     -Complexity                                                                                                                
                                                                                                                                
     -Funding & time                                                                                                            
                                                                                                                                
                                                                                                                                
He noted the impacts they didn't study are important. This study                                                                
is only a start at understanding potential economic impacts of                                                                  
fiscal options.                                                                                                                 
                                                                                                                                
                                                                                                                                
CHAIR COSTELLO  asked if there is  a plan to study  the long-term                                                               
impacts.                                                                                                                        
                                                                                                                                
DR. KNAPP reported  that the end of the study  contains a list of                                                               
relevant areas for future study.                                                                                                
                                                                                                                                
1:50:34 PM                                                                                                                    
DR. KNAPP emphasized that they  are not advocating for or against                                                               
any  fiscal options  or  choices.  The only  purpose  is to  help                                                               
inform  the  fiscal discussion.  Their  analysis  is relevant  to                                                               
their fiscal choices  and is far from sufficient as  a sole basis                                                               
for arguing for or against any fiscal options.                                                                                  
                                                                                                                                
1:51:30 PM                                                                                                                    
DR.   KNAPP   reiterated   that    they   prepared   this   study                                                               
independently:                                                                                                                  
     •The Department or Revenue and Office of Management and                                                                    
     Budget funded this study                                                                                                   
     •They had no influence over the study design, analysis or                                                                  
     conclusions                                                                                                                
     •The findings are only what is reported in their report and                                                                
     presentations - They are not necessarily what other people                                                                 
     say they are                                                                                                               
                                                                                                                                
1:52:06 PM                                                                                                                    
DR. KNAPP  turned to  the revenue impacts  of taxes  and dividend                                                               
cuts. He displayed  a chart showing that  non-residents would pay                                                               
about 9-11 percent  of sales taxes and about 7  percent of income                                                               
taxes. He described the logic behind that analysis.                                                                             
                                                                                                                                
CHAIR  COSTELLO  noted that  82.9  percent  and 83.9  percent  of                                                               
income tax would be paid  by Alaskans. The committee learned that                                                               
not all Alaskans would pay income tax.                                                                                          
                                                                                                                                
DR. KNAPP said he would address that later in the presentation.                                                                 
                                                                                                                                
1:54:26 PM                                                                                                                    
SENATOR STEVENS asked how a  Seattle-based fisherman's income tax                                                               
would be calculated in Alaska.                                                                                                  
                                                                                                                                
DR.  KNAPP  said he  would  need  to  learn  the details  of  the                                                               
situation and the tax would be difficult to determine.                                                                          
                                                                                                                                
CHAIR COSTELLO asked what the assumptions were in this study.                                                                   
                                                                                                                                
DR. KNAPP  said they are in  Appendix A of the  report. More data                                                               
could be added to the final report if there is a need to do so.                                                                 
                                                                                                                                
1:56:10 PM                                                                                                                    
He displayed a chart showing that  the impacts of state taxes and                                                               
dividend cuts on  Alaskans' incomes would be  partially offset by                                                               
reductions in their federal  taxes. Higher-income households that                                                               
pay  higher  tax  rates  would  benefit  most.  The  chart  shows                                                               
estimates of these offsets.                                                                                                     
                                                                                                                                
He  noted that  the higher  the income,  the more  pronounced the                                                               
impact.                                                                                                                         
                                                                                                                                
SENATOR MEYER  asked if  sales tax is  deductible on  the federal                                                               
form.                                                                                                                           
                                                                                                                                
DR.  KNAPP  said  yes  and  added there  is  discussion  in  Matt                                                               
Berman's report about who would deduct sales tax.                                                                               
                                                                                                                                
He noted the  difference between the dividend cut  and the income                                                               
taxes  and sales  taxes for  non-residents  versus residents,  is                                                               
that some  of the  sales and  income taxes are  paid for  by non-                                                               
residents. The  dividend cut  has a  higher economic  impact when                                                               
not offset by non-residents.                                                                                                    
                                                                                                                                
2:00:31 PM                                                                                                                    
DR.  KNAPP  showed  slide 15,  which  illustrates  the  estimated                                                               
effects  of taxes  and  dividend  cuts for  10  groups of  Alaska                                                               
households,  grouped by  their per-capita  cash  income in  2013,                                                               
from the lowest 10 percent to the highest 10 percent.                                                                           
                                                                                                                                
Slide  16  shows  the  three  lowest-income  groups  had  average                                                               
household incomes of less than  $45,000. The highest-income group                                                               
had an  average household income  of more than $200,000.  He said                                                               
this  relative range  of  income distribution  is  more than  any                                                               
other state. He noted 21 percent  is earned by the highest income                                                               
group and is equivalent to the rest of the groups.                                                                              
                                                                                                                                
2:03:26 PM                                                                                                                    
He discussed  on slide  18 how  options affect  different groups:                                                               
income reduction per  person - the average  per capita disposable                                                               
income reduction per $100 million in deficit reduction.                                                                         
                                                                                                                                
He used  various lines on a  graph to make his  points: the brown                                                               
line shows that the dividend cut  takes more from low income. The                                                               
red line  shows that the income  tax is the most  progressive and                                                               
collects  nothing from  the lowest  income group.  The sales  and                                                               
property taxes have an intermediate effect.                                                                                     
                                                                                                                                
SENATOR GIESSEL noted that the  committee was told that estimates                                                               
show that 43  percent would pay no income tax.  She asked if that                                                               
was taken into account on this chart.                                                                                           
                                                                                                                                
DR.  KNAPP  said Dr.  Berman's  estimates  show some  income  tax                                                               
kicking in  at the  lower level.  Dr. Knapp did  not know  how to                                                               
reconcile  Senator  Giessel's statement  and  noted,  if it  were                                                               
true, you  would expect the red  line to remain at  zero. He said                                                               
he would need to see the source of that information.                                                                            
                                                                                                                                
SENATOR GIESSEL said the statement came from DOR.                                                                               
                                                                                                                                
DR. KNAPP said he'd look into  it, but his impression is that DOR                                                               
said ISER's  analysis was more  complex than theirs. He  said for                                                               
the final report he would check  to see if there is a discrepancy                                                               
and what would explain it. Clearly,  most of the burden of income                                                               
tax would be borne by high income people.                                                                                       
                                                                                                                                
SENATOR MEYER thought DOR said  anyone under $50,000 would pay no                                                               
income tax. He agreed with Dr. Knapp's theory.                                                                                  
                                                                                                                                
DR. KNAPP  said he'd  be surprised to  learn that  anyone earning                                                               
less than $50,000 would not pay any income tax.                                                                                 
                                                                                                                                
2:09:37 PM                                                                                                                    
DR.  KNAPP turned  to  slide  20 that  shows  how options  affect                                                               
different  groups: percentage  income  reduction  per person,  as                                                               
opposed to dollars  in the previous slide. He noted  this is cash                                                               
income and some lower income households use cash equivalents                                                                    
                                                                                                                                
CHAIR  COSTELLO   asked  how  the  study   calculated  children's                                                               
dividends.                                                                                                                      
                                                                                                                                
DR.  KNAPP  said they  were  included  in household  income.  His                                                               
colleague  looked  at  detailed   data  on  the  different  taxes                                                               
different people pay.  He used that to estimate  the marginal tax                                                               
that would  be paid  by each group.  It's a  complex calculation,                                                               
but intuitively reasonable.                                                                                                     
                                                                                                                                
2:12:31 PM                                                                                                                    
Slide  21  shows  how  the  combination  of  options  would  have                                                               
intermediate effects on households of different income levels.                                                                  
                                                                                                                                
Slide 22 is the same  graph in percentage terms. The combinations                                                               
of  options  would have  intermediate  effects  on households  of                                                               
different income levels.                                                                                                        
                                                                                                                                
2:14:03 PM                                                                                                                    
DR. KNAPP turned to the saving less option:                                                                                     
                                                                                                                                
Saving less (and  using the money to fund  government) would have                                                               
no short-run economic impacts on the Alaska economy.                                                                            
                                                                                                                                
     •Options for saving less include:                                                                                          
     -Reducing inflation-proofing transfers to PF principal                                                                     
     -Adding less to the PF earnings reserve                                                                                    
                                                                                                                                
     •Saving less would not:                                                                                                    
     -take any money out of the economy                                                                                         
     -have any short-run impacts on jobs or income                                                                              
                                                                                                                                
     •But it would reduce:                                                                                                      
     -our future investment earnings                                                                                            
     -how much savings we leave for future Alaskans                                                                             
                                                                                                                                
DR. KNAPP explained  that the graph on slide  25 illustrates that                                                               
from  2010 to  2015,  Alaska  saved an  average  of $1.4  billion                                                               
annually of  Permanent Fund  realized earnings.  He distinguished                                                               
between the concept of sustainably  saving less and unsustainable                                                               
saving; use of  current earnings, as opposed to  drawing down the                                                               
CBR.                                                                                                                            
                                                                                                                                
In contrast, spending  cuts, taxes, and dividend  cuts would have                                                               
significant  short-run  economic  impacts. They  would  all  take                                                               
significant amounts of  money out of the economy,  but they would                                                               
do  so in  different ways,  with different  impacts on  different                                                               
Alaskans  and different  relative impacts  on public  and private                                                               
employment.                                                                                                                     
                                                                                                                                
CHAIR  COSTELLO  pointed  out  she  was  told  that  states  that                                                               
implement an income tax see lower job growth.                                                                                   
                                                                                                                                
DR. KNAPP  said that  is an  example of  a longer  term potential                                                               
economic  impact  of  an  option   that  they  didn't  study.  He                                                               
suggested  it would  be useful  for  someone to  research it.  He                                                               
noted  that 35  states have  income taxes  and not  all of  their                                                               
economies are having issues.                                                                                                    
                                                                                                                                
SENATOR  MEYER asked  if the  study considers  the efficiency  of                                                               
collecting the revenue.                                                                                                         
                                                                                                                                
DR. KNAPP  said no; his  general understanding is it  is cheapest                                                               
to have a  state income tax formula that is  based on the federal                                                               
income tax,  and that a sales  tax is more expensive  to collect.                                                               
The study is focused on the money coming out of the economy                                                                     
                                                                                                                                
2:20:01 PM                                                                                                                    
SENATOR  MEYER said  he  mentioned it  because  DOR estimated  it                                                               
would take an  additional 50 employees to collect  an income tax.                                                               
He assumed if the  PFD was reduced there would be  no need to add                                                               
more state employees.                                                                                                           
                                                                                                                                
DR. KNAPP said that is a relevant consideration.                                                                                
                                                                                                                                
2:20:38 PM                                                                                                                    
He  said slide  27 shows  how ISER  compared relative  impacts of                                                               
spending cuts,  taxes, and  dividend cuts.  They used  a standard                                                               
"economic  impact analysis"  using the  IMPLAN model.  They began                                                               
with the question, "How does  spending change?" They standardized                                                               
it  with impacts  per  $100 million  of  deficit reduction.  They                                                               
paired  both low  and high  impact estimates  based on  different                                                               
assumptions  about  how changes  in  income  affect spending  and                                                               
multiplier  impacts. They  also paired  low and  high assumptions                                                               
estimated from different data  sources. The earlier presentations                                                               
presented  high  impact  estimates.   Low  impact  estimates  are                                                               
slightly smaller, but have the same relative impacts.                                                                           
                                                                                                                                
CHAIR  COSTELLO asked  if they  considered the  relative size  of                                                               
families in different areas of the state.                                                                                       
                                                                                                                                
DR.  KNAPP  reiterated  that  family   size  is  built  into  the                                                               
calculation.  He   also  reiterated  that  different   cuts  have                                                               
different  impacts. The  report gives  examples of  the potential                                                               
range of impacts.                                                                                                               
                                                                                                                                
DR. KNAPP  explained slide 28,  the economic impacts  of spending                                                               
cuts depending on what is cut.                                                                                                  
                                                                                                                                
Cuts affect:                                                                                                                    
     •Direct impacts on workers' incomes and jobs for both                                                                      
     government workers and contractor workers                                                                                  
                                                                                                                                
     •Impacts on contractor sales and spending                                                                                  
                                                                                                                                
     •Impacts of reductions in state services                                                                                   
          -Instructure development and maintenance                                                                              
          -Resource management (fish catches, mine permitting)                                                                  
          -Transportation (Marine Highway service, road plowing,                                                                
          etc.)                                                                                                                 
          -Quality of social services (schools, health care,                                                                    
          parks, etc.)                                                                                                          
                                                                                                                                
He concluded that you can't  generalize about economic impacts of                                                               
spending  cuts.   Estimates  illustrate  a  range   of  potential                                                               
impacts.                                                                                                                        
                                                                                                                                
2:26:55 PM                                                                                                                    
He   discussed   the   input-output  modeling   methodology   for                                                               
estimating  short-run  economic  impacts of  fiscal  options,  on                                                               
slide 29, such as spending  cuts, dividend cuts, and taxes. There                                                               
are both direct  income impacts and job impacts, as  well as off-                                                               
shoot impacts from those impacts, such as spending.                                                                             
                                                                                                                                
2:28:46 PM                                                                                                                    
He showed  the calculation of  direct impacts on income  on slide                                                               
30. He  assumed a short-run  economic impact per $100  million of                                                               
deficit reduction. He listed spending  cut options and impacts of                                                               
direct  earned  income  in  millions,   direct  other  income  in                                                               
millions,  and why  the direct  income impact  is less  than $100                                                               
million.                                                                                                                        
                                                                                                                                
CHAIR  COSTELLO  asked about  the  capital  spending cut  option,                                                               
which  is  less  than  any  other option.  She  asked  about  the                                                               
construction industry.                                                                                                          
                                                                                                                                
DR. KNAPP said  in cutting the capital budget by  $100 million, a                                                               
lot of  construction jobs  will be  lost, but not  as much  as if                                                               
workers alone were cut.                                                                                                         
                                                                                                                                
CHAIR COSTELLO said this illustrates  how complex the calculation                                                               
is because the  operating budget is where state  workers would be                                                               
paid.                                                                                                                           
                                                                                                                                
DR. KNAPP  pointed out that  a dramatic drop in  capital spending                                                               
affects the money coming into the  state economy and that will be                                                               
seen in coming years.                                                                                                           
                                                                                                                                
2:33:25 PM                                                                                                                    
DR. KNAPP turned to the  topic of calculating economic impacts on                                                               
slide  31: multiplier  income  impacts,  with short-run  economic                                                               
impacts per $100 million of  deficit reduction. He noted pay cuts                                                               
have a smaller multiplier impact  than dividend cuts because more                                                               
of pay goes to federal taxes and savings.                                                                                       
                                                                                                                                
2:34:52 PM                                                                                                                    
He continued with  calculating economic impacts on  slide 32: job                                                               
impacts, short-run  economic impacts per $100  million of deficit                                                               
reduction.  Job  impacts  are   biggest  for  cutting  government                                                               
workers because  they include direct  losses of  government jobs.                                                               
Taxes and dividend cuts have only multiplier impacts on jobs.                                                                   
                                                                                                                                
He showed  the short-run economic  impacts under a  high scenario                                                               
on  slide  33 and  a  summary  of  fiscal options  and  estimated                                                               
impacts per $100 million of deficit reduction on slide 34.                                                                      
                                                                                                                                
2:39:13 PM                                                                                                                    
The  graph on  slide  35  shows estimated  job  impacts per  $100                                                               
million of  deficit reduction  (FTE jobs)  and income  impacts on                                                               
slide 36. He  emphasized that all the numbers are  big and affect                                                               
the economy.  The differences  aren't that  great unless  a large                                                               
share is going outside to buy supplies for construction.                                                                        
                                                                                                                                
2:40:37 PM                                                                                                                    
The economic impacts of reducing  the deficit will depend on what                                                               
combination of options  are used - slide 37. Slide  38 is a table                                                               
from the  report giving examples of ranges of  estimated economic                                                               
impacts  per $100  million of  deficit  reduction resulting  from                                                               
selected potential  combinations of fiscal options.  It makes the                                                               
point  that   the  impacts  will   be  different  based   on  the                                                               
combination of those that are chosen.                                                                                           
                                                                                                                                
2:42:43 PM                                                                                                                    
CHAIR COSTELLO asked what the 25 percent represents.                                                                            
                                                                                                                                
MR  KNAPP  provided a  hypothetical  example  that combines  four                                                               
approaches to raising $100 million,  and 25 percent would be one-                                                               
fourth  each,  or the  average  of  each option.  It  illustrates                                                               
examples of potential combinations.                                                                                             
                                                                                                                                
2:43:57 PM                                                                                                                    
DR. KNAPP turned  to regional differences in  economic impacts of                                                               
fiscal  options. He  showed that  income distribution  varies for                                                               
different regions of  Alaska. His chart highlighted  the share of                                                               
total  2013  federal  income tax  exemptions  by  adjusted  gross                                                               
income group and Alaska census areas - slide 40.                                                                                
                                                                                                                                
2:45:50 PM                                                                                                                    
He showed the  share of state government jobs in  wage and salary                                                               
earnings  in  different regions  -  slide  41. Regional  economic                                                               
impacts  of state  spending cuts  would depend  on how  important                                                               
state government  jobs and  income are  in the  regional economy.                                                               
Some regions are much more dependent than others.                                                                               
                                                                                                                                
Slide 42 shows  the relative importance of  local government jobs                                                               
in  the economy.  Regional economic  impacts of  cuts to  revenue                                                               
sharing,  K-12  education, and  other  ways  that state  spending                                                               
helps fund local  government would depend on  how important local                                                               
government jobs  are in  the regional  economy. Some  regions are                                                               
much more dependent than others.                                                                                                
                                                                                                                                
2:47:31 PM                                                                                                                    
DR. KNAPP  turned to the  total economic impacts of  reducing the                                                               
deficits. Slide 44 shows the  estimated income and job impacts of                                                               
reducing  the  deficit  by   different  amounts  using  different                                                               
options.  This gives  a  sense of  what the  effect  on jobs  and                                                               
income there would be at any particular level.                                                                                  
                                                                                                                                
Slide 45  shows how  big Alaska's economy  is. It  lists selected                                                               
estimates of Alaska income and  employment in 2014. The source is                                                               
the Bureau of Economic Analysis.                                                                                                
                                                                                                                                
Slide  46  shows  the  estimated  percentage  income  impacts  of                                                               
reducing  the  deficit  by   different  amounts  using  different                                                               
options.  Slide 47  shows how  jobs are  impacted. He  emphasized                                                               
that he  isn't saying any of  the numbers is the  right estimate.                                                               
The purpose of the table is  to facilitate a comparison of fiscal                                                               
options.                                                                                                                        
                                                                                                                                
2:52:07 PM                                                                                                                    
DR. KNAPP  raised the question  of how  much is needed  to reduce                                                               
the deficit. He  said they didn't study  that important question.                                                               
He noted  the answer  depends in  part on  what you  assume about                                                               
future oil revenues  and how much Alaska is willing  to draw down                                                               
its savings.                                                                                                                    
                                                                                                                                
2:53:43 PM                                                                                                                    
He  highlighted  Alaska  Department of  Revenue  projections  for                                                               
general  fund  unrestricted revenues.  He  noted  that this  year                                                               
general fund spending  is $5.2 billion. He  showed projections of                                                               
forecasts for various years at  various oil prices. At $30/barrel                                                               
there would be a $4 billion deficit.                                                                                            
                                                                                                                                
2:54:39 PM                                                                                                                    
He stated  that Alaska can't  sustain general fund  spending over                                                               
time that  is more than  its unrestricted general  fund revenues.                                                               
This year  (FY16) spending is  $5.2 billion for  government. Over                                                               
the  next  10  years,  the general  fund  revenues  from  current                                                               
sources will  probably be about $1.5  - $2.5 billion. It  will be                                                               
necessary to reduce the difference  between general fund spending                                                               
and general fund  revenues by between $2.7 and  $3.7 billion. How                                                               
much and  how fast the  reductions need  to be depends  on future                                                               
revenues and the willingness to draw down savings.                                                                              
                                                                                                                                
2:56:07 PM                                                                                                                    
He continued  to say the  state has  lost billions of  dollars of                                                               
oil  revenues -  slide  51. There  will  be significant  economic                                                               
impacts of adjusting to lower oil revenues.                                                                                     
                                                                                                                                
•Impacts of spending cuts we've already made:                                                                                   
     -Impacts of capital budget cuts on construction industry                                                                   
     -Delayed because capital projects take several years                                                                       
     -Actual capital spending will decline as money from past                                                                   
     large capital budgets runs out                                                                                             
•Impacts of future adjustments we will have to make                                                                             
     -Spending cuts                                                                                                             
     -Taxes                                                                                                                     
     -Dividend cuts                                                                                                             
                                                                                                                                
2:57:16 PM                                                                                                                    
CHAIR  COSTELLO  noted  that   Representative  Ortiz  joined  the                                                               
committee some time ago.                                                                                                        
                                                                                                                                
DR.  KNAPP addressed  how  fast  the state  needs  to reduce  the                                                               
deficit  - slides  52 and  53.  He highlighted  that closing  the                                                               
deficit  in this  year  could  have a  significant  impact on  an                                                               
already  weakened   economy.  On  the  other   hand,  not  making                                                               
significant progress  would also  have significant impact  on the                                                               
economy,  such   as  having  increased  business   and  household                                                               
uncertainty about  the future. It could  affect future investment                                                               
and downgrade the state's credit rating.                                                                                        
                                                                                                                                
He opined there will be a  smoother transition if there is a plan                                                               
toward a sustainable path and  building confidence in the state's                                                               
future  -  slide  54.  If the  state  substantially  reduces  the                                                               
deficit  this   year  and   clearly  demonstrates   to  Alaskans,                                                               
businesses, and investors  that it can, and  will, finish closing                                                               
the deficit  there will be  a smoother transition. The  plan must                                                               
build confidence in Alaska's fiscal future.                                                                                     
                                                                                                                                
2:59:46 PM                                                                                                                    
DR. KNAPP noted  many other potential economic  impacts of fiscal                                                               
options  -  slide   56.  Their  studies  are  only   a  start  in                                                               
understanding potential economic  impacts. He addressed potential                                                               
economic impacts of spending cuts listed on slide 57:                                                                           
     •Impacts of reductions in state services?                                                                                  
     •Impacts on economic development and future revenues?                                                                      
     •Impacts on future state costs and spending?                                                                               
     •Impacts of cost shifting to local governments and service                                                                 
     users?                                                                                                                     
     •Impacts on federal matching funding?                                                                                      
     •Impacts on public employee work force?                                                                                    
                                                                                                                                
3:00:39 PM                                                                                                                    
He listed on slide 58 other potential economic impacts of taxes:                                                                
     •Some level of taxes is a "necessary evil," but:                                                                           
          -What level is necessary?                                                                                             
          -What kinds are "least evil?"                                                                                         
     •Shifting of purchases to non-Alaska retailers?                                                                            
     •Reduced incentives to invest in Alaska?                                                                                   
     •Reduced competitiveness of Alaska resource industries?                                                                    
     •Higher labor costs?                                                                                                       
     •Administration and enforcement costs?                                                                                     
     •Public "skin in the game" and more attention to state                                                                     
     spending?                                                                                                                  
     •Fixing the "Alaska disconnect" so that growth pays for                                                                    
     itself?                                                                                                                    
                                                                                                                                
He concluded  that not all impacts  are bad. They may  bring more                                                               
attention to state  spending and may fix  the "Alaska disconnect"                                                               
so that growth pays for itself.                                                                                                 
                                                                                                                                
DR.  KNAPP listed  other potential  economic impacts  of dividend                                                               
cuts on slide 59:                                                                                                               
     •Ability of lower-income Alaskans to live in high-cost                                                                     
     rural areas?                                                                                                               
     •Ability of Alaskans to accumulate wealth for "big-ticket"                                                                 
     investments such as homes and college                                                                                      
     •Impacts on Alaska wage rates?                                                                                             
     •Impacts on how many and what kind of people move to or                                                                    
     from Alaska?                                                                                                               
     •Impacts on extent to which Alaskans feel they have a stake                                                                
     in the Permanent Fund and are committed to growing and                                                                     
     protecting it?                                                                                                             
                                                                                                                                
He  suggested  thinking  about the  long-term  impacts  of  these                                                               
potential changes.                                                                                                              
                                                                                                                                
DR.   KNAPP  summarized   that  Alaska's   fiscal  choices   will                                                               
significantly  affect Alaska's  future  economy  and society.  He                                                               
urged thinking  not only about  short-term economic  impacts, but                                                               
also about longer-term economic and social impacts.                                                                             
                                                                                                                                
3:02:27 PM                                                                                                                    
SENATOR  MEYER  said  he  didn't see  any  analysis  of  tobacco,                                                               
alcohol, or motor fuel taxes.                                                                                                   
                                                                                                                                
DR. KNAPP said  his colleague looked at those  and considered how                                                               
regressive  they would  be.  The data  shows  that higher  income                                                               
Alaskans pay  more for alcohol,  whereas tobacco taxes  take more                                                               
money from  low income people.  There is similar income  data for                                                               
motor fuel taxes.                                                                                                               
                                                                                                                                
SENATOR  MEYER said  DOR  admitted that  Alaska  already has  the                                                               
highest alcohol tax in the nation  and he opined that doubling it                                                               
will affect  small businesses. He  asked if  that data is  in the                                                               
analysis.                                                                                                                       
                                                                                                                                
DR. KNAPP said  that is a relevant point and  the comparative tax                                                               
burden question really matters.                                                                                                 
                                                                                                                                
SENATOR MEYER  asked about  slide 35.  He questioned  whether the                                                               
job impacts consisting  of a spending cut in pay  and a sales tax                                                               
with exclusions would have the least impact.                                                                                    
                                                                                                                                
DR.  KNAPP said  yes.  He  added that  it  is  related to  income                                                               
distribution.  He  provided  an  example  of a  cut  in  pay  for                                                               
government workers having less  impact due to higher-than-average                                                               
wages and their tendency to save more.                                                                                          
                                                                                                                                
SENATOR  MEYER suggested  that a  sales tax  protects those  with                                                               
lower incomes.                                                                                                                  
                                                                                                                                
DR. KNAPP  said that is  probably related  to the amount  paid by                                                               
non-residents.                                                                                                                  
                                                                                                                                
3:06:58 PM                                                                                                                    
SENATOR GIESSEL  said she  is struggling with  her take  away and                                                               
the utility  of the study. The  last slide in particular  is what                                                               
has been  known for  several years. She  asked what  her concrete                                                               
takeaway should be.                                                                                                             
                                                                                                                                
DR.  KNAPP responded  that  "all these  things  would affect  the                                                               
economy."  He  stressed  that  income  distribution  effects  are                                                               
definitely  relevant  regarding  cuts and  taxes,  and  decisions                                                               
about that ought to reflect consideration of this factor.                                                                       
                                                                                                                                
He stated that it took writing  this report to realize what is in                                                               
the  last slide.  There  is  a lot  more  that  is relevant  than                                                               
previously thought. These results don't  tell you the right thing                                                               
to do, so reasonable people will come to different conclusions.                                                                 
                                                                                                                                
3:11:44 PM                                                                                                                    
SENATOR  GIESSEL  commented  that  Dr. Knapp  has  described  the                                                               
difficulty of the  work he has done and she  appreciates that for                                                               
the  public's  information.  She  concluded  that  it  will  take                                                               
patience, discipline, and vision to get to the right answer.                                                                    
                                                                                                                                
SENATOR STEVENS  said a  strong takeaway is  having "skin  in the                                                               
game." He said  perhaps we're in the fix we're  in because people                                                               
have not had to pay in the past.                                                                                                
                                                                                                                                
DR. KNAPP  agreed it is  a reasonable hypothesis. He  cited local                                                               
spending decisions  regarding capital  projects in  Anchorage and                                                               
opined  that there  hasn't been  that  level of  scrutiny at  the                                                               
state level.                                                                                                                    
                                                                                                                                
CHAIR COSTELLO thanked Dr. Knapp.                                                                                               
                                                                                                                                
3:15:16 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair Costello  adjourned the Senate Labor  and Commerce Standing                                                               
Committee meeting at 3:15 p.m.                                                                                                  

Document Name Date/Time Subjects
CS SB 111 Ver. P.pdf SL&C 3/15/2016 1:30:00 PM
SB 111
SB 111 - Sponsor Answers to Questions.pdf SL&C 3/15/2016 1:30:00 PM
SB 111
2016.02.23 - SB 111- Opposition Follow-up ACC.pdf SL&C 3/15/2016 1:30:00 PM
SB 111
2016.03.14 - ISER - Economic Impacts of Alaska Fiscal Options-Draft Report.pdf SL&C 3/15/2016 1:30:00 PM
ISER Alaska Fiscal Options Draft Report
2016.03.15 - Sen. L&C - ISER Economic Impacts of Alaska Fiscal Options.pdf SL&C 3/15/2016 1:30:00 PM