Legislature(2017 - 2018)BELTZ 105 (TSBldg)

04/25/2017 01:30 PM LABOR & COMMERCE

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Audio Topic
01:32:20 PM Start
01:32:59 PM HB115
02:42:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Dept. of Revenue - How an Income Tax Would be TELECONFERENCED
Implemented in Alaska
- HB115 Fiscal Notes
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
                         April 25, 2017                                                                                         
                           1:32 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Mia Costello, Chair                                                                                                     
Senator Shelley Hughes, Vice Chair                                                                                              
Senator Kevin Meyer                                                                                                             
Senator Gary Stevens                                                                                                            
Senator Berta Gardner                                                                                                           
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Cathy Giessel                                                                                                           
Representative Dan Saddler                                                                                                      
COMMITTEE CALENDAR                                                                                                            
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 115(FIN) AM(EFD FLD)                                                                    
"An Act bearing  the short title of the  'Education Funding Act';                                                               
relating  to the  taxation of  income  of individuals,  partners,                                                               
shareholders in S corporations,  trusts, and estates; relating to                                                               
a payment  against the individual  income tax from  the permanent                                                               
fund  dividend disbursement;  and repealing  tax credits  applied                                                               
against the  tax on individuals  under the Alaska Net  Income Tax                                                               
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 115                                                                                                                  
SHORT TITLE: INCOME TAX; PFD PAYMENT/CREDIT;                                                                                    
SPONSOR(s): FINANCE                                                                                                             
02/10/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/10/17       (H)       FIN                                                                                                    
02/13/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/13/17       (H)       Heard & Held                                                                                           
02/13/17       (H)       MINUTE(FIN)                                                                                            
02/14/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/14/17       (H)       Heard & Held                                                                                           
02/14/17       (H)       MINUTE(FIN)                                                                                            
02/15/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/15/17       (H)       Heard & Held                                                                                           
02/15/17       (H)       MINUTE(FIN)                                                                                            
02/17/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/17/17       (H)       Heard & Held                                                                                           
02/17/17       (H)       MINUTE(FIN)                                                                                            
02/21/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/21/17       (H)       Heard & Held                                                                                           
02/21/17       (H)       MINUTE(FIN)                                                                                            
02/24/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
02/24/17       (H)       Heard & Held                                                                                           
02/24/17       (H)       MINUTE(FIN)                                                                                            
03/14/17       (H)       FIN AT 8:30 AM HOUSE FINANCE 519                                                                       
03/14/17       (H)       Heard & Held                                                                                           
03/14/17       (H)       MINUTE(FIN)                                                                                            
03/15/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/15/17       (H)       Heard & Held                                                                                           
03/15/17       (H)       MINUTE(FIN)                                                                                            
03/17/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/17/17       (H)       Heard & Held                                                                                           
03/17/17       (H)       MINUTE(FIN)                                                                                            
03/20/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/20/17       (H)       Heard & Held                                                                                           
03/20/17       (H)       MINUTE(FIN)                                                                                            
03/23/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/23/17       (H)       Heard & Held                                                                                           
03/23/17       (H)       MINUTE(FIN)                                                                                            
03/27/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/27/17       (H)       Heard & Held                                                                                           
03/27/17       (H)       MINUTE(FIN)                                                                                            
03/28/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/28/17       (H)       Heard & Held                                                                                           
03/28/17       (H)       MINUTE(FIN)                                                                                            
03/28/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/28/17       (H)       Heard & Held                                                                                           
03/28/17       (H)       MINUTE(FIN)                                                                                            
03/29/17       (H)       FIN AT 1:00 PM HOUSE FINANCE 519                                                                       
03/29/17       (H)       Heard & Held                                                                                           
03/29/17       (H)       MINUTE(FIN)                                                                                            
03/29/17       (H)       FIN AT 5:30 PM HOUSE FINANCE 519                                                                       
03/29/17       (H)       Heard & Held                                                                                           
03/29/17       (H)       MINUTE(FIN)                                                                                            
03/30/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/30/17       (H)       Heard & Held                                                                                           
03/30/17       (H)       MINUTE(FIN)                                                                                            
04/03/17       (H)       FIN AT 1:00 PM HOUSE FINANCE 519                                                                       
04/03/17       (H)       Heard & Held                                                                                           
04/03/17       (H)       MINUTE(FIN)                                                                                            
04/04/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/04/17       (H)       -- MEETING CANCELED --                                                                                 
04/07/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/07/17       (H)       <Bill Hearing Canceled>                                                                                
04/11/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/11/17       (H)       Moved CSHB 115(FIN) Out of Committee                                                                   
04/11/17       (H)       MINUTE(FIN)                                                                                            
04/12/17       (H)       FIN RPT CS(FIN) NT 4DP 4DNP 2NR 1AM                                                                    
04/12/17       (H)       DP: GUTTENBERG, GARA, SEATON, FOSTER                                                                   
04/12/17       (H)       DNP: TILTON, THOMPSON, PRUITT, WILSON                                                                  
04/12/17       (H)       NR: GRENN, ORTIZ                                                                                       
04/12/17       (H)       AM: KAWASAKI                                                                                           
04/15/17       (H)       BEFORE HOUSE IN SECOND READING                                                                         
04/16/17       (H)       TRANSMITTED TO (S)                                                                                     
04/16/17       (H)       VERSION: CSHB 115(FIN) AM(EFD FLD)                                                                     
04/17/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/17/17       (S)       L&C, FIN                                                                                               
04/24/17       (S)       L&C AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
04/24/17       (S)       -- MEETING CANCELED --                                                                                 
04/25/17       (S)       L&C AT 9:00 AM BELTZ 105 (TSBldg)                                                                      
04/25/17       (S)       Heard & Held                                                                                           
04/25/17       (S)       L&C AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
WITNESS REGISTER                                                                                                              
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Delivered a PowerPoint titled "New                                                                        
Sustainable Alaska Plan Pulling Together to Build Our Future"                                                                   
during the hearing on HB 115.                                                                                                   
JERRY BURNETT, Deputy Commissioner                                                                                              
Office of the Commissioner                                                                                                      
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Answered questions and provided information                                                               
related to HB 115.                                                                                                              
ACTION NARRATIVE                                                                                                              
1:32:20 PM                                                                                                                    
CHAIR MIA COSTELLO called the  Senate Labor and Commerce Standing                                                             
Committee meeting  to order at 1:32  p.m. Present at the  call to                                                               
order  were   Senators  Gardner,   Stevens,  Hughes,   and  Chair                                                               
Costello. Senator Meyer arrived soon thereafter.                                                                                
             HB 115-INCOME TAX; PFD PAYMENT/CREDIT;                                                                         
1:32:59 PM                                                                                                                    
CHAIR  COSTELLO  announced  the  consideration  of  HB  115.  She                                                               
advised that she  asked the Department of Revenue  to focus their                                                               
presentation  on three  areas: 1)  how  the income  tax would  be                                                               
implemented, 2) the fiscal notes  associated with the tax, and 3)                                                               
the revenue projections.                                                                                                        
She welcomed Senator Giessel and Commissioner Hoffbeck.                                                                         
1:34:32 PM                                                                                                                    
KEN  ALPER,  Director,  Tax   Division,  Department  of  Revenue,                                                               
Juneau,  delivered a  PowerPoint titled  "New Sustainable  Alaska                                                               
Plan  Pulling Together  to  Build Our  Future."  He advised  that                                                               
earlier today the Chair asked him  to start with a brief synopsis                                                               
of  the origin  of the  language in  the bill  and DOR's  role in                                                               
developing that language.                                                                                                       
He explained  that the income  tax bills  last year were  tied to                                                               
federal  liability, but,  as other  states have  recognized, that                                                               
approach  has structural  problems. When  DOR started  to prepare                                                               
bills for this  session, he asked the Department of  Law (DOL) to                                                               
shift the  basis to adjusted  gross income. Because there  was no                                                               
internal  expertise,  DOL  contracted  with  Professor  Pump,  an                                                               
expert  on  state  and  local taxation  from  the  University  of                                                               
Connecticut. For a contract fee  of $85,000, he delivered a draft                                                               
income  tax  bill  based  on  adjusted  gross  income.  When  the                                                               
governor chose not to introduce  an income bill this session, DOR                                                               
asked Representative  Seaton and  the House Finance  Committee if                                                               
they wanted  to use this  technical language in their  bill. They                                                               
chose to  incorporate it. He  described HB  115 as a  hybrid that                                                               
marries the House Finance Committee's  tax tables, revenue goals,                                                               
and  ideas  about exemptions  with  the  technical language  that                                                               
Professor Pump  developed on how  to tax based on  adjusted gross                                                               
1:37:03 PM                                                                                                                    
SENATOR MEYER joined the committee.                                                                                             
1:37:16 PM                                                                                                                    
MR.  ALPER said  the  bill  proposes a  bracketed  tax on  Alaska                                                               
taxable income.  Speaking to the  following charts,  he explained                                                               
that  the numbers  in the  left columns  represent income  before                                                               
both the $4,000 individual deduction  and the $1,250 baseline PFD                                                               
exemption. A  filer who  has an adjusted  gross of  $10,300 would                                                               
have zero state tax liability. A  filer who has an adjusted gross                                                               
of $10,300  - $50,000 would  pay 2.5  percent of the  amount over                                                               
$10,300.  Therefore,  an individual  with  an  adjusted gross  of                                                               
$50,000  would pay  2.5 percent  of $39,700  or $992.50.  The tax                                                               
liability  steps up  for each  bracket until  the individual  who                                                               
earns more  than $250,000 pays  $10,992.50 plus 7 percent  of the                                                               
amount over $250,000. The brackets  are doubled for joint filers,                                                               
but the tax rates remain the same.                                                                                              
  Single Filer or Non-Resident                  Tax                                                                             
Below $10,300                    $0                                                                                             
$10,300 - $50,000                2.5 % of amount over $10,300                                                                   
$50,000 - $100,000               $992.50 + 4% of amount over                                                                    
$100,000 - $200,000              $2,992.50 + 5% of amount over                                                                  
$200,000 - $250,000              $7992.50 + 6% of amount over                                                                   
$250,000 or more                 $10,992.50 + 7% of amount over                                                                 
       Joint Filer Income                       Tax                                                                             
Below $20,600                                   $0                                                                              
$20,600 - $100,000               2.5 % of amount over $20,600                                                                   
$100,000 - $200,000              $1985 + 4% of amount over                                                                      
$200,000 - $400,000              $5,985 + 5% of amount over                                                                     
$400,000 - $500,000              $15,985 + 6% of amount over                                                                    
$500,000 or more                 $21,985 + 76% of amount over                                                                   
MR. ALPER  referenced Senator Hughes' question  from this morning                                                               
and  described  the "marriage  bonus"  embedded  in the  bill.  A                                                               
single filer  who marries  someone without an  income will  pay a                                                               
lower tax as  a joint filer. He described the  three goals of the                                                               
marriage  triangle for  income taxes:  1) the  tax rate  rises as                                                               
income levels rise;  2) prevent a marriage penalty  or bonus; and                                                               
3) the stay-at-home-spouse penalty  or bonus. Mathematically it's                                                               
only possible  to accomplish two  of the  three goals and  HB 115                                                               
does so.  It is a progressive  tax and there is  no stay-at-home-                                                               
spouse penalty.                                                                                                                 
1:40:42 PM                                                                                                                    
MR.  ALPER discussed  the revenue  impact of  HB 115  outlined on                                                               
slide 3. DOR  estimates that $341 million will  be collected from                                                               
withholding  in  the  second  half of  FY2019.  This  assumes  an                                                               
effective date of  January 1, 2019, although the  bill passed the                                                               
House  with a  failed effective  date.  Tax returns  will not  be                                                               
filed until April 2020.                                                                                                         
DOR estimates, based on modeling  using aggregated federal income                                                               
data for Alaska  residents, that $687 million in  revenue will be                                                               
collected in FY2020.                                                                                                            
CHAIR COSTELLO asked how he  came up with those estimates because                                                               
she  doesn't believe  it's  possible  to know  how  much will  be                                                               
raised until the tax is instituted.                                                                                             
MR.  ALPER  said DOR  has  IRS  aggregate information  on  Alaska                                                               
filers  from 2014.  DOR  therefore knows  how  many joint  filers                                                               
there  were  in  Alaska,  how  many  had  incomes  of  $50,000  -                                                               
$100,000,  and  the   total  taxes  they  paid   to  the  federal                                                               
government. "At that level of  granularity, we could break it out                                                               
to the  expectation of how people  will be filing this  state tax                                                               
and  make  certain  assumptions,   and  get  reasonably  accurate                                                               
information." Adjustments have been made  to the baseline data to                                                               
account for known  changes such as high  unemployment and layoffs                                                               
in  certain sectors.  Normal  inflation  and economic  background                                                               
growth are also added to the estimate.                                                                                          
CHAIR COSTELLO opined  that 2014 is quite  a lookback considering                                                               
the  significant  job  losses  and   recession  the  economy  has                                                               
undergone in  the last  year. The public  should know  that these                                                               
are guesses  as much  as anything  because the  information isn't                                                               
current. "We're in uncharted territory," she said.                                                                              
MR.  ALPER  argued that  there  is  surprising stability  in  the                                                               
underlying income  figures and that  adjustments can be  made for                                                               
changes in both the employment rate and wages.                                                                                  
CHAIR COSTELLO asked if nonresident  workers are figured into the                                                               
MR.  ALPER said  there  is  considerable data  on  the number  of                                                               
nonresident workers  and where they  fit on the income  scale. He                                                               
explained  the basic  math  and advised  that  the most  accurate                                                               
estimate  in  the  first  year   is  that  $84  million  will  be                                                               
nonresident income taxes.                                                                                                       
CHAIR COSTELLO  said the  sponsor's statement  that it  will take                                                               
Alaskans about a  minute to figure out their  state tax liability                                                               
is probably not the case.                                                                                                       
1:46:41 PM                                                                                                                    
MR. ALPER  said more  and more  taxpayers use  tax software  or a                                                               
professional to prepare their return.  The state tax is typically                                                               
a  one  button add  on,  which  takes  just  seconds to  run  the                                                               
calculation. The tables on slide 2  are similarly simple and easy                                                             
to use. It gets complicated  for the multi-state filer, but those                                                               
are  the  more  complex  taxpayers  that  tend  to  already  have                                                               
professional assistance with their taxes.                                                                                     
SENATOR HUGHES asked if the  adjustments to the 2014 data account                                                               
for:  1) the  4,000 higher  wage  jobs lost  in the  oil and  gas                                                               
industry, and 2)  outmigration that has happened  in other states                                                               
that instituted an income tax.                                                                                                  
MR.  ALPER  confirmed that  oil  industry  adjustments have  been                                                               
incorporated into the  baseline data, and that  the bill accounts                                                               
for future  population. It  does so by  assuming a  percentage of                                                               
underlying growth and  the drag factor that's  created when taxes                                                               
1:49:29 PM                                                                                                                  
SENATOR  HUGHES  asked  if the  administration  did  an  economic                                                               
analysis  of  how  Professor Pomp's  proposal  would  impact  the                                                               
economy, particularly small businesses.                                                                                         
MR.  ALPER  said  several different  analyses  of  the  potential                                                               
impacts on  the economy have been  done in the last  year and the                                                               
committee  will be  hearing from  those entities.  Professor Pomp                                                               
was  told  that the  income  tax  was  to  raise X  dollars.  His                                                               
specific  expertise  was  to  provide  language  to  ensure  that                                                               
everyone was accounted  for and that people  couldn't avoid taxes                                                               
by  moving their  money around  and hiding  it through  different                                                               
shell transactions. The fact that this  is a $680 million bill is                                                               
a decision that was made in  the House, not by Professor Pomp and                                                               
his language.                                                                                                                   
1:51:59 PMSENATOR HUGHES                                                                                                      
SENATOR HUGHES  asked if any modeling  was done to see  how small                                                               
businesses  would be  affected by  the proposed  income tax.  She                                                               
shared that  a lot  of small businesses  and S  Corporations have                                                               
voiced concern with the bill and she is likewise concerned.                                                                     
MR. ALPER said  he appreciates the concern, but  the latest study                                                               
from the Institute  on Taxation and Economic  Policy (ITEP) shows                                                               
that middle  income people pay less  under this type of  tax than                                                               
under  a sales  tax  that raises  the same  amount  of money.  He                                                               
reminded members that the proposed  tax is tied to adjusted gross                                                               
income in total.  The things that feed into [line  37 on IRS form                                                               
1040]  include wages,  S  Corporation distributions,  partnership                                                               
income,  sole proprietor  income, and  retirement income  that is                                                               
taxable. This mix of these  business and wage incomes provides an                                                               
Alaska-specific data set.                                                                                                       
CHAIR COSTELLO welcomed Representative Dan Saddler.                                                                             
She asked Mr. Alper to continue the presentation.                                                                               
1:53:51 PM                                                                                                                    
MR. ALPER referenced  the revenue summary on slide  3 and advised                                                               
that DOR's fiscal note shows  revenue increasing to a little over                                                               
$700 million in FY2023. He said  that slides 4-6 use federal data                                                               
and  extrapolate  it to  Alaska-specific  numbers.  The chart  on                                                               
slide 4 shows how the 230,000  returns fall into the income chart                                                               
after adjusting  for the  $4,000 personal  deduction. Individuals                                                               
making less  than $50,000 will  have an average tax  liability of                                                               
$407. The  average taxpayer making $50,000-$100,000  will have an                                                               
average tax  liability of  just less than  $1,800. He  noted that                                                               
the  $60,000-$70,000 income  range is  the crossover  point where                                                               
the tax exceeds  the PFD. By comparison, the  110 single resident                                                               
taxpayers with over  $1 million in income would pay  the state an                                                               
average of  a little more  than $152,000. After  further analysis                                                               
DOR estimates that  35-40 percent of the total  tax receipts will                                                               
come from households earning more than $250,000/year.                                                                           
CHAIR COSTELLO asked  if taxpayers would be  required to indicate                                                               
in advance  that they  want to  pay some  of their  tax liability                                                               
with their dividend.                                                                                                            
MR.  ALPER  replied  there  is   a  calendar  issue  because  the                                                               
dividends come out  in October and taxes are due  in April of the                                                               
next  year.  Individuals would  need  to  pre-pledge before  they                                                               
receive their dividend.                                                                                                         
1:57:36 PM                                                                                                                    
SENATOR HUGHES asked if 230,106  is the total number of non-joint                                                               
MR. ALPER said yes.                                                                                                             
SENATOR HUGHES said this doesn't  reflect the sponsor's statement                                                               
this morning that about 500,000 Alaskans would be paying.                                                                       
1:58:34 PM                                                                                                                    
MR. ALPER directed  attention to slide 5 that  shows that another                                                               
[128,220] returns  will be  filed by joint  filers. The  total of                                                               
single and joint  returns is just less than  360,000 tax returns.                                                               
The joint  returns do  not reflect the  second adult.  That would                                                               
bring the  total to  about 490,000 filers  and then  the children                                                               
would  be added.  The expectation  is that  nearly every  Alaskan                                                               
will file  a tax return,  although a  portion will have  zero tax                                                               
He  said the  question asked  this morning  is best  addressed by                                                               
looking at  the zero brackets  in the charts  on slides 4  and 5.                                                               
About  88,000 returns-or  20-22  percent  of taxpayers-will  have                                                               
zero tax  liability. Keeping that  number as low as  possible was                                                               
part  of the  reason for  basing the  tax on  the adjusted  gross                                                               
income. He  noted that the  original version  of this bill  had a                                                               
minimum tax  level where everyone  would have paid at  least $25.                                                               
"These  are  important  conversations," he  said,  "because  it's                                                               
widely understood  that a broad-based  tax means  everyone should                                                               
participate in the cost of government."                                                                                         
CHAIR COSTELLO  reminded Senator Hughes that  the committee heard                                                               
this morning  that no state  in the nation calculates  its income                                                               
tax  as  a   percentage  of  the  federal  tax.   It's  not  only                                                               
unpredictable  but the  federal  government may  stop allowing  a                                                               
deduction for state tax. The point was well made, she said.                                                                     
SENATOR HUGHES calculated that about 400,000 would pay.                                                                         
MR. ALPER  said there are about  400,000 adults in the  state and                                                               
roughly 20 percent of the filers will pay zero tax.                                                                             
2:02:29 PM                                                                                                                    
SENATOR MEYER  recalled that he  told Senator Gardner  that 35-40                                                               
percent of the  tax receipts would come from  filers with incomes                                                               
of $200,000 and higher.                                                                                                         
MR. ALPER clarified that he said $250,000 and higher.                                                                           
SENATOR MEYER calculated  that 60-65 percent of  the tax receipts                                                               
would come from incomes below $250,000.                                                                                         
MR.  ALPER agreed  with the  calculation.  He further  calculated                                                               
that 60  percent of 400,000 filers  represents 240,000 households                                                               
that in  aggregate would  pay about $400  million. He  said those                                                               
non-wealthy  Alaskans  would  pay  a substantial  tax  but  still                                                               
smaller than the  overall average. He posited  that most million-                                                               
dollar  income earners  who pay  $150,000 to  the state  itemize.                                                               
They are  paying federal  income tax at  the 40  percent marginal                                                               
tax rate,  so the  $150,000 they're paying  the state  only costs                                                               
them $90,000; $60,000 will come off their federal taxes.                                                                        
SENATOR MEYER  asked if the  implication is that people  who make                                                               
$250,000  and  above are  wealthy  and  people making  less  than                                                               
$250,000 are not wealthy.                                                                                                       
MR.  ALPER said  no;  DOR was  asked to  do  this analysis  using                                                               
$250,000 as  a threshold in  another context in another  bill. He                                                               
described  Representative Clamen's  tax bill  that has  a maximum                                                               
tax of  $8,000 for  filers making more  than $250,000.  That bill                                                               
tracked HB 115  up to the $250,000 level, but  it brought in less                                                               
revenue from the higher income individuals.                                                                                     
SENATOR  HUGHES admitted  that she  was  stuck on  the number  of                                                               
payers.  She   reviewed  her  calculations  and   concluded  that                                                               
"there's  a  considerable  number  of adults  who  would  not  be                                                               
2:06:53 PM                                                                                                                    
MR.  ALPER said  the  graphs  on slides  4  and  5 indicate  that                                                               
360,000  taxpayers represent  about 490,000  adults, and  that 80                                                               
percent  of those  adults will  pay  something to  the state.  He                                                               
couldn't say how  many adults pay nothing because  they are below                                                               
an income threshold or some other reason.                                                                                       
2:07:27 PM                                                                                                                    
CHAIR COSTELLO  asked him  to walk  through (for  the individuals                                                               
listening online)  the number  of returns  for each  income level                                                               
shown on slide 5.                                                                                                               
MR. ALPER stated that the 17,071  joint filers who make less than                                                               
$20,600 would have  zero tax liability. The  62,208 households in                                                               
the $20,600-$100,000 income  range have a 2.5  marginal tax rate;                                                               
the  average  tax  liability  per  return  is  $971.  The  37,127                                                               
households  in  the  $100,000-$200,000  income  range  have  a  4                                                               
percent marginal tax  rate; the average tax  liability per return                                                               
is $3,608.  The 8,032 households in  the $200,000-$400,000 income                                                               
range have  a 5 percent  marginal tax; the average  tax liability                                                               
per  return is  $9,853.  The 2,031  households  in the  $400,000-                                                               
$500,000 income range have a  6 percent marginal tax; the average                                                               
tax liability per return is  $18,862. The 1,230 households in the                                                               
$500,000-$1,000,000 income  range have a 7  percent marginal tax;                                                               
the  average  tax  liability  per  return  is  $36,096.  The  520                                                               
households  in the  $1,000,000 and  over  income range  have a  7                                                               
percent marginal  tax; the  average tax  liability per  return is                                                               
He said  it's important  to note  that the  bracket that  has the                                                               
highest  number of  joint filers  does not  generate the  highest                                                               
amount of revenue. The 62,208  joint filers in the second bracket                                                               
generate  just  $60  million.  The  filers  in  $100,000-$200,000                                                               
bracket  generate the  most revenue  at $134  million. The  joint                                                               
filers in  the $1 million  plus bracket generate $76  million, or                                                               
roughly 11 percent of the  total income tax. Combined with single                                                               
filers in  the $1 million  plus bracket brings the  total revenue                                                               
to $93 million or 14 percent of the total revenue.                                                                              
2:12:11 PM                                                                                                                    
SENATOR STEVENS said  his concern is that there may  be a tipping                                                               
point at which time people living  on a fixed income may begin to                                                               
leave when  they retire. That's  what they  did in the  1970s. He                                                               
asked Mr. Alper to reflect.                                                                                                     
MR.  ALPER opined  that  the  higher cost  of  living and  higher                                                               
income levels balance  out, and wherever retirees  move is likely                                                               
to be a  higher tax jurisdiction. Washington  state, for example,                                                               
doesn't  have  an income  tax  but  the  state  sales tax  is  10                                                               
percent.  Another factor  is that  not all  retirement income  is                                                               
taxed.  For example,  a lower  income  senior won't  see much  of                                                               
their Social  Security reflected in their  adjusted gross income.                                                               
"Very little  of the  fixed income of  seniors-if they  truly are                                                               
lower income/fixed income-is going  to actually be taxable. Quite                                                               
likely, that's where  a lot of the zero filers  are going to come                                                               
into this equation," he said.                                                                                                   
CHAIR COSTELLO asked how seniors  living in assisted living homes                                                               
who pay  $5,000-$7,000 monthly will  be affected by HB  115. "Are                                                               
you aware of that or do  you think we'll hear this evening during                                                               
public testimony?"                                                                                                              
MR. ALPER said he looks  forward to hearing testimony about that,                                                               
but  people  who are  paying  those  fees  out of  pocket  aren't                                                               
exceedingly  low  income.  Also,   anyone  living  in  subsidized                                                               
housing wouldn't pay tax on that subsidy.                                                                                       
CHAIR COSTELLO asked Mr. Alper to continue the presentation.                                                                    
2:15:57 PM                                                                                                                    
MR. ALPER  turned to  slide 6  that lays  out the  calculation to                                                               
reach  the estimated  $673 million  in revenue  generated by  the                                                               
income  tax. The  total  joint and  single  return tax  liability                                                               
before  the  PFD  deduction and  residency  adjustments  is  $652                                                               
million.  Subtract the  $30 million  PFD deduction  to arrive  at                                                               
$622 million. Subtract the $34  million of Alaska resident income                                                               
earned in  other states  and add the  $84 million  of nonresident                                                               
income earned  in Alaska to  arrive at  $673 million, which  is a                                                               
2017 number.  The modeling  adjustment brings  the total  to $687                                                               
for FY2020.                                                                                                                     
2:17:33 PM                                                                                                                    
MR. ALPER turned to implementation of the tax on slide 8.                                                                       
CHAIR COSTELLO said she would first  like him to describe the tax                                                               
division as  it exists now what  it will look like  should HB 115                                                               
MR.  ALPER explained  that  the tax  division  currently has  110                                                               
authorized positions, about 10 of  which are vacant. Roughly two-                                                               
thirds of those  are in the Anchorage office and  the other third                                                               
are in Juneau.  The division has a  three-person management team:                                                               
a  director, a  deputy director,  and an  operations manager  who                                                               
oversees the back-office  operations. He said a  large portion of                                                               
the need  associated with the  bill is new  back-office positions                                                               
in  IT and  accounting. The  hope  is to  get 80  percent of  the                                                               
expected 400,000 filers  to do so electronically,  but that still                                                               
leaves  80,000 paper  forms. This  means that  a substantial  new                                                               
team  would be  required to  open  those envelopes  and scan  the                                                               
documents into the system.                                                                                                      
He listed  the 25 different  tax programs the  division currently                                                               
administers.  Each group  has its  own  structure, but  generally                                                               
there  is   a  supervisor  as   well  as  several   auditors  and                                                               
technicians. He  summarized, "You  have auditors  and technicians                                                               
and supervisors and then the back-office folks."                                                                                
MR. ALPER  said the 60  people the bill anticipates  needing will                                                               
include a supervisor,  20 some auditors, 10  or more technicians,                                                               
and  as  many  as  15 back-office/data  handlers.  A  handful  of                                                               
special project specialists will also  be needed to work with the                                                               
supervisor.  They  are  higher range  positions  for  experienced                                                               
professionals. Another  IT position and an  office assistant will                                                               
also likely be added.                                                                                                           
2:22:26 PM                                                                                                                    
SENATOR STEVENS  asked what  the difference  is that  would cause                                                               
Montana  to  need roughly  twice  as  many  people as  Alaska  to                                                               
administer its income tax.                                                                                                      
MR. ALPER  explained that Alaska  already has a tax  division and                                                               
doesn't need to  double up on many of the  existing positions. If                                                               
the need for 60 additional  positions is inaccurate, that will be                                                               
clear when  the implementation contractor  is hired. More  to the                                                               
point,  he said,  is that  the entire  cost to  implement is  1.5                                                               
percent of the  revenue and the ongoing  administration costs are                                                               
way less  than 2 percent.  He said he  recognizes that this  is a                                                               
major step  that elicits strong feelings,  but the implementation                                                               
and  administration costs  shouldn't  be the  deciding factor  to                                                               
have an income tax.                                                                                                             
CHAIR  COSTELLO  asked him  to  discuss  the need  to  promulgate                                                               
regulations. She  specifically asked about the  potential need to                                                               
write  regulations around  the  section of  the  bill that  talks                                                               
about mistakes  and the assumption  that the department  is right                                                               
and  the  taxpayer wrong,  and  the  potential  need to  hire  an                                                               
administrative law judge.  She noted that Neil  Slotnick with the                                                               
Department of  Administration (DOA) was available  to explain the                                                               
DOA fiscal note.                                                                                                                
2:26:57 PM                                                                                                                    
MR. ALPER  said that  when he discussed  staffing earlier  in the                                                               
presentation he neglected  to mention that DOR  has a five-person                                                               
appeals  team and  they  would  need to  add  a  couple of  these                                                               
positions to  handle potential income  tax appeals.  He explained                                                               
that  the  first step  in  the  appeals  process is  before  that                                                               
internal appeals  team. The next step  in an appeal is  before an                                                               
administrative  law  judge  in  DOA's  Office  of  Administrative                                                               
Hearings.   He  explained   that  DOR's   fiscal  note   includes                                                               
approximately  $200,000/year  to  pay  for  the  services  of  an                                                               
administrative  law   judge,  and  DOA's  fiscal   note  requests                                                               
interagency receipt  authority to bill  DOR for that  service. He                                                               
opined that the  technical language in the bill  that assumes the                                                               
state is in the right is boilerplate income tax language.                                                                       
MR. ALPER said there is no  question that the bill will mandate a                                                               
large, multi-part  regulatory package. However, the  fact that it                                                               
has  27 pages  of technical  language will  make that  easier. It                                                               
doesn't leave a  lot of judgment to the  regulation writer. "This                                                               
bill provides  extraordinarily precise  direction as far  as what                                                               
should be in those regulations  and how we should be interpreting                                                               
these various provisions."                                                                                                      
CHAIR COSTELLO said the sponsor went into that this morning.                                                                    
MR.  ALPER  said Ms.  Hansen  from  the  sponsor's office  is  an                                                               
extraordinary  resource  and  deserves  a  tremendous  amount  of                                                               
credit for the bill being where it is today.                                                                                    
SENATOR HUGHES referenced Senator  Steven's concern and expressed                                                               
doubt that the  income tax could be  implemented and administered                                                               
with just 60 additional people.                                                                                                 
MR.  ALPER suggested  Deputy Commissioner  could provide  a fresh                                                               
2:30:50 PM                                                                                                                    
JERRY BURNETT,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department  of Revenue  (DOR), explained  that some  of the  work                                                               
associated  with  the   income  tax  will  be   spread  to  DOR's                                                               
Administrative Services  Division, existing employees in  the Tax                                                               
Division,  and the  Department of  Administration. Also,  the Tax                                                               
Division has  become more efficient  as technology  has advanced.                                                               
He  opined that  it is  not  an unreasonable  assumption that  60                                                               
employees will  be sufficient. "We  have many ways  of addressing                                                               
the problem you're concerned about."                                                                                            
CHAIR  COSTELLO  asked  if there  were  further  questions  about                                                               
implementation of HB 115.                                                                                                       
SENATOR STEVENS  said you very  clearly heard Senator  Meyer talk                                                               
about what  the Senate does and  does not support to  address the                                                               
budget  gap.  He listed  reducing  the  Permanent Fund  Dividend,                                                               
establishing  a percent  of  market value  (POMV),  cuts to  four                                                               
major areas, the use of  the Constitutional Budget Reserve (CBR),                                                               
and oil  tax credits.  He asked  if it is  his position  that the                                                               
only way to balance the budget is to institute an income tax.                                                                   
MR. ALPER  said it doesn't matter  what he thinks, but  he agrees                                                               
with the Governor that we need  a complete plan. It's not wise to                                                               
build in a structural deficit  that's in the multiple hundreds of                                                               
millions of  dollars per year,  he said. The problem  with basing                                                               
the solution on the permanent  fund without some other feature is                                                               
that  it leads  to  four choices:  1)  you cut  the  budget by  a                                                               
certain amount each year; 2) you're  forced to try to raise a tax                                                               
quickly; 3) you spend from  the Constitutional Budget Reserve; or                                                               
4)  you take  more out  of the  Permanent Fund  Earnings Reserve.                                                               
Choice  4 presents  the biggest  danger, he  said. The  Permanent                                                               
Fund  has very  strict  rules for  managing it  that  need to  be                                                               
respected.   Changing  them   is  a   generationally  significant                                                               
decision for  Alaskans. "Building  in a structural  deficit might                                                               
be making  a system where it's  too easy to fail."  That's why we                                                               
need a complete package, he said.                                                                                               
CHAIR COSTELLO asked if he is  speaking on behalf of the governor                                                               
or himself.                                                                                                                     
MR.  ALPER said  he was  speaking on  behalf of  himself. He  was                                                               
paraphrasing  the Governor  and  Commissioner to  an extent,  but                                                               
wouldn't  say that  is their  policy without  checking with  them                                                               
2:37:49 PM                                                                                                                    
SENATOR MEYER said it's hard  to explain to constituents why it's                                                               
not more  efficient to cut  the size  of the dividend.  He opined                                                               
that it's inefficient  to give money in the form  of the dividend                                                               
and then take it back in the form of an income tax.                                                                             
MR. ALPER  said that's accurate  for the  $50,000-$60,000 middle-                                                               
income  earner. They  will probably  pay  an income  tax that  is                                                               
equivalent to the  dividend. A lower income person  will pay less                                                               
and get the  same dividend and the $1 million  plus income person                                                               
will  pay over  $100,000 in  taxes  and get  the $1,000  dividend                                                               
back. He  agreed with  the sponsor's statement  that there  is an                                                               
inherent equity to the income tax.                                                                                              
SENATOR MEYER  said fairness  is a  matter of  interpretation. He                                                               
posited  that  middle-income  people,  those  earning  less  than                                                               
$250,000, will pay the bulk of this tax.                                                                                        
CHAIR  COSTELLO  thanked  the  presenters  and  held  HB  115  in                                                               
2:42:22 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair Costello  adjourned the Senate Labor  and Commerce Standing                                                               
Committee meeting at 2:42 p.m.                                                                                                  

Document Name Date/Time Subjects
HB 115 - 2017.04.24 DOR TAX Presentation Excerpt.pdf SL&C 4/25/2017 1:30:00 PM
HB 115