Legislature(2017 - 2018)BELTZ 105 (TSBldg)

04/26/2017 09:00 AM LABOR & COMMERCE

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Audio Topic
09:03:10 AM Start
09:03:23 AM HB115
10:38:48 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Presentation - Tax Foundation - "Implications of TELECONFERENCED
an Alaska Income Tax"
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
                         April 26, 2017                                                                                         
                           9:03 a.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                                                                                                             
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)       MINUTE(L&C)                                                                                            
04/25/17       (S)       L&C AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
04/25/17       (S)       Heard & Held                                                                                           
04/25/17       (S)       MINUTE(L&C)                                                                                            
04/25/17       (S)       L&C AT 5:00 PM BELTZ 105 (TSBldg)                                                                      
04/25/17       (S)       Heard & Held                                                                                           
04/25/17       (S)       MINUTE(L&C)                                                                                            
04/26/17       (S)       L&C AT 9:00 AM BELTZ 105 (TSBldg)                                                                      
WITNESS REGISTER                                                                                                              
JARED WALCZAK, Policy Analyst                                                                                                   
Tax Foundation                                                                                                                  
Washington, D.C.                                                                                                                
POSITION STATEMENT: Delivered a PowerPoint presentation titled                                                                
"Implications of an Alaska Income Tax."                                                                                         
ACTION NARRATIVE                                                                                                              
9:03:10 AM                                                                                                                    
CHAIR MIA COSTELLO called the  Senate Labor and Commerce Standing                                                             
Committee meeting  to order at 9:03  a.m. Present at the  call to                                                               
order were  Senators Stevens, Hughes,  Gardner, Meyer,  and Chair                                                               
             HB 115-INCOME TAX; PFD PAYMENT/CREDIT;                                                                         
9:03:28 AM                                                                                                                    
CHAIR  COSTELLO  announced  the  consideration  of  HB  115,  and                                                               
advised her office was accepting  written testimony on the income                                                               
tax bill.                                                                                                                       
She welcomed Mr. Walczak from the Tax Foundation.                                                                               
9:05:10 AM                                                                                                                    
JARED WALCZAK,  Policy Analyst, Tax Foundation  (TF), Washington,                                                               
D.C., said  HB 115 seeks to  resolve the important issues  of the                                                               
budget shortfall, but  it's a challenge because  the state relies                                                               
on a single industry for most of its revenue.                                                                                   
9:06:18 AM                                                                                                                    
SENATOR STEVENS  asked Mr. Walczak  to introduce himself  and who                                                               
he works for, so the committee understands his potential bias.                                                                  
MR.  WALCZAK stated  that  he represents  the  Tax Foundation,  a                                                               
nonpartisan,   nonprofit  tax   policy   organization  based   in                                                               
Washington, D.C. They work with  the principles that taxes should                                                               
be  simple, transparent,  and pro-growth.  Taxes  should also  be                                                               
applied  in as  neutral a  manner as  possible. As  a tax  policy                                                               
organization, TF tries to steer  clear of questions about whether                                                               
a state  needs additional revenue  and what the optimal  level of                                                               
tax revenue  may be. He  said his  interest is tax  structure and                                                               
the implications  of imposing  an income tax  versus a  sales tax                                                               
versus the  current situation of  no tax. He looks  at behavioral                                                               
responses and what  is optimal in a tax code.  Being a nonprofit,                                                               
TF  receives  contributions  from   both  family  and  charitable                                                               
foundations, corporations, and individuals.                                                                                     
9:09:09 AM                                                                                                                    
SENATOR HUGHES  asked if  he prepared his  comments after  he had                                                               
looked  at  the overall  budget,  the  per capita  spending,  how                                                               
Alaska compares  to other  states, the  state's savings,  and the                                                               
Senate's goals to reduce the budget deficit.                                                                                    
MR. WALCZAK  said he'd go into  that in more detail  later in the                                                               
presentation but  Alaska does have  the highest  expenditures per                                                               
capita of any state in the  nation. Some of that can be explained                                                               
by  Alaska's  unique  characteristics.   Other  states  can  take                                                               
advantage  of economies  of scale  that are  more difficult  in a                                                               
large,  dispersed   geographic  region  like   Alaska.  Providing                                                               
education  and basic  services in  Alaska can  be expected  to be                                                               
more expensive on a per capita basis.                                                                                           
He said  he does  believe that  Alaska has been  on a  glide path                                                               
where expenditures were not controlled  as strictly as they would                                                               
have  been  in  other  states. Because  revenue  was  so  readily                                                               
available,  the  pros and  cons  of  different spending  programs                                                               
probably were  not scrutinized as  much as they might  have been.                                                               
The   individual  income   tax  was   repealed  because   it  was                                                               
essentially deemed  unnecessary once oil started  to flow through                                                               
the pipeline. At  the peak in FY2014, state and  local per capita                                                               
spending was  $19,357 compared to  about $8,700  nationwide. This                                                               
is something  to take  seriously within  the context  and perhaps                                                               
before any consideration of broad-based tax changes, he said.                                                                   
CHAIR COSTELLO asked him to proceed with the slide presentation.                                                                
9:13:00 AM                                                                                                                    
MR. WALCZAK said  everyone realizes that the  budget shortfall is                                                               
related to  the degree of  reliance on a single  industry. Mining                                                               
and minerals  represent about  18 percent  of the  gross domestic                                                               
product (GDP)  and, at peak,  oil and gas taxes  were responsible                                                               
for as  much as 72 percent  of all state revenue.  He said Alaska                                                               
also has  a severance  tax that  is based  on the  operator's net                                                               
income, which is unique and  potentially volatile. He highlighted                                                               
that the oil related revenue in  2017 is estimated to be about $1                                                               
billion,  whereas it  was $7.4  billion in  2014. He  said Texas,                                                               
North  Dakota, and  Louisiana have  also experienced  shortfalls,                                                               
but not  the scope of  what we're seeing  in Alaska. He  said one                                                               
answer to  the problem of  relying on  a single industry  for the                                                               
overall revenue picture is to  adopt a new broad-based individual                                                               
income tax. The  difficult question is whether that  is the right                                                               
answer. He said  he believes that most people would  say that the                                                               
current tax structure  is too volatile, but  many other questions                                                               
need  answers too.  These generally  relate  to price  forecasts,                                                               
estimated  revenue needs,  the tax  structure  and duration,  the                                                               
role of the state's traditional  revenue sources, and expenditure                                                               
9:16:45 AM                                                                                                                    
MR.  WALCZAK  said  he  wanted to  talk  about  what  constitutes                                                               
optimal tax  design to help  inform the general  understanding of                                                               
how a  tax code is developed.  One principle is to  develop a tax                                                               
code  that   distorts  economic  choices  to   the  least  extent                                                               
possible. The  goal is that the  code is not picking  winners and                                                               
losers. It's as  neutral as possible so people  base their market                                                               
decisions on  their own assessments  of relative value  and worth                                                               
rather than  on tax arbitrage  or tax avoidance. He  said there's                                                               
also  a broad  principle  that the  optimal  tax on  intermediate                                                               
goods is always zero.                                                                                                           
9:18:09 AM                                                                                                                    
SENATOR GARDNER  asked if he  agrees that tax  incentives distort                                                               
economic choices.                                                                                                               
MR. WALCZAK said absolutely, and  the amount of distortion varies                                                               
based on  the incentive and  how it functions. An  incentive that                                                               
is  available to  many firms  in  the market  operates more  like                                                               
simply  having a  lower overall  rate, whereas  one that  is very                                                               
narrowly construed  to benefit one industry  or economic activity                                                               
is going to establish a set  of winners and losers. That would be                                                               
economically distortive and sub-optimal.                                                                                        
He  said there  is  widespread agreement  in  the public  finance                                                               
world that incentives  are sub-optimal, but it's  hard for states                                                               
to opt out  when they see themselves in a  competition. He opined                                                               
that the  best economic development  policy a state can  adopt is                                                               
to have  a broader base  and a lower  rate. He cited  the extreme                                                               
example of North Carolina that  extensively carved out incentives                                                               
for  agricultural  and   textile  manufacturing  industries.  The                                                               
state's  economy changed  over time,  but it  was still  hard for                                                               
other businesses  to come  in and  compete. It  demonstrates that                                                               
it's  increasingly   difficult  to   pick  winners   and  losers,                                                               
particularly as the economy changes over time, he said.                                                                         
SENATOR  COSTELLO asked  if  he had  any  experience with  people                                                               
deciding to leave  a state based on tax policy.  She related that                                                               
the  committee  heard extensive  testimony  to  that effect  last                                                               
night. She asked  if these are the things that  a military family                                                               
considers when they decide where to retire.                                                                                     
MR.  WALCZAK said  that  is relevant,  but in  Alaska  it may  be                                                               
difficult to  get a  handle on the  significance. People  do make                                                               
decisions  on  location  based  to  some  degree  on  taxes,  but                                                               
generally it's based on a  range of factors regarding the broader                                                               
environment. This  can be  the tax  climate, the  actual climate,                                                               
proximity to amenities, an educated  workforce, or ease of access                                                               
in  transportation. He  said he  suspects  that a  lot of  people                                                               
would find  it challenging to  move to Alaska, meaning  there are                                                               
probably some people  who are on the margin on  whether they want                                                               
to be in Alaska or another state.                                                                                               
MR. WALCZAK  said we know  people make this determination  at the                                                               
margin.  There is  a net  outmigration from  high tax  states and                                                               
inmigration to  states with low  taxes, especially those  with no                                                               
individual income  tax. In fact,  7 of  the 9 states  that forego                                                               
wage income taxes  are growing faster than  the national average,                                                               
and the  other 2  are growing faster  than their  regional peers.                                                               
While  this  isn't  the  only  thing people  care  about,  it  is                                                               
something  that  is  within  the  power  of  the  legislature  to                                                               
address,  so it's  pertinent. Many  people  in Alaska  experience                                                               
high  costs of  living. That  can  put them  on the  cusp of  the                                                               
decision  and increasing  living costs  through a  new tax  could                                                               
drive  out   some  individuals.   He  clarified  that   he  isn't                                                               
suggesting there  will be a  massive outmigration, but  people do                                                               
make  these decisions,  especially  when  they have  flexibility.                                                               
Retirees, for  example, are  more sensitive  to tax  changes than                                                               
people  in the  workforce. "We  often see  retirees or  wealthier                                                               
individuals  leaving."   The  idea   isn't  to   protect  wealthy                                                               
individuals,  but communities  don't  necessarily want  to see  a                                                               
large outflow of higher income individuals.                                                                                     
CHAIR  COSTELLO advised  that Mr.  Walczak  was still  discussing                                                               
optimal tax design and avoiding distorting economic choices.                                                                    
MR.  WALCZAK  discussed  exempting   intermediate  goods  in  the                                                               
optimal tax design. He said the  goal is to tax things just once.                                                               
This isn't just a problem with  a sales tax but also with capital                                                               
taxation.  Capital is  more mobile  than labor,  which makes  the                                                               
element of  the individual  income tax  that hits  small business                                                               
particularly pertinent.  It may  change where a  business locates                                                               
and whether there is new  hiring. Businesses also need to respond                                                               
to the  fact that an individual  income tax reduces the  value of                                                               
an employee's  salary. Over  time wages will  rise as  an offset,                                                               
but it  means that employment overall  will be lower. He  said an                                                               
economist  at  the  University   of  Alaska  Anchorage  did  some                                                               
economic modeling  and suggested a  loss of 3,500 to  5,000 jobs,                                                               
should the tax to be implemented.  He opined that while there may                                                               
be some  dislocation of jobs  initially, the real impact  will be                                                               
in later years when growth is slower than it would be otherwise.                                                                
9:31:36 AM                                                                                                                    
SENATOR HUGHES  asked if he  had looked  at the idea  that Alaska                                                               
would be  more negatively  impacted by  an individual  income tax                                                               
because it  has more small  businesses per capita than  any other                                                               
MR.  WALCZAK  said  he  isn't  sure  if  Alaska  has  more  small                                                               
businesses  per capita  or if  it's that  a larger  percentage of                                                               
working Alaskans  are employed  by a  small business.  He related                                                               
that  nearly  90  percent  of  all businesses  in  the  U.S.  are                                                               
identified as  small businesses. These are  primarily passthrough                                                               
entities meaning that  for tax purposes income  passes through to                                                               
the  individual  federal   form.  If  Alaska  were   to  have  an                                                               
individual income tax,  they would pay that too. He  said this is                                                               
a significant  issue for Alaska's  economy, perhaps more  than in                                                               
other states  because so many  individuals are employed  by small                                                               
businesses, many of whom are fulltime residents.                                                                                
9:34:47 AM                                                                                                                    
MR. WALCZAK suggested  thinking of an income tax as  a tax on the                                                               
total value  of consumption plus  the rate of change  in savings,                                                               
which is essentially  a tax on future consumption.  At some level                                                               
it's a double tax  if you have an income tax and  a sales tax, he                                                               
said, because you're taxing current  consumption in the sales tax                                                               
and future consumption  of both the income and the  sales tax. He                                                               
said  we often  don't think  about what  income is  equivalent to                                                               
economically.  Sales tax  falls  to  a return  to  savings or  on                                                               
capital income which is exempt from  a consumption tax, but it is                                                               
taxed in  an income tax. He  said taxable return to  savings does                                                               
distort work effort because it  lowers the payoff to work. People                                                               
who work today  and plan on consuming in the  future will be able                                                               
to consume less in the future for  a given hour of work. A tax on                                                               
the  return to  savings, like  a sales  tax, would  increase that                                                               
future cost of  consumption. It's hours of  labor producing fewer                                                               
goods at  a later date.  He said we  think of different  taxes in                                                               
different  ways, but  economists  worry about  income taxes  with                                                               
high rates because of the distortive effects.                                                                                   
9:37:57 AM                                                                                                                    
SENATOR  GARDNER asked  him to  speak  to the  definition of  tax                                                               
MR.  WALCZAK explained  that tax  neutrality  is essentially  the                                                               
notion that  the tax code  should apply equally to  all similarly                                                               
situated  persons or  activities. It  should try  to stay  out of                                                               
economic  decisions  as  much  as   possible  while  raising  the                                                               
revenues  desired. Trying  to  pick winners  and  losers is  sub-                                                               
SENATOR  GARDNER  said  it's puzzling  that  you're  saying  that                                                               
efforts and programs to change  behavior are sub-optimal as a tax                                                               
policy because virtually every state employs those tools.                                                                       
MR.  WALCZAK  said  he  believes  that  people  in  the  economic                                                               
community would  broadly agree that  programs to  change behavior                                                               
are  sub-optimal  but extremely  common.  He  drew a  distinction                                                               
between  an overarching  goal to  grow the  economy of  the state                                                               
versus a  more modest  goal to shift  investment into  a blighted                                                               
area. He suggested  thinking of the latter as  a more traditional                                                               
governmental expenditure or grant than  as a tax policy tool even                                                               
though they do run through the tax code.                                                                                        
9:43:39 AM                                                                                                                    
MR. WALCZAK  returned to the slide  that looks at both  sales tax                                                               
and income tax.  He noted the variation in  the 107 jurisdictions                                                               
in Alaska  that impose sales  tax and commented on  the advantage                                                               
of a broader base and lower  income tax rate versus a very narrow                                                               
eroded base. He said tax  can be applied to capital accumulation,                                                               
labor  force participation,  consumption,  or  property, but  the                                                               
advantage in taxing consumption and  property is that it has less                                                               
impact on economic growth.                                                                                                      
9:45:11 AM                                                                                                                    
CHAIR COSTELLO  asked if  consideration of  an income  tax should                                                               
also include a look at the  onslaught of other taxes and expenses                                                               
individuals  and families  face. Last  night the  committee heard                                                               
about a  family of four  who spent  $36,000 on health  care costs                                                               
and now their property taxes are  going up. She asked him to talk                                                               
about the  impact that  passing an  income tax  will have  on the                                                               
overall economy.                                                                                                                
MR.  WALCZAK  agreed  that  taxes should  be  considered  in  the                                                               
aggregate because they can be  a significant burden, particularly                                                               
for those  on a lower or  fixed income. He continued  to say that                                                               
legislators are probably in a better  position than he is to look                                                               
in  detail at  the  interaction  of local  tax  increases and  an                                                               
income tax proposal.                                                                                                            
9:49:48 AM                                                                                                                    
MR.  WALCZAK  returned to  the  presentation.  He summarized  the                                                               
advantages  of  sales taxes  saying  they  are more  economically                                                               
efficient,  have low  compliance costs,  and can  capture revenue                                                               
from  tourists. If  the legislature  were  to decide  on a  state                                                               
sales tax,  it would  provide an  opportunity to  standardize the                                                               
local  sales tax  bases and  collection. The  disadvantages of  a                                                               
sales  tax  include  regressivity,  business  input  would  be  a                                                               
problem if  they are taxed,  taxes on use often  aren't remitted,                                                               
and remote transactions could be a problem.                                                                                     
The challenges associated with an  income tax are that it reduces                                                               
labor  force participation  and  makes it  more  expensive to  do                                                               
business in  the state.  An advantage  for the  state is  that an                                                               
income  tax would  capture revenue  from nonresident  workers. An                                                               
income tax also falls on small  businesses, which is a pro or con                                                               
depending  on  the perspective.  He  said  the disparity  between                                                               
corporations that  are taxed  and small  businesses that  are not                                                               
taxed  would persist  if an  income tax  were adopted,  because a                                                               
corporate  income tax  is  essentially a  double  tax. He  didn't                                                               
necessarily  agree that  adopting an  income tax  creates greater                                                               
9:53:01 AM                                                                                                                    
MR. WALCZAK  turned to  the issue  of volatility.  He said  a Pew                                                               
study  found  that state  revenue  swings  over the  last  decade                                                               
average  plus   or  minus  5   percent.  Wyoming   ranked  second                                                               
nationwide with  revenue swings  of plus  or minus  12.1 percent.                                                               
Alaska experienced  revenue swings  of plus  or minus  34 percent                                                               
over  that period.  With  that  sort of  volatility,  it is  very                                                               
difficult   to   do    accurate   projections,   make   long-term                                                               
investments, or  build programs that  require stable  funding. He                                                               
noted that the state does have  several options to respond to and                                                               
smooth these significant revenue  swings. Investment revenue from                                                               
the Alaska  Permanent Fund and the  Constitutional Budget Reserve                                                               
Fund may be used as well  as interest on the permanent fund. It's                                                               
also very good news that  Alaska has substantial reserves to draw                                                               
from. Earlier  this year  the market value  of the  funds totaled                                                               
$55.7 billion. He opined that as  long as the state has a natural                                                               
resource  based   economy,  there  will  always   be  significant                                                               
volatility and it  makes sense to regularly rely  on these funds.                                                               
Put the money away  in good years and use it in  the bad years to                                                               
address a shortfall, but not  as a source of supplemental revenue                                                               
for new programs.                                                                                                               
9:57:45 AM                                                                                                                    
SENATOR STEVENS recalled  that when Alaskans voted  to create the                                                               
permanent fund  it was as  a rainy-day  fund and now  there isn't                                                               
one. He asked Mr. Walczak to  talk about the difference between a                                                               
rainy-day fund and a fund that smooths the state's economy.                                                                     
MR. WALCZAK said  rainy-day funds vary in  structure, but they're                                                               
basically designed  so that states  don't need to  recreate their                                                               
tax code  when they experience  the inevitable  economic declines                                                               
in  the business  cycle. He  said Alaska  is different  primarily                                                               
because it  has reserves  that are an  order of  magnitude larger                                                               
than any  other state.  Because the state  relies heavily  on one                                                               
industry  for revenue,  it  makes  sense to  modify  the way  the                                                               
reserves  currently work  to have  a  more traditional  rainy-day                                                               
fund. The  structure is in place,  but the way it's  been used is                                                               
not as consistent  as what we normally see for  a rainy-day fund,                                                               
he said.                                                                                                                        
MR. WALCZAK  turned to the  question of competitiveness  and what                                                               
taxes should be  if there were an individual income  tax. He said                                                               
the  Tax  Foundation published  the  State  Business Tax  Climate                                                               
Index  that  looks  at  whether  the  tax  structure  is  simple,                                                               
neutral, and transparent.  Other components on the  index look at                                                               
corporate  taxes,  property  taxes,  and  unemployment  insurance                                                               
taxes. Alaska  does very well  right now because it  forgoes both                                                               
an individual income  tax and a state sales tax.  It currently is                                                               
in a four-way  tie for first but would  fall to 27   if an income                                                               
tax  were adopted.  There are  several reasons  for that.  HB 115                                                               
reflects an above average top marginal  rate of 7 percent, it has                                                               
an above average  number of brackets, and  the personal exemption                                                               
is  not indexed  to inflation.  If the  bill becomes  law, Alaska                                                               
would go  from having no  personal income tax  to having the  12                                                                
highest top marginal rate in the country.                                                                                       
He  advised  that  Alaska  would  have  a  broader  than  average                                                               
individual  income  tax  base simply  because  nothing  has  been                                                               
carved out through deductions and  exemptions. However, that also                                                               
means that the  effective tax rate would be higher  than in other                                                               
states that have a similar top marginal rate.                                                                                   
10:07:40 AM                                                                                                                   
CHAIR COSTELLO asked what people  should expect in the transition                                                               
from a no income tax to an income tax, should HB 115 pass.                                                                      
MR. WALCZAK  said these transitions  are always  difficult. There                                                               
is a large  body of regulatory and administrative  code that must                                                               
be built  essentially from scratch, revenue  projections might be                                                               
less  than  precise  the  first  couple  of  years,  and  certain                                                               
necessary components  might be initially forgotten.  He clarified                                                               
that  individuals won't  see a  large difference  because they're                                                               
already  accustomed   to  paying  income  tax;   it's  the  state                                                               
administrative buildout that would be somewhat burdensome.                                                                      
CHAIR COSTELLO clarified that her  question related to the impact                                                               
on the economy transitioning from no  income tax to an income tax                                                               
MR.  WALCZAK answered  that you  should  anticipate some  adverse                                                               
impacts. "People  are going to  realize that they just  have less                                                               
disposable  income, or  small businesses  are  suddenly going  to                                                               
have a  cost that they  had not budgeted."  This will show  up in                                                               
the  employment market.  There aren't  any studies  at the  state                                                               
level, but federal studies generally  indicate that the reduction                                                               
in  economic activity  resulting from  imposing or  increasing an                                                               
income  tax would  be larger  by  a significant  margin than  the                                                               
revenue gained.                                                                                                                 
10:15:35 AM                                                                                                                   
CHAIR  COSTELLO asked  if  it's  the right  time  to initiate  an                                                               
income tax when Alaska is experiencing a recession.                                                                             
MR.  WALCZAK   said  it's  relatively   common  for   states  and                                                               
individuals to  experience an economic  crunch at about  the same                                                               
time. Taxes are  often raised when people  are already struggling                                                               
to make ends meet. That's  why revenue reserves are so important.                                                               
He pointed out that Alaska  the opportunity to take things slowly                                                               
because HB 115 doesn't actually impose the tax until 2019.                                                                      
10:17:14 AM                                                                                                                   
SENATOR  HUGHES  asked,  despite  the  2019  effective  date,  if                                                               
implementing an  individual income  tax could prolong  and deepen                                                               
the recession.                                                                                                                  
MR. WALCZAK said it has  the potential to create adverse economic                                                               
impacts.  He  said  he  couldn't  speculate  on  whether  it  has                                                               
recessionary   impacts,  but   reducing   disposable  income   of                                                               
individuals  or  reducing the  demand  for  labor would  have  an                                                               
adverse  effect  on  a  recession.   If  HB  115  were  to  pass,                                                               
businesses would  presumably make investment decisions  this year                                                               
and next  year in anticipation of  the change in the  tax code in                                                               
10:18:58 AM                                                                                                                   
SENATOR GARDNER mentioned the generalized  uncertainty due to the                                                               
failure of the  state to tackle the fiscal crisis,  and asked how                                                               
he  suggests addressing  the  recession  and building  confidence                                                               
that there is  a durable plan when there aren't  new revenues now                                                               
or the promise of new revenues from taxes in 2020.                                                                              
MR.  WALCZAK  answered that  if  legislators  decide that  a  new                                                               
general tax  is the way  to tackle  the fiscal crisis,  there are                                                               
several things  to consider in  the process. There  are questions                                                               
about the appropriate  revenue aims for the tax  and whether this                                                               
is a fix for the current  recession or a more fundamental shakeup                                                               
of  the entire  tax code.  It appears  that HB  115 leans  toward                                                               
reshaping the  tax code, but that  is something that needs  to be                                                               
explicitly debated and understood.  Expenditure reform is also an                                                               
important part,  particularly since  the state  has significantly                                                               
higher  expenditures  per capita  than  any  other state  in  the                                                               
nation. He said  he also thinks that revenue smoothing  must be a                                                               
big  part of  the picture.  New  revenues may  be necessary,  but                                                               
there doesn't seem  to be agreement on the  amount that's needed.                                                               
There's also  the question of  what will avert this  situation in                                                               
the  future. He  said  he thinks  there is  some  danger to  only                                                               
tackling the revenue  side without tackling the  other issues. He                                                               
urged  a  cautious  approach.  He  said HB  115  is  certainly  a                                                               
credible starting point but there are  a lot of questions that it                                                               
doesn't entirely answer. He pointed  out that HB 115 doesn't have                                                               
things  like a  Section 179  deduction or  a standard  deduction,                                                               
although the latter  may be intentional. Also,  the conformity to                                                               
the  Internal Revenue  code  doesn't appear  to  be complete.  He                                                               
suggested taking a  step back to assess whether all  the aims are                                                               
in context.                                                                                                                     
10:26:26 AM                                                                                                                   
SENATOR GARDNER commented that placing  a sunset on a new revenue                                                               
program prolongs the uncertainty.                                                                                               
MR. WALCZAK  said there's truth  to that,  but he didn't  know if                                                               
there would be a downside for the taxpayer.                                                                                     
CHAIR COSTELLO asked Mr. Walczak to continue the presentation.                                                                  
10:28:53 AM                                                                                                                   
MR.  WALCZAK  said  he  thinks  there  is  risk  associated  with                                                               
adopting  a  new  tax  regime  on the  notion  that  the  current                                                               
expenditure level  is sustainable and  desirable. If the  goal is                                                               
to be comprehensive, it's important  to look at spending, revenue                                                               
smoothing, revenue needs,  and whether the new  tax is necessary.                                                               
He opined that  a sunset or trigger mechanism  is consistent with                                                               
the aims  of many members who  don't support a permanent  tax. He                                                               
said  there is  something to  the  Senate proposal  to limit  the                                                               
dividend to $1,000 for three  years and to implement $750 million                                                               
in  spending cuts  over three  years,  because it  looks at  both                                                               
elements. He reiterated  that looking at the  smoothing option is                                                               
very important.  He urged doing things  simultaneously so getting                                                               
the new revenue doesn't short circuit other efforts.                                                                            
CHAIR COSTELLO  advised that the  Senate proposal has  a spending                                                               
cap, whereas  the House proposal  does not. She asked  if raising                                                               
revenue through taxes without a spending cap is a concern.                                                                      
MR. WALCZAK  said the Tax  Foundation doesn't have a  position on                                                               
spending  caps,  but  some  sort of  expenditure  control  is  an                                                               
important part of a package that looks at revenues.                                                                             
10:32:46 AM                                                                                                                   
SENATOR HUGHES  asked him to  comment on the potential  impact if                                                               
the state income tax deduction is no longer available.                                                                          
10:33:27 AM                                                                                                                   
MR WALCZAK  said it's  relevant because  that is  essentially the                                                               
partial  offset  associated  with  state  and  local  governments                                                               
raising revenues  through the  major tax  sources. He  noted that                                                               
this deduction is one of  the rare, highly regressive elements in                                                               
the federal  income tax code.  He said  there is a  good argument                                                               
that  Alaskans  would  benefit  from  having  a  lower  rate  and                                                               
eliminating the  deduction because most  of the value  is flowing                                                               
to  states  like  New York,  California,  Pennsylvania,  and  New                                                               
Jersey. Nevertheless, it means that  state income tax wouldn't be                                                               
offset by the  federal income tax deduction. More of  it would be                                                               
borne by Alaskan  payers. It is also  significant because federal                                                               
adjusted gross income might change.  If the base is broadened for                                                               
the  federal income  tax  and  used to  lower  rates, those  base                                                               
broadeners are  going to flow  through to any Alaska  income tax.                                                               
The rate  reductions will  not flow through  because HB  115 sets                                                               
those  separately. He  further pointed  out that  if HB  115 were                                                               
adopted, it  would be  a stealth  increase in  the tax  because a                                                               
larger definition of income would be  taxed at the same rate. All                                                               
states  with an  income tax  will need  to think  about that  and                                                               
perhaps  lower rates  to avoid  a potentially  significant income                                                               
tax increase.                                                                                                                   
10:38:32 AM                                                                                                                   
CHAIR COSTELLO thanked Mr. Walczak and held HB 115 in committee.                                                                
10:38:48 AM                                                                                                                   
There being  no further  business to  come before  the committee,                                                               
Chair Costello  adjourned the Senate Labor  and Commerce Standing                                                               
Committee meeting at 10:38 a.m.                                                                                                 

Document Name Date/Time Subjects
TF Testimony - AK Sen Labor and Commerce (04-26-17).pdf SL&C 4/26/2017 9:00:00 AM