Legislature(2017 - 2018)BELTZ 105 (TSBldg)
04/25/2017 09:00 AM Senate LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE LABOR AND COMMERCE STANDING COMMITTEE
April 25, 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
Act."
- 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)
WITNESS REGISTER
REPRESENTATIVE PAUL SEATON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Sponsor of HB 115.
TANEEKA HANSEN, Staff
Representative Paul Seaton
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented the sectional analysis for HB 115.
ACTION NARRATIVE
9:03:31 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 Gardner, Meyer, Stevens, Hughes, and Chair
Costello. She said that during the economic hearings throughout
the session the committee learned that Alaska is experiencing a
recession and extensive job losses. Economists who presented
information to the committee asked the legislature to help
provide some certainty for moving forward. Using that
presentation as a basis, the committee started asking what
impact each bill that was introduced would have on the state's
economy.
HB 115-INCOME TAX; PFD PAYMENT/CREDIT;
9:05:08 AM
CHAIR COSTELLO announced the consideration of HB 115. She stated
that the intent is to hear the introduction, walk through a
sectional analysis, and hold the bill for further consideration.
Public testimony will be heard during the 6:00 p.m. meeting.
[CSHB 115(FIN)am(efd fld) was before the committee.]
9:05:48 AM
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, sponsor of
HB 115, explained that the bill creates a broad-based tax that
is based on the adjusted gross income of residents and
nonresidents. The revenue that is collected will flow into the
Public Education Fund to fund the base student allocation (BSA)
and pupil transportation. There is a $4,000 exemption for each
resident filer and their dependents. Permanent fund income is
also excluded from taxation. The tax brackets provide that each
taxpayer pays the same tax rate on the first $50,000 of their
adjusted gross income. Income from Sub S Corporations and
partnerships is reported on the partner's or owner's individual
return.
Withholding for the school tax would begin January 1, 2019 and
the first return would be due in April 2020.
9:08:04 AM
REPRESENTATIVE SEATON stated that a broad-based tax is the last
piece of a complete fiscal plan that will provide a stable and
sustainable future. Uncertainty is bad for both the economy and
Alaska's schools, but forward funding education eliminates some
of that uncertainty. Adding a new revenue source also protects
schools from uncertainty because diversifying revenues reduces
volatility. Alaska has already experienced the growth and
contractions that come from relying too heavily on one source of
income. Drawing from multiple sources will help smooth the ups
and downs.
The Education Funding Act is important for a fair and balanced
plan. He pointed out that all fiscal plans before the
legislature this session require some use of the Permanent Fund
Earnings Reserve Fund and a reduction in the dividend. He noted
that the latter is regressive and hurts the lowest-income
Alaskans most. He opined that the school tax in HB 115 is the
best broad-based tax to balance the reduction in the dividend.
The sales tax option is also regressive and hits the lowest-
income Alaskans twice. For example, a general sales tax would
raise $500 million in revenue and Alaskans in the bottom 20
percent of income would feel a 2.2 percent impact on their
overall income while the top 15 percent would contribute 0.9
percent and the top 1 percent would contribute just 0.4 percent.
REPRESENTATIVE SEATON posited that connecting Alaskans directly
with state services through a broad-based tax will increase the
awareness and participation in how state government revenues are
used. A broad-based tax also directly connects the state with
economic growth. There is currently no incentive for the state
to encourage economic or population growth. One thousand new
jobs means more students in the schools, more people driving on
the roads, and more common state services. Without a broad-based
tax, the state receives no revenue to help pay for the services
needed for those additional people. That is a disincentive for
economic growth, he said. If the state is connected to growth
through a broad-based revenue source, the state will be
incentivized to make choices that grow the economy. Most
importantly, plans without a broad-based tax leaves a deficit of
$500 million to be filled at some future time from new revenues,
drastic budget cuts, or spending down our savings. Leaving this
sort of uncertainty in place puts at risk the savings and
services we would be preserving for future generations.
9:12:09 AM
REPRESENTATIVE SEATON spoke to the question of why the tax is
based on the adjusted gross income. He pointed out that 29 other
states use this as a starting point and Alaska did too from 1975
through 1980. Using a percentage of the federal tax liability as
the starting point seemed like a good idea initially, but it is
too volatile. Using the adjusted gross as the starting point
avoids automatically adopting all the federal credits and
deductions and allows Alaska to make those choices for itself.
Also, all sources of income are treated equally in computing the
adjusted gross income. This includes capital gains and wages.
Calculating nonresident taxable income is simpler under adjusted
gross income than under federal tax liability. This approach is
Alaska specific. Specifically, the permanent fund dividend and
Alaska municipal bonds are exempt from taxation. Most
importantly, it is the purview of the legislature to define what
is and is not taxable. That authority cannot be delegated to the
administration. He said much of HB 115 is technical details
telling the administration how to create regulations without
imposing taxes.
REPRESENTATIVE SEATON discussed the history of tax in Alaska
paraphrasing the following document:
Before oil started flowing, Alaskans were accustomed
to participating in their state economy through a
structured tax program. The income and school taxes
created stability for basic programs - education,
health, public safety, infrastructure, and more.
• School tax implemented in 1949 during territorial days;
• Alaska Territorial Legislature also passed income tax
in 1949 (in 11 days);
• Alaskans paid both taxes from 1949-1980;
• In 1975 the income tax had changed from 16 percent of
federal tax liability to a tax with brackets from 3 to
14.5 percent;
• Alaska income tax provided 40 percent of all state
revenue.
9:18:38 AM
REPRESENTATIVE SEATON stated that based on an effective date of
January 1, 2019, the Department of Revenue estimates that the
Education Funding Act will raise $341 million in FY2019 and $687
million in FY2020. Once the tax is fully implemented,
approximately $80 million will be collected from nonresidents
who work in Alaska. DOR estimates that administering the tax
will cost between 1 percent and 1.5 percent of the total revenue
raised.
He said the Education Funding Act is intended to be part of a
larger fiscal plan that includes restructuring the permanent
fund earnings and changing the calculation of the permanent fund
dividend. Individuals and families in the lowest 20 percent of
the income range will feel the reduction in the dividend the
most, because it makes up a larger percentage of their income.
Those in the higher income range will contribute a slightly
higher percentage through the school tax, but will see a smaller
impact through the change to the dividend. The higher income
brackets will also see a larger offset in their federal tax
liability. He directed attention to the chart on page 7 that
illustrates that the lowest 20 percent of filers will feel about
the same impact to their total income as the top 1 percent when
the Education Funding Act is combined with HCS SB 26, the
restructured PFD. Individuals in the lowest income brackets will
be impacted more in the first few years because the dividend
will change first, and the full year of income tax won't be paid
until 2020.
92155
REPRESENTATIVE SEATON highlighted that Alaska is the only state
that doesn't have some form of broad-based tax to support core
state services. It is ranked 50 in state and local tax burden,
but 10 in per capita income. Forty-one states have a statewide
income tax and two have an income tax on interest and dividend
income. The school tax in HB 115 would be the fourth lowest
amount of tax revenue collected as a portion of total personal
income. Alaska would rank 30 in the per capita revenue collected
through this tax. The three states with lower tax rates than HB
115 proposes all have statewide sales taxes. North Dakota has a
5 percent state sales tax and a total state and local tax of
6.78 percent. Arizona has a 5.6 percent state sales tax and a
total state and local tax of 8.25 percent. Louisiana has a 5.0
percent state sales tax and a total state and local tax of 9.98
percent. Alaska's average local sales tax is 1.76 percent. Of
the 6 other states with no income tax, all have a statewide
sales tax. He reminded members that a sales tax is regressive
and would disproportionately affect communities with a higher
cost structure.
He said it's difficult to quickly and accurately compare income
taxes between states because of the differences in deductions,
tax brackets, and credits. Some states also have income taxes at
the local level. He directed attention to page 10 that shows
that Hawaii does not adjust brackets for inflation, Ohio has
additional income taxes at the local level that average 2.25
percent, Montana allows deductions for some federal taxes, and
Kentucky does not adjust brackets for inflation but has
additional income taxes at the local level that average 2
percent. He disputed the claim that the tax brackets proposed in
th
HB 115 are the 12 highest marginal tax rate in the country. It
ignores the fact that most states apply the top marginal rate
after the first $10,000-$50,000. Thus, more people are paying
the highest rate on a majority of their income leading to a
higher effective tax rate.
REPRESENTATIVE SEATON offered more information on how different
states create their brackets. Twenty-nine states use the federal
adjusted gross, 14 states automatically adjust their brackets
for inflation, 10 states double the bracket for joint filers,
and 9 states increase but don't double joint filing. Nine states
have a flat tax that applies to all taxable income between 3
percent and 5.5 percent. Most states start their tax brackets at
zero and 30 states have a standard deduction. The proposed
school tax in HB 115 does not have a standard deduction, but the
first $10,300 is exempt and there is also a personal exemption.
Four states have a tax benefit recapture that results in certain
high-income taxpayers paying the top marginal rate on all their
income. HB 115 has no such proposal.
9:30:24 AM
REPRESENTATIVE SEATON reported that Alaska Department of Labor
and Workforce Development (DOLWD) 2015 statistics show that
nonresidents comprised 21.3 percent of the total workforce and
earned 16 percent of the total wages in the state. That means
$2.7 billion in wages left the state that year. That doesn't
include income from self-employed individuals and non-wage
industries such as commercial fishing. DOR estimates that
nonresidents will contribute about $80 million of the $687
million in revenue that is collected in FY2020.
He directed attention to a chart from Northern Economics that
shows the projected job losses under three budget scenarios. He
said the state has already lost jobs and any choice that is made
to address the deficit will contribute to future job losses
before state employment is forecast to recover. The question is
how much. According to the analysis from Northern Economics, a
cut to the permanent fund dividend or implementing a broad-based
tax would have similar effects on the employment forecast.
However, cutting the budget an additional $1 billion will have a
far greater effect, even with the full projected dividend.
Cutting the budget instead of using the dividend or a broad-
based tax to fill the deficit would result in the loss of an
additional 10,000 jobs before employment is projected to
stabilize.
9:32:25 AM
REPRESENTATIVE SEATON displayed the chart on page 13 that shows
the impact of different cuts on Alaska's workforce. He said that
according to the Institute of Social and Economic Research
(ISER), every $100,000 million of deficit reduction will have
the following impact on jobs: initiating an income tax will
result in the loss of 450-800 jobs; cutting the dividend will
result in the loss of 558-892 jobs; cutting the budget will
result in the loss of 980-1260 jobs; and cutting the state
workforce will result in the loss of 1,400-1,600 jobs. The ISER
report also indicates that 3 private sector jobs will be lost
for every 2 state employees that lose their job due to budget
cuts.
He noted that the income losses are similar for each of the
choices.
9:33:47 AM
REPRESENTATIVE SEATON displayed the IRS form 1040 on page 14 to
illustrate how the Alaska tax would be calculated. Filers start
with the adjusted gross income on line 37, deduct the $4,000 per
person personal exemption, and enter the adjustments for taxable
income or nontaxable municipal bonds on lines 8a and 8b.
REPRESENTATIVE SEATON concluded his presentation emphasizing the
importance of adopting a complete fiscal plan this year, because
failing to do so creates uncertainty. Until Alaska shows it has
a balanced and sustainable budget, credit rating agencies may
continue to downgrade the state's standing. The intended
implementation date of HB 115 is January 1, 2019, which provides
time for other parts of the fiscal plan to be put in place. "We
cannot afford to wait one more year."
9:36:40 AM
CHAIR COSTELLO asked Ms. Hansen to walk through the sectional
analysis for HB 115.
9:33:14 AM
TANEEKA HANSEN, Staff, Representative Paul Seaton, Alaska State
Legislature, spoke to the following sectional analysis for CSHB
115:
Section 1 (page 1, line 7) - Clarifies that this Act
may be known as the Education Funding Act.
Section 2 (page 1, line 10) - Legislative intent
language outlining what income level for an individual
or a couple is considered exempt from this income tax.
Section 3 (page 2, line 8) - AS 43.05.045(a) clarifies
that there is a penalty if a state return is not filed
electronically. However, individual filers are exempt
from this penalty as noted later in AS 43.22.075(i)
- (see page 19, line 25).
Section 4 (page 2, line 18) - Creates the Individual
Income Tax within AS 43.22
Sec. 43.22.010 (page 2, line 20) - Imposes a
progressive income tax on residents and nonresidents
on their taxable income. Taxable income, defined later
in this chapter, is based on federal adjusted gross
income with some state specific modifications.
Residents are taxed on all taxable income, while
nonresident individuals will be taxed on income from a
source within the state.
Subsection (b) outlines the income tax brackets for an
individual.
Subsection (c) outlines the income tax brackets for
two individuals who file jointly; those who are
eligible to file a joint federal income tax return are
eligible to file jointly in the state. Under
subsection (d) and (e), those that are eligible to
file a joint return federally but do not do so are
directed how to file on the state level.
Subsection (f) describes how two individuals who filed
a joint federal return but who are not both residents
of Alaska shall file with the state. They may choose
to file separately, as nonresidents, under the tax
brackets described in (b) of this section, or they may
elect to file jointly under the brackets in (c) but
only if both choose to be taxed as residents.
Sec. 43.22.015 (page 4, line 4) - Describes how a
nonresident individual will determine their Alaska
state income tax due. Their tax is determined on all
of their taxable income, using the brackets in
43.22.010(b). That tax is then reduced by a ratio
based on how much of the nonresident's taxable income
is from a source within the state. [Nonresidents who
choose to file jointly are not eligible to use this
allocation of income, and are instead considered as
residents.]
9:39:56 AM
Sec. 43.22.020 (page 4, line 20) -Defines the tax on
trusts and estates. Trusts are taxed at the same rates
as an individual under the income tax brackets in
43.22.010(b), except that the first $10,300 is not
exempt as it is for an individual. Nonresident trusts
are taxed on Alaska source income. Alaska Native
Settlement trusts receive alternative federal tax
treatment and are taxed at 2.5% by this state income
tax. Trusts that are not taxed federally, including
union pension trusts and charity trusts, are not taxed
under this chapter. Disability trusts are also exempt
from state taxation.
Sec. 43.22.025 (page 5, line 31) - Provides a credit
to residents for taxes paid to another state based on
income earned in that other state (ensuring a resident
is not taxed twice on the same income). A credit for
income taxes paid in another state cannot reduce the
tax due to Alaska below what it would have been if the
out-of-state income was never included in the
calculation of the tax due. This means that regardless
of the amount of income tax the resident paid in other
states, the credit cannot reduce the amount of income
tax due to Alaska below what the resident individual
would owe on just the income that is not taxed by
other states.
9:45:34 AM
Sec. 43.22.030 (page 7, line 12) - Defines the income
that is considered taxable income under this chapter.
This is based on the federal adjusted gross income
with a few specific items added and subtracted.
Specific to Alaska, this section allows a per person
exemption of $4000 and also allows the permanent fund
dividend to be deducted from state tax. Alaska
municipal bonds will also not be taxed.
Items added into federal adjusted gross income
include: interest and income from state and municipal
bonds and certain United States bonds which are not
taxed by the federal government but which are taxable
by the states; deductions from federal adjusted gross
income for Alaska income taxes (normally deducted
after adjusted gross income); gain from a trade of
like-kind properties which is not federally recognized
or taken as a gain; income from an incomplete non-
grantor trust; and any deductions allowed to federal
adjusted gross income which relate to income that is
not being taxed under this chapter, including
deductions for losses on Alaska municipal bonds.
Items subtracted from federal adjusted gross income
include: interest or income from federal bonds which
are not legally taxable by the states; refunds for
overpayment of an income tax; expenses that are not
deducted from federal adjusted gross income but that
relate to income taxed under this chapter; a gain from
a trade of like-kind properties that is federally
recognized as a gain; gains on Alaska municipal bonds
which are not taxed under this chapter; nonresident
pension income under 4 U.S.C. 114; military
compensation for nonresidents; and the permanent fund
dividend
9:47:04 AM
MS. HANSEN noted there is a small typo in this section. The
subsections weren't all renumbered after an amendment was
adopted on the House floor. She clarified that it is
subsection (c) that deals with the personal exemption.
Subsection (b) allows an exemption of $4000 per
individual claimed as an exemption on the federal
income tax forms. For non-residents the exemption is
$4000 per individual claimed times the fraction used
to determine the non-resident's taxes due.
Subsection (c) states that expenses not used in the
tax year they were incurred may not be carried back to
previous year returns, and may only be carried forward
for a total of five years.
Sec 43.22.035 (page 10, line 8) - Describes how income
from a partnership or an s-corporation shall be
adjusted based the additions and subtractions of
taxable income under 43.22.030. Subsection (c) states
that if partnership income is allocated with the
specific purpose of evading taxes, that allocation
shall be disregarded.
9:50:23 AM
Sec. 43.22.040 (page 11, line 1) - Describes how
income from a trust or estate shall be adjusted based
on the additions and subtractions of taxable income
under 43.22.030. Taxable income is reduced by the
amount distributed to the beneficiaries, in accordance
with U.S.C. 661. The Department of Revenue may
determine in regulation how the adjustments to income
will be allocated between the trust or estate and the
beneficiary of that trust or estate. Subsection (b)
states that if income or loss is distributed with the
specific purpose of evading taxes, that distribution
shall be disregarded.
Sec. 43.22.045 (page 11, line 15) -Identifies items of
income that are considered as being derived from or
connected with a source in the state. This is the income
on which nonresidents will be taxed.
Sec. 43.22.050 (page 15, line 26) - Directs the
Department of Revenue to create regulations determining
what is considered income from a source in the state for
business conducted by a nonresident individual,
partnership, or s-corporation. The regulations must be
consistent with AS 43.19, the multistate compact. This
provision will allow the department to create regulations
to allocate what income is taxable under this chapter
when an out of state business is conducting business both
in and out of state.
Sec. 43.22.055 (page 16, line 12) - Directs the
department to create regulations to detail what income
from a nonresident trust or estate is considered
derived from or connected with a source within the
state. These regulations shall be consistent with AS
43.22.045, which identifies income from a source
within the state.
Sec. 43.22.060 (page 16, line 30) - Provides that the
taxable income for a part-year resident, trust, or
estate shall be the sum of all taxable income
associated with the part of the year that the
individual or entity was a resident of Alaska and the
income from a source in the state for the part of the
year that the individual or entity was not a resident
of the state.
Sec. 43.22.065 (page 17, line 12) - In the case of a
personal service corporation formed to evade taxes,
the department may allocate the income between the
personal service corporation and the employee-owners
if necessary to accurately reflect the source of the
income.
9:54:16 AM
Sec. 43.22.070 (page 18, line 9) - States that a
taxpayer's taxable year and method of accounting for
the state income tax shall be the same as for the
taxpayer's federal income tax. The department shall
adopt regulations addressing situations where a
taxpayer changes methods of accounting. [For most
individuals, the taxable year is the calendar year.
However, entities such as partnerships that file an
individual income tax return may use a fiscal year in
place of a calendar year, and may have different
methods of accounting for their income.]
Sec. 43.22.075 (page 18, line 18) - Establishes how
taxpayers will submit tax returns and make payments
for the individual income tax. It clarifies that this
tax is due and payable to the department at the same
time and in the same manner as the tax payable to the
U.S. IRS for federal taxes. The section also outlines
procedures in case there are changes to the taxpayer's
federal income tax return. Any overpayments will be
reimbursed by the department out of the general fund.
As noted above, (i) exempts an individual from the
penalty for not filing their income tax
electronically. However, a person paid to file returns
is not exempt, and must file electronically.
Sec. 43.22.080 (page 19, line 31) - Establishes how
taxes will be withheld by employers making payment of
wages or salaries. The employer shall deduct and
withhold the amount of tax, remit the tax to the
department, and provide a written statement to the
employee by January 31 of the succeeding year showing
the amount deducted and other necessary information,
similar to the federal W2. The Department of Revenue
shall publish the rate of withholding required by this
section.
Sec. 43.22.085 (page 20, line 24) - Partnerships that
are required to file an annual return with the federal
government shall also file a partnership return with
the Department of Revenue, and shall withhold income
tax from a nonresident partner. Publically traded
partnerships are not required to withhold.
Sec. 43.22.090 (page 21, line 13) - Allows a resident
the option to apply some or all of their PFD as a
refundable tax payment to their upcoming state income
tax due, less any garnishment, levy, donations to Pick
Click Give or college funds, etc., as allowed under
other sections of statute. For example, a person may
apply some or all of their 2018 PFD to their 2018
taxes due. If a person's Refundable Tax payment of
their dividend is more than the amount of their state
income tax due, any remaining amount will be
reimbursed to the person as a tax refund, after the
person has filed their state income taxes.
9:59:14 AM
Sec. 43.22.095 (page 21, line 23) - Authorizes the
department to create all necessary forms and adopt
regulations to implement this tax, including
regulations for online filing and online payment and
prepayment of taxes due, and forms for itemizing
deductions. This section allows the department to
adopt Internal Revenue Code regulations, as long as
they do not conflict with this chapter.
Subsection (b) clarifies that transactions or payments
between related parties must have a reason other than
the purpose of lowering taxes. The department may
determine and adjust the tax due on such a payment as
necessary.
Subsection (d) directs the department to adjust the
tax brackets and the personal exemption every two
years, based on the Anchorage rate of inflation.
Subsection (e) allows that the legislature may deposit
the estimated income collected under this chapter into
the public education fund.
Sec. 43.22.100 (page 22, line 31) - allows the
provisions of the Internal Revenue Code that are
mentioned in this chapter to be considered as if they
are fully set out and defined in the chapter itself,
unless the provision is inconsistent with the chapter.
Allows the department to adopt by reference certain
IRS penalties for violations of this chapter.
Sec. 43.22.110 (page 23, line 15) - Allows certain tax
information to be released to a banking institution
for the purpose of verifying a direct deposit of an
income tax refund.
Sec. 43.22.150 (page 23, line 19) - Defines terms used
in this chapter. Key terms include 'domiciled',
'resident', and 'resident trust'. Resident is defined
as an individual who: lives in the state for the
entire calendar year; receives an Alaska permanent
fund dividend; or receives a tax benefit such as a
property tax exemption only available to a resident
individual.
Section 5 (page 26, line 28) - AS 43.23 is amended by
adding a new section which directs the Permanent Fund
Division in the Department of Revenue to create a
place on the PFD application where an applicant may
apply some or all of their PFD to their upcoming state
income tax due.
Section 6 (page 27, line 2) - AS 43.05.085, AS
43.20.012(b), and AS 43.20.013, a former tax credit
for political contributions that existed under
Alaska's prior individual income tax which ended in
1980, are repealed on January 1, 2019.
10:04:20 AM
Section 7 (page 27, line 3) - Clarifies that the state
income tax created under section 4 of this act only
goes into effect starting on January 1, 2019, and will
not be applied to any income earned prior to that
date.
Section 8 (page 27, line 7) - Authorizes the
Department of Revenue to adopt regulations to
implement the act, but not before the effective date
of the law implemented by the regulation.
10:05:14 AM
CHAIR COSTELLO thanked Representative Seaton and Ms. Hansen,
and asked members if they had questions.
SENATOR GARDNER asked Representative Seaton for a copy of his
opening comments.
REPRESENTATIVE SEATON agreed to provide it to the chair for
distribution.
10:05:57 AM
SENATOR GARDNER said she assumes that his statement that the
first $50,000 of income would be taxed at the same rate means
the adjusted gross income after the deductions.
REPRESENTATIVE SEATON said yes. The point is that everyone in
the same bracket is taxed at the same rate. He added that
it's a complex bill but not a complex calculation. Much of
the bill gives detailed instructions to the Department of
Revenue on implementing regulations.
SENATOR GARDNER referenced page 7 of the presentation and
questioned the $300 reduction to the permanent fund dividend.
REPRESENTATIVE SEATON clarified that is an estimate for 2023.
Modeled in a tax year 2016 economy, the dividend payout is
estimated to be $1,700. The difference between that number
and the dividend this year is $300.
MS. HANSEN added that the packet has the full report from the
Institute on Taxation and Economic Policy that shows a
greater change between next year and 2023. Over time,
however, the difference is reduced, and the 2023 estimate is
$1,700.
SENATOR GARDNER asked if any states collect tax on income
earned in another state. For example, could her husband's
nonresident business partner pay income tax on the Alaska
earnings to both Alaska and his home state?
REPRESENTATIVE SEATON explained that the Interstate Compact
allows a credit when income is taxed in both states so there
isn't a double payment.
10:13:20 AM
SENATOR STEVENS asked how much it would cost to manage the
tax system with 120 employees.
REPRESENTATIVE SEATON clarified that there would be 60
employees, not 120. The initial implementation cost is $14
million and DOR estimates that total administrative costs
will be 1 percent to 1.5 percent. Starting with the adjusted
gross income that is reported on the federal 1040 form is
financially advantageous to the state because the Internal
Revenue Service audits those numbers.
SENATOR STEVENS asked if it's reasonable to assume that 60
employees can administer the tax system when Montana employs
155 people for that purpose.
MS. HANSEN suggested that DOR could speak to the question in
detail this afternoon, but her understanding is that that
Montana's entire tax division employs 155 people. Alaska
already has an established tax division and DOR estimates it
will only need an additional 60 people to administer the
income tax.
SENATOR STEVENS referenced Section 7 and asked if retirement
income will be taxed.
MS. HANSEN explained that retirement, Social Security, and
pension income that is reported and taxed at the federal
level will be taxed on the state level.
REPRESENTATIVE SEATON added that pension and annuity income
is entered in box 16(a) of the federal 1040 form and the
taxable amount is reported on line 16(b). Social Security
benefits are entered in box 20a and the taxable amount is
entered on line 20b. Those amounts are part of the
calculation of adjusted gross income on the federal level, so
they aren't reported separately on the state form.
SENATOR MEYER said he agrees with Senator Stevens that 60
people probably wouldn't be enough to administer an income
tax. He pointed out that the state is six or seven years
behind on the audits for the more complicated oil and gas
taxes.
He asked why it isn't preferable to simply pay a state tax
based on a percentage of the federal tax.
REPRESENTATIVE SEATON said his office looked at that approach
initially, but it is more complicated and potentially more
volatile. Years ago, many states, Alaska included, based
their state tax on the federal tax due but none do that now.
Now most states use adjusted gross income as the starting
point for calculating the state tax.
SENATOR MEYER commented, "It's a shame we can't do something
simple like just a certain percent. I think accountants are
going to love your income tax bill because we're going to
have to hire more accountants." He recalled that the
governor's income tax bill last year-which was a percentage
of the federal tax-was estimated to generate about $400
million, whereas HB 115 is estimated to collect about $700
million. He said the largest fear his constituents have is
that the income tax will continue to rise.
SENATOR MEYER continued:
As you know, in the Senate we don't believe we need
$700 million with the PFD restructured-Senate Bill 26-
at $2 billion, and approximately $300 million in cuts,
you're at 2.3 and your deficit's 2.7 so under your
income tax proposal we'd be collecting approximately
$300 million more than we need. I think that's a
concern of people too. Are we going to now suddenly go
back to our old habits of spending more money?
Whereas, again, in the Senate we like that little bit
of deficit, whether it's $300 million or $500 million.
It keeps the pressure on us to keep spending down.
When you've got $4 billion in your CBR [Constitutional
Budget Reserve] you can get away with that for quite
some time and maybe hold off on an income tax, hold
off on taking money from our constituents as long as
possible, because it does have an impact to our
constituents and to the economy.
I think that's why we're having difficulty with an
income tax proposal and, frankly, it's very
inefficient. We're going to give people, under your
proposal, a dividend of $1,200 and then take it back
via an income tax. I have so many constituents say,
'Look, if you need more money just reduce the dividend
down to $800' rather than hiring another 60, 70, 80
state employees to collect the tax from working
Alaskans.
I don't know if there's a question in there. It's more
a philosophical difference we have in the need for an
income tax.
He asked to hear the sponsor's response.
REPRESENTATIVE SEATON clarified that the governor's income
tax was $200 million; it was calculated to fill a specific
hole in the budget that wasn't filled by the nine other
targeted taxes. Doing just an income tax instead of targeting
individual industries spreads the burden wider. He pointed
out that it costs the same to administer a $650 million tax
as a $200 million tax, so collecting the smaller tax is less
efficient. He reiterated that this tax is not complicated; it
starts with the federal adjusted gross income so most of the
calculations are already done. He again directed attention to
the tax calculator on the majority website that quickly tells
your tax. TurboTax and other tax software also automatically
calculates state taxes, he said. Individuals who have income
reported on a federal form 1099 would need to send a copy of
that 1099 to the state.
SENATOR MEYER maintained that it wouldn't be the same as the
federal income tax. For example, he said, the PFD isn't taxed
at the state level, but it is at the federal level.
REPRESENTATIVE SEATON clarified that the calculator on the
House and Senate majority websites automatically removes the
PFD and the $4,000 personal exemption.
SENATOR HUGHES asked how many Alaskans would pay this state
income tax.
MS. HANSEN said that in tax year 2014 about 500,000 single
and joint returns were filed, but some of those had no tax
liability due to the child tax credit and the earned income
credit. She opined that most of the filers that would be
required to file under the state income tax would pay a small
portion.
SENATOR HUGHES offered her understanding that approximately
330,000 returns are filed and that not all the joint returns
have two incomes. She maintained that it's a misnomer to call
this a broad-based tax if fewer than 400,000 returns are
filed. She asked if the calculations account for
outmigration, because other states have experienced
population loss when an income tax was implemented. That's a
concern because the ratio of workers to nonworkers would
become skewed, she said.
10:31:45 AM
REPRESENTATIVE SEATON said the calculations in the fiscal
note were done by the Department of Revenue (DOR). He pointed
out that just six states don't have a state income tax, and
all other jurisdictions have a higher tax burden than what HB
115 proposes.
SENATOR HUGHES responded that things like cost of living are
also factored into the decision to move.
She asked if he'd looked at the economic impact that HB 115
will have on small businesses. "They're the backbone of our
communities so I'm concerned about that," she said.
REPRESENTATIVE SEATON said they've looked at studies from
ISER, Northern Economics, and others that say that this is
the lowest job loss option to close the deficit. Also, the
packets contain the report released yesterday from the
Institute on Taxation and Economic Policy titled "Comparing
the Distributional Impact of Revenue Options in Alaska." He
said a lot of people have the idea that they'll pay state
taxes starting with dollar one, but that's not accurate. A
single person will start paying after approximately the first
$15,300 and a couple filing jointly will have a tax exemption
for the first $31,000. He reiterated that people who use the
tax calculator on the majority websites realize that the tax
burden isn't as large as they imagined. However, he said,
people in the million or multimillion dollar income bracket
will have a higher tax burden. He encouraged members to read
the report, describing it as good information on how to
generate $500 million to reduce the deficit. It finds that
low- and middle-income families would be better off under a
progressive personal income tax than any other option
examined in the report.
10:37:30 AM
SENATOR HUGHES said her concern is that most people are in
that middle income, so the tax will hit a lot of people. She
then questioned why a single adult with an adjusted gross of
$75,000 and two dependents pays more than a couple filing
jointly with the same adjusted gross and same number of
dependents.
REPRESENTATIVE SEATON said it's set up on the individual
basis, so there is no advantage to filing jointly. In that
scenario the single return has three family members and the
joint return has four family members. The single return has
one less $4,000 exemption and one less $1,250 PFD exclusion
so the income bracket is higher.
SENATOR HUGHES expressed concern about single parents paying
more.
CHAIR COSTELLO held HB 115 in committee.
10:39:15 AM
There being no further business to come before the committee,
Chair Costello adjourned the Senate Labor and Commerce
Standing Committee meeting at 10:39 a.m.