Legislature(2001 - 2002)
03/21/2002 03:35 PM Senate STA
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* first hearing in first committee of referral
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+ teleconferenced
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ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS COMMITTEE
March 21, 2002
3:35 p.m.
MEMBERS PRESENT
Senator Gene Therriault, Chair
Senator Ben Stevens
Senator Bettye Davis
MEMBERS ABSENT
Senator Randy Phillips, Vice Chair
Senator Rick Halford
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 35 am
Relating to urging the United States Congress to amend the tax
code to permanently repeal the estate tax.
MOVED HJR 35 am OUT OF COMMITTEE
SENATE BILL NO. 306
"An Act establishing the Prescription Drug Assistance Task Force;
and providing for an effective date."
MOVED CSSB 306 (STA) OUT OF COMMITTEE
SENATE JOINT RESOLUTION NO. 13
Proposing amendments to the Constitution of the State of Alaska
relating to inflation- proofing the permanent fund.
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
HJR 35 - No previous action to record.
SB 306 - No previous action to record.
SJR 13 - See State Affairs minutes dated 4/26/01 and
2/22/02
WITNESS REGISTER
Representative Jeannette James
Alaska State Capitol, Room 214
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HJR 35
Heath Hilyard
Alaska State Capitol, Room 214
Juneau, AK 99801-1182
POSITION STATEMENT: Presented HJR 35
Senator Bettye Davis
Alaska State Capitol, Room 504
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of SB 306
Richard Benavides
Alaska State Capitol, Room 504
Juneau, AK 99801-1182
POSITION STATEMENT: Explained SB 306
Steve Ashman
Department of Administration
Director of Senior Services
3601 C Street Suite 310
Anchorage, AK 99503
POSITION STATEMENT: Testified on SB 306
Gene Dau
AARP member
P.O. Box 20995
Juneau, AK 99801
POSITION STATEMENT: Testified on SB 306
John Furuness
NARFE member
1285 Fritz Cove Road
Juneau, AK 99801
POSITION STATEMENT: Testified on SB 306
Marie Darlin
AARP member
No address provided
POSITION STATEMENT: Testified on SB 306
Nancy Weller
Division of Medical Assistance
Department of Health &
Social Services
PO Box 110601
Juneau, AK 99801-0601
POSITION STATEMENT: Testified on SB 306
Joe Balash
Staff to State Affairs Committee
Alaska State Capitol, Room 121
Juneau, AK 99801-1182
POSITION STATEMENT: Introduced SJR 13
ACTION NARRATIVE
TAPE 02-16, SIDE A
CHAIRMAN GENE THERRIAULT called the Senate State Affairs
Committee meeting to order at 3:35 p.m. Present were Senators
Davis, Stevens and Chairman Therriault. Senators Halford and
Phillips were out of town.
HJR 35-REPEAL ESTATE TAX
HEATH HILYARD, staff for Representative Jeannette James,
introduced HJR 35 and read the following into the record:
This resolution is similar in wording and intent to HJR
34 introduced by Rep. Coghill in the first session of
the twenty first Alaska Legislature. The major reason
we've chosen to revisit this issue is that in 2001,
President Bush signed into law a tax relief act that
included a temporary repeal of the Death tax and that
repeal sunsets in 2010.
To address some of the technical elements of the new
provisions I have included with my sponsor statement a
timeline, prepared by Deloitte & Touche LLP, which
demonstrates the graduated decline in tax rates and the
increasing exemption levels as a result of the 2001
law. Alaska currently has its own Estate tax (AS
43.31) and our rate, and thus the revenue generated, is
driven by the federal law. According to Brett Fried, a
tax economist with the Alaska Dept. of Revenue,
regardless of whether or not the federal repeal becomes
permanent, the temporary repeal will cause Alaska's
revenue stream from this tax will dry up by FY06.
In the same study cited in the sponsor statement, using
very sophisticated econometric models, analysts believe
that had the tax been repealed in 1996 the nation's
economy would have yielded an average of $11 billion in
additional output, created an average of 145,000 new
jobs, and personal income would have increased by an
average of $8 billion over the following nine years.
The overall increase in the national economy would have
created enough additional revenue to compensate for
that which had been generated by the tax.
In a statement of support from NFIB Alaska for HJR 35,
the NFIB states, "In addition to the tax itself,
thousands of small businesses are impacted each year by
expensive fees paid to attorneys, accountants, and life
insurers necessary to prepare for an eventual death tax
debt." Further, an article appearing in Farm Bureau
News published by the American Farm Bureau Federation
states "many farmers and ranchers feel compelled to
spend money for estate planning, an expense that is
drain on ongoing farm operations." In addition to the
NFIB, efforts to permanently repeal this tax enjoy
broad support from the National Black Chamber of
Commerce, the National Association of Women Business
Owners and the National Congress of American Indians
among others.
As indicated in the sponsor statement, not only does
the death tax disproportionately tax several specific
demographic groups, it also does not justify its own
existence from a fiscal perspective costing more to
collect than the revenue it generates.
Finally, I will leave with a quote from President Bush
in a speech given this week to the Women's
entrepreneurship summit, "We must make the repeal of
the death tax permanent. I call upon Congress to do
this immediately."
CHAIRMAN THERRIAULT asked whether the phone call that was
scheduled for the following day from Speaker Hastert was in
regard to the national effort to permanently repeal the estate
tax.
REPRESENTATIVE JEANNETTE JAMES, resolution sponsor, replied it
was for that purpose and she had already had one teleconference
meeting with the U.S House on the issue.
CHAIRMAN THERRIAULT stated that his office received a notice that
contained a copy of a suggested resolution for the Legislature to
consider. He asked whether HJR 35 contained the suggested
language.
MR. HILYARD replied that legislative legal had that basic
document when they drafted the resolution.
CHAIRMAN THERRIAULT noted there was a zero fiscal note. There
were no further questions or additional testimony.
CHAIRMAN THERRIAULT disclosed his wife is an attorney with a
master degree in tax issues.
REPRESENTATIVE JAMES announced she changed the name of the
resolution to "Repeal Estate Tax" from "Repeal Death Tax."
CHAIRMAN THERRIAULT said he appreciated the change.
There was no prepared CS and no proposed amendments.
He asked for the will of the committee.
Senator Davis made a motion to move HJR 35 am and zero fiscal
note from committee with individual recommendations.
There being no objection, HJR 35 am moved from committee.
SB 306-PRESCRIPTION DRUG ASSISTANCE TASK FORCE
SENATOR BETTYE DAVIS, bill sponsor, stated that she has spent a
lot of time reviewing prescription drug issues. She is currently
serving on the Committee on Aging for the Council of State
Governments and recently attended a conference on prescription
drugs. Representative Joe Hayes is the sponsor of the same bill
on the House side and asked that she mirror his bill in the
Senate. She hopes that this legislation will help to find ways to
aid senior citizens in the purchase of prescription drugs.
RICHARD BENAVIDES, aide to Senator Davis, explained that while
Congress has been debating proposals to add a prescription drug
benefit to Medicare, many states are taking steps to protect
their more vulnerable residents from rising out of pocket costs
and declining insurance coverage for prescription drugs.
According to the National Conference of State Legislatures, over
40 states have considered legislation to help seniors and the
disabled address these issues. SB 306 only involves Alaska's
growing senior population. American Association of Retired People
(AARP) statistics report that the annual growth rate for Medicaid
spending on medications in Alaska rose 23.4 percent between 1996
and 1998. They also reported that about 11,000 seniors have no
prescription drug coverage whatsoever.
Between October 31, 1999 and October 31, 2000, over 5,500
Alaskans aged 65 and above who were eligible for the state's
Medicaid program, received 263,000 prescriptions at a cost to the
state of over $10 million. SB 306 would create a method to look
at ways to provide meaningful relief to seniors without creating
large new expenditure programs.
STEVE ASHMAN, Director of the Division of Senior Services,
testified via teleconference that the Department of
Administration would be charged with putting together the task
force called for in the legislation. Currently they don't have
accurate information on the number of seniors in need of
prescription drug relief but there are certainly a number of
anecdotal cases. It is a significant problem and one of the goals
of the legislation is to investigate the options that are
available as well as other states' practices.
He looks forward to working with the sponsor and will help in any
way possible.
GENE DAU, AARP member testified in support of SB 306. He noted
AARP Alaska sent a letter in support as well. Washington state
doctors are now able to fax prescriptions directly to pharmacists
in Canada who will mail the medicine to you in the U.S. He asked
why this wouldn't be possible in the state of Alaska.
CHAIRMAN THERRIAULT commented he didn't know that you couldn't do
that here.
SENATOR DAVIS stated that would be an option the task force could
look into.
SENATOR STEVENS asked if the method of payment was a credit card
or similar and not a credit against a U.S. based program.
MR. DAU replied payment was cash.
3:50 p.m.
JOHN FURUNESS, National Association of Retired Federal Employees
(NARFE), testified in support of SB 306. Prescription drugs need
to be made more affordable.
MARIE DARLIN, AARP member, testified in support of SB 306. She is
the coordinator for the Capital City Task Force and although they
are following many bills this session, this is of particular
concern. The AARP letter of support is in the bill file.
CHAIRMAN THERRIAULT asked Ms. Darlin whether she had a comment on
the makeup of the task force.
MS. DARLIN said she was pleased with the composition of the task
force.
CHAIRMAN THERRIAULT asked whether the Department of Social
Services had any concern about the makeup of the proposed task
force.
NANCY WILLER, a representative from the Division of Medical
Assistance, said they had no concerns with its makeup. They
understand that most of the federal proposals that are in the
President's budget use Medicaid as a funding source for providing
prescription drug coverage to additional senior populations. They
would be available to provide assistance to the task force.
CHAIRMAN THERRIAULT asked Mr. Benavides about the meaning on page
2, lines 4-6.
MR. BENAVIDES said the wording came from the drafters and legal
terminology isn't always easy for the layperson to understand.
SENATOR DAVIS explained the meaning is that we would have to
adopt other state's strategies to fit Alaska. She said she
supports the statement but was receptive to more artful wording.
CHAIRMAN THERRIAULT moved conceptual amendment number one to
replace page 2, lines 4-6 with something similar to the
following: "In considering the adoption of a strategy to help
senior citizens cope with the cost of prescription drugs, the
State of Alaska should review what has been done in other
states."
SENATOR DAVIS said she could support the change.
CHAIRMAN THERRIAULT said he would work with Senator Davis and the
drafters rather that holding the bill and presenting a proposed
CS at the next meeting.
There was no objection to the conceptual amendment.
He asked Mr. Benavides to explain the fiscal note.
MR. BENAVIDES said the second page of the fiscal note explained
this would cover the cost of three meetings if travel, lodging,
per diem and telephonic costs were incurred. Mr. Ashman was the
author of the note and could answer specific questions.
CHAIRMAN THERRIAULT said he didn't have any particular questions
and the bill had a referral to the Finance Committee where fiscal
questions would be addressed.
There were no further amendments.
He asked for the will of the committee.
SENATOR STEVENS made a motion to move CSSB 306 (STA) and attached
fiscal note from committee with individual recommendations.
There being no objection, CSSB 306 (STA) moved from committee.
SJR 13-CONST. AM: PERMANENT FUND
CHAIRMAN THERRIAULT said he would like to discuss some of the
information they received from the Permanent Fund Trustees
regarding the tax problems that might be triggered if anything
was done to guarantee any part of the dividend in the Alaska
State Constitution. He asked Mr. Balash to distribute copies of
the legal opinions the trustees have gotten from Morrison &
Foerster LLP over the years. He understood the trustee's concern
and desire to let the Legislature know that if anything is done
regarding ensuring any kind of dividend, there is a potential tax
problem. His reading of the legal opinions leads him to believe
it is not an absolute.
Mr. Balash conducted research based on discussions from the legal
memos and developed a grid sheet comparing funds from other
states. He also prepared a paper that discusses the Integral Part
Theory, which is a legal theory that protects state activities
from taxation.
MR. BALASH, staff to Senate State Affairs Committee, established
the report given to the trustees was conducted by a tax firm in
Washington D.C. The letter was addressed to the Attorney
General's office because that office is statutorily the legal
counsel to the Permanent Fund Corporation. They discussed a
variety of ways the Permanent Fund can claim an exemption from
federal taxation. Primarily they focus on the Integral Part
Theory; the underlying doctrine is that Congress can tax the
income of states if they expressly say so, but they have never
chosen to do so. Additionally, an entity that is an integral part
of the state is not subject to taxation unless Congress
specifically subjects it to taxation. This has been a successful
defense against taxation with the IRS in a number of instances.
Primarily they look at three points.
1. First they look at the type of entity. Is it a public
corporation, a state agency or a type of fund within the
treasury or even apart from the treasury?
2. Second they look at state creation, control and domination
of the entity. Did the state create the fund and does the
state maintain strict control over or domination of the
entity?
3. Third they look at both the source and destination of the
funds. Where did the money come from that is in the fund and
what is the destination of the proceeds or assets?
There is no single determinant factor; rather the IRS looks at
all three factors and sometimes there has been negotiation of
what features the state needed to have to create the different
disaster insurance funds and insulate them from taxation and
qualify for the Integral Part Theory.
Of particular concern is the third part of the test or the
destination. In Alaska the primary destination has been the
dividend. Whether or not that counts as a private benefit or the
creation of a private benefit causes some concern because anytime
the destination is a private benefit the IRS carefully
scrutinizes that benefit.
MR. BALASH referred to the grid sheet found at the end of the
minutes to discuss and compare funds from other states according
to the Integral Part Theory
For example, the State of Michigan set up a prepaid tuition
program where parents invested a set amount of money into a
public corporation. That money was invested and returns were paid
out to the beneficiaries that were designated by the original
investors. The state argued it was an integral part of the state
while the IRS held that it was an investment scheme in which the
investors were using the cloak of the state's tax-exempt status
to hide their gains. Of particular concern to the IRS was that
individuals invested their personal money, earned a return and
then got a benefit.
CHAIRMAN THERRIAULT pointed out that it was largely due to the
IRS rejection that Congress took specific action to approve such
funds.
MR. BALASH concurred and added that when the IRS rejected the
supposition that they were an integral part of the state,
Michigan filed a tax return, asked for a refund and sued when
they didn't get it. Although they lost in the first round of
litigation, the Sixth Circuit Court of Appeals ruled in their
favor. The court ruled it was serving a public purpose; it was
used in the State of Michigan and was an integral part of the
state. The IRS disregarded the court and simply stopped issuing
private letter rulings on the subject. Other states wanted to get
similar benefits for their residents, which led to the lobbying
effort and subsequent passage of the specific exemption in the
IRS code.
SENATOR STEVENS asked if it wasn't a specific exemption for just
Michigan.
CHAIRMAN THERRIAULT stressed it was for that type of activity.
MR. BALASH added that Alaska began a similar program at the
University of Alaska.
CHAIRMAN THERRIAULT confirmed it is private individuals investing
their money and those private individuals specifically receive
the benefit.
He asked Mr. Balash to discuss the hurricane and disaster funds.
MR. BALASH explained that Florida, Hawaii, and California are all
states where natural disasters are not uncommon or unexpected.
Florida and Hawaii have hurricanes and California has
earthquakes. Those states have established entities from which
individuals or insurance companies purchase premiums. The premium
revenues are invested to earn a return and if a disaster strikes,
reimbursement is made for the amount of the policy. If you
purchased a premium, you would receive a benefit but you wouldn't
if you hadn't purchased a premium. Just as in the Michigan case,
individuals or individual companies invest their money and are
using the state's tax-exempt status to receive a benefit. Those
states negotiated with the IRS to ensure the funds wouldn't be
rejected. The IRS wanted the states to contribute some public
money into the funds so they wouldn't be viewed as just an
investment scheme.
It is clear that the source and destination is key to the IRS
determination. As stated in the Alaska Constitution, the
Permanent Fund belongs to the state. It does not belong to any
individuals, corporation, or agency, but a corporation manages
it. The managing corporation always refers to the assets of the
fund and the returns of the fund in its annual reports and news
releases in order to clearly make the distinction that the fund
belongs to the state and not the corporation. The corporation
board is comprised of state officials and individuals that were
appointed by the executive and the employees of the corporation
are state employees.
It is easy to demonstrate that the state has controlling
domination of the fund because the Legislature statutorily
restricts how the corporation can invest the fund. For example
they are currently able to invest no more that 55 percent in
equities. Also, the Legislative Budget and Audit Committee has
oversight of the fund and the corporation.
The source and destination is different for the Alaska Permanent
Fund than the other examples. The source of the fund comes from
state royalties, some settlements and approximately 2.7 billion
general fund dollars that were deposited in the early 1980's. For
the last 20 years, Alaska has paid out a benefit to private
individuals in the state so there is clearly a private benefit
from the payment. However, the individuals receiving the benefit
never put any of their own money in the fund and never used the
fund as a tax shield. Thus, the source and destination question
of the Alaska Permanent Fund has not been posed to the IRS.
CHAIRMAN THERRIAULT stated that according to the Integral Part
Theory, it is clear to him that the Permanent Fund is an integral
part of the State of Alaska. Compared to the disaster funds
discussed, Alaska has a much stronger case than the others due to
the structure and source of the fund. The payout is not
necessarily to individuals because they are not able to control
or demand it, which gives Alaska a good basis to argue that the
fund earnings should not be taxed unless Congress specifically
authorizes it. Although Congress has that power, they must
explicitly say that is what they want to do and they have not
done so.
The question now is whether guaranteeing some level of dividend
is enough for the IRS to say there is no public purpose.
Currently some parts of the operating budget are funded with the
earnings, which does point to a state purpose. Also, if all of
the earnings aren't used for a state dividend they certainly are
available for the Legislature to use, which is a state purpose.
Under the proposed percent of market value methodology, it says
that if a draw is made it must be limited to five percent. That
draw is permissive, it is not dictated that a draw must be made.
The state could elect not to make a draw and that money would
remain available to the Legislature or to the citizens if they
elected to change the Constitution and put that money toward a
public purpose.
Although the Legislature and the trustees have been counseled
that guaranteeing any kind of dividend would result in a negative
tax ruling, he's not so sure. His reading of the legal opinion as
well as examining some of the cases discussed gives him
confidence that the state would prevail.
CHAIRMAN THERRIAULT stated that the percent of market value
proposal from the Permanent Fund Corporation has been in the
committee for some time. He wanted to have the discussion so that
members would be apprised of his interpretation and give them the
opportunity to study the information and come to their own
conclusion. With this done, the committee could consider taking
final action on SJR 13 in the next several weeks.
CHAIRMAN THERRIAULT held SJR 13 in committee.
There being no further business to come before the committee,
Chairman Therriault adjourned the meeting at 3:20 p.m.
Alaska Michigan Florida Hurricane Hawaii California
Permanent Education Catastrophe Hurricane Earthquake
Fund Trust Fund Relief Authority
Fund
State Fund; Public State Fund Public State Agency
Corporate Status
managed by Corporation Corporation
a public
corporation
Ownership State Investors Reverts to the state Reverts to Transferred
of Assets upon termination the state to the state
upon upon
dissolution termination
Control and Domination
dictated by of the State; operations operations
law; LB&A decisions subject to approved by
Committee could not be legislative the
has oversight overridden review legislature;
by any amendments
agency approved by
the insurance
commissioner
Board state officials state officials state official state officials
Make-up and public and public
members members
confirmed by confirmed by
the the senate
legislature
Employees state Fund employees and Administered Employees
employees contract advisors by a state subject to
agency state civil
servant
requirements
Source and Destination
Source State Participants Insurers/Participants; Participants Equivalent of
royalties and some nonparticipant + additional state
settlements funds state funds premium tax
(mortgage collections;
recording some seed
fee) money; sale
of fund
premiums
Destination Currently, a private revenues earmarked insurers and insurers and
matter of beneficiaries for the fund the insured the insured
legislative
grace
IRS ruling none rejected exempt exempt exempt
requested
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