HOUSE BILL NO. 250 "An Act relating to the taxation of income of individuals; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." 5:41:59 PM RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE, introduced himself. He recognized the bill was one of the most controversial piece of legislation. He explained that why an income tax was chosen over other taxes. The bill would establish a personal income tax equal to six percent of taxpayers total federal tax liability for Alaska residents and nonresidents with income from a source in the state. Because the tax that would be established by the bill is calculated based on federal tax liability and not on income, the bill effectively incorporates federal brackets and exemptions and so permits this bill, and the personal income tax system it would create to be as simple and transparent as possible. 5:46:31 PM BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, introduced the PowerPoint Presentation: "Individual Income Tax: HB 250." Mr. Spanos addressed slide 2: "Individual Income Tax." "An Act relating to the taxation of income of individuals; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." Mr. Spanos reviewed slide 3: "Income Tax History." Began in 1949 at 10 percent of federal tax liability By 1961, the tax was 16 percent of federal tax liability In 1975, Alaska switched from federal tax liability to its own tax brackets Ranged from 3 percent to 14.5 percent on taxable income Alaska repealed personal income tax in 1980 after oil revenue boom Mr. Spanos turned to slide 4: "Tax Proposal." Creates a tax on an individual's income. The proposed rate is 6 percent of a person's federal income tax liability Mr. Spanos explained slide 5: "Income Tax Proposal (Continued)." He stated that the slide addressed the current federal tax brackets. Vice-Chair Saddler looked at the third column and wondered whether that was taxable income, or gross income. Mr. Spanos responded that it was taxable income. Mr. Spanos slide 6: "Income Tax Proposal (Continued)." Tax applies to nonresidents' income from a source in Alaska Residents receive credit for taxes paid in other states Provides for employers to withhold taxes and remit them to the state 5:50:11 PM Representative Guttenberg asked how he defined resident. Mr. Spanos responded that in the bill the term "resident" was defined several times. Representative Wilson wondered if the $3 billion of "out of state" workers were defined as residents or nonresidents. Mr. Spanos stated that the $3 billion was wages earned in Alaska by nonresidents. He understood that there may be other nonresidents who may receive the Permanent Fund Dividend (PFD). He shared that there were other sources of income, other than wages, that would be taxable for residents. Representative Wilson did not feel that the definition would work. Vice-Chair Saddler queried the amount of money earned in wages by Alaska residents in Alaska, if $3 billion was earned by non-residents. Commissioner Hoffbeck would have to provide the information at a later time. Representative Pruitt wondered whether military personnel would be taxed, or was it all the other individuals who could receive the PFD but not live the state. Mr. Spanos responded to the extent that the pay resident tax, if they were to pay federal income tax. Commissioner Hoffbeck stated that the income tax would be based on their income in Alaska or from an Alaska source. Representative Pruitt thought it was cumbersome to manage the income tax, to require those living outside of the state to pay the income tax on the PFD. Commissioner Hoffbeck replied that their residency allowed for a credit in other states against the Alaska tax. He explained that some of the money earned in other states could be transferred if the Alaska tax rate was higher than the other state. He stated that the individual would need to fill out a state income tax return. Representative Pruitt asked about the cost to the state. He was skeptical about really collecting any money. Commissioner Hoffbeck agreed that all taxes would have to be processed. 5:56:44 PM Vice-Chair Saddler mentioned military members. He wondered if those living outside the state, retaining residency, who received a PFD would be required to pay the state income tax. Mr. Spanos replied that other states dealt with the same issue. He stated that they would be required to pay the taxes in their home state. Vice-Chair Saddler surmised that they would be subject to Alaska income tax. Mr. Spanos agreed. Representative Gara surmised that the tax was a percentage of federal tax. He stressed that the state taxes were deducted from the federal tax. He wondered how that loop would be solved. Mr. Spanos stated the IRS made it fairly simple with the use of W-2's. Mr. Spanos continued to discuss slide 6. Mr. Spanos moved to slide 7: "Income Tax Estimates: Estimated tax for married couple filing jointly with 2 children." He reported that he slide showed an example of what an individual or family might pay in taxes. Mr. Spanos provided another example on slide 8: "Income Tax Estimates: Estimated tax for head of household with 2 children." He pointed out that the head of household had a slightly different deduction allowance. 6:01:10 PM Mr. Spanos advanced to slide 9: "Relative Tax Rate": 43 states currently have an income tax Among states with an income tax, Alaska's rate would be lowest North Dakota would be second-lowest Average state income tax is about 30 percent of federal liability, five times Alaska's proposed rate Six states would still have zero state income tax1 Two states tax only dividends and interest2 Mr. Spanos discussed slide 10: "Impacts of Tax Proposal": Income from subchapter S corporations and partnerships will be taxed Taxed on income with a source in Alaska Not currently subject to state Corporate Income Tax Income earned in Alaska by both non-residents and residents will be taxed Rough estimate: 20 percent - 30 percent of Alaskans would pay zero tax Mr. Spanos scrolled to slide 11: "Revenue Impact": · DOR estimates $100 million in FY17 due to the tax taking effect in January 2017 o This amount is from withholding o No tax returns filed until April 2018 · DOR estimates $200 million in FY18 based on modeling using aggregated federal income data for Alaska residents Mr. Spanos moved to slide 12: "Implementation Cost." · Implementing an individual income tax in 18 months will be a significant challenge o Need to draft regulations o Need to design, develop, and test technology to administer tax that would have estimated 450,000 tax returns filed annually. · Estimated $250,000 supplemental appropriation for a contractor to work with DOR on an implementation plan · Estimated $14,000,000 one-time capital appropriation to build income tax into our current tax revenue system o Includes withholding and online filing · Annual staffing cost of about $6,000,000 for 52 FTE employees 6:04:43 PM Commissioner Hoffbeck addressed slide 13: "Closing the Budget Gap" and slide 14: "Closing the Budget Gap (Continued)." The components used to close the budget gap included the FY 17 baseline revenue (after proposed legislation; FY 17 spending reductions; and new revenue components. Mr. Spanos asked if he should address the sectional analysis. Co-Chair Thompson replied in the negative and relayed it could be taken up at a later date. He recalled that the income tax in the 1960s was a one-page form and very simple. He felt that the current system was too complicated. He wondered if there was a simpler method. Mr. Spanos replied that the form would still be simple, but it was based on the complicated federal income tax. He stated that the cost projection was based one-half Montana's structure. He stated that Vermont had a similar population as Alaska, so they had relayed that they belied Alaska's proposal was reasonable. He stated that the auditors and computer system were essential to processing the system. Co-Chair Thompson wondered whether the federal system would be connected to the state's system. 6:07:46 PM Mr. Spanos replied in the affirmative. Representative Wilson pointed to slide 8, and surmised that one would pay $7 dollars for a $40,000 income; and $97 for $50,000. Mr. Spanos replied in the affirmative. Representative Wilson surmised that the state would have someone do all of the paperwork for $7.00. Representative Gattis referred to nonresident pilots flying Alaskan routes and sports teams. She wondered if the state would recoup any of those dollars. Mr. Spanos replied that most states had some kind of daily limit income earned in the state. Representative Gattis hoped the state did not use California as a role model. 6:10:09 PM Vice-Chair Saddler queried the rates for those individuals who earned higher than $100,000. Co-Chair Thompson asked if he was referring to slide 5. Commissioner Hoffbeck replied that the highest rate was 2.38 percent, and agreed to provide more information. Representative Guttenberg referred to the state form that specified how much state and federal taxes were paid. Commissioner Hoffbeck replied that a person would pay whatever their federal tax bracket and 20 percent of that for state income tax. Representative Munoz asked about auditors. Mr. Spanos answered replied with a rough estimate and the department relied on a contractor to see if they estimated too high or low. Representative Munoz wondered if the audits would be random and meaningful. Mr. Spanos replied in the affirmative. 6:13:39 PM Representative Gara wondered if the state income tax was deducted from the federal income tax. Co-Chair Thompson replied in the affirmative. Representative Gara requested a chart related to the percentages related to what would actually be paid by the individual. Commissioner Hoffbeck agreed that the department could provide the information. Representative Gara wondered whether everyone had the opportunity to take tax reductions or were itemizations required. Mr. Spanos responded that only those who itemized would qualify for the reductions. Representative Gara queried families and single people. Commissioner Hoffbeck thought the information had been provided previously. Representative Munoz wondered why the fiscal note had a smaller number of employees in the fiscal note. Commissioner Hoffbeck replied that he limited the number of employees. 6:16:39 PM Vice-Chair Saddler asked whether someone under 16 would be subject the taxes. Mr. Spanos responded that it depended on their level of income. He stressed that if they filed federally they also must file for the state. He shared that the parents may need to pay taxes if the minor earned at a certain level. He agreed to provide more information. Vice-Chair Saddler wondered whether the 20 percent of Alaskans who would not pay were citizens or wage earners. Mr. Spanos referenced the ISER report. He believed it was wage earners. Vice-Chair Saddler queried the standard deduction. Mr. Spanos responded that it was $12,600 for a married couple; and $6,300 for a single individual. HB 250 was HEARD and HELD in committee for further consideration. 6:19:00 PM