HOUSE BILL NO. 115 "An Act relating to the permanent fund dividend; relating to the appropriation of certain amounts of the earnings reserve account; relating to the taxation of income of individuals; relating to a payment against the individual income tax from the permanent fund dividend disbursement; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." 2:52:52 PM Co-Chair Seaton MOVED to ADOPT the proposed committee substitute (CS) for HB 115, Work Draft 30-LS0125\K (Nauman, 4/7/17). Representative Wilson OBJECTED for the purpose of discussion. TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, explained that the current version contained the amendments to the income tax section that had been adopted by the committee. The sections referring to the permanent fund had been removed. She said that there were three additional changes; the sort title had been changed to reflect that the bill was no longer a combined act, from the State Revenue Restructuring Act to the Education Funding Act. She directed committee attention to Page 22, line 12, which directed that the legislature could appropriate the estimated amount collected for the tax to the Public Education Fund. She pointed to Page 5, subsection (g), which was related to an amendment that had been adopted in committee and was conceptually amended define "disabled beneficiary" under AS 18.80.300, (a) and (b) only. 2:55:46 PM Representative Wilson pointed to page 22, line 12. She had initially thought a new fund was created, but she no longer believed that was the case. She wondered why the word "may had been used, and not "shall". Ms. Hansen replied that a new fund was not being created. She said that the reason for the use of "may" was due to the Constitution; there always had to be an appropriation done by the legislature. She relayed that the Public Education Fund was distributed without further appropriation, so the direction could not be that the revenue "shall" go into a fund where there was no further appropriation, the legislature had to appropriate the revenue. Representative Wilson stated no matter where the funds were put outside of the General Fund, it was still General Fund money. She requested further clarity. Ms. Hansen answered that the bill could have no binding effect on future legislatures and did not address revenue beyond what was in the bill. 2:57:57 PM Representative Wilson felt that it should be clear to the public that the money could be appropriated for anything and was not earmarked for education. Co-Chair Seaton clarified that the Public Education Fund was where the legislature put money for forward funding of education; the money flowed from the fund automatically and funded the formula and pupil transportation. He said that an appropriation had to be made into the fund for the deposit, but the funds automatically funded only education. 3:00:25 PM Vice-Chair Gara preferred the use of the word "shall", but explained that the word "may" had to be used under the Constitution. Representative Pruitt expressed his distaste for short titles. He plugged the use of iPads in committee to easily access information for bills that were accompanied by excessive documents. Representative Guttenberg remarked that the issue of electronic and telecommunications was under discussion in Legislative Council. Representative Wilson MAINTAINED her OBJECTION. A roll call vote was taken on the motion. IN FAVOR: Gara, Grenn, Guttenberg, Kawasaki, Ortiz, Pruitt, Thompson, Foster, Seaton OPPOSED: Wilson, Tilton The MOTION PASSED (9/2). 3:03:22 PM Vice-Chair Gara addressed the two fiscal notes attached to the bill. Representative Wilson reiterated her request that the bill version on the notes be updated to reflect the committee substitute. She asked about the inter-agency receipts on FN1, she had understood that the hearings would be done by the administration and not the court system. 3:06:15 PM KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, replied that the interagency receipt meant DOR would pay the funds to DOA. He said that it had been estimated that $200,000 to $300,000 of the $1.2 million listed on the services line of FN2 would be money paid to the Office of Administrative Hearings (OAH) for the purpose of appeals. Representative Wilson understood that DOR would be paying for the administrative hearings from collected taxes. Mr. Alper replied that DOR would make the payments from its general fund budget. Representative Wilson asked whether a person could go to the courts to appeal the income tax. Mr. Alper replied that the first step would be the internal appeals group, then OAH, and then to superior court. Representative Wilson asked why there was not a fiscal note for that process. Mr. Alper responded that he did not know that the process would require revenue spending. He said that the Department of Law would support the state's position and the court system would have costs as well, but forecasting the number of cases would be difficult. He added that OAH had a metric for the percentage of tax items that were appealed. Representative Wilson hoped that the costs would be clearly laid out. Co-Chair Foster noted his staff would research the issue. 3:09:45 PM Representative Pruitt addressed that regulations would have to be written. He wondered whether DOR would need additional money to write regulations. Mr. Alper replied there was a $14 million capital budget item in the fiscal note that would partially go to drafting regulation. Co-Chair Seaton MOVED to REPORT CSHB 115(FIN) out of committee with individual recommendations and the accompanying fiscal notes. Representative Wilson spoke to her OBJECTION. 3:12:11 PM Representative Thompson said that 80 percent of the wages paid to residents was in the Railbelt. He stated that a person working on the North Slope that lived in the Railbelt was not included in that 80 percent because they would be considered a North Slope employee and not a Railbelt resident. He thought that the bill needed further vetting. Vice-Chair Gara thought that the only way to tax more people was to tax those at lower incomes. He was satisfied that the legislation would not impose taxes at lower incomes, which he felt would disproportionately hurt rural and poor areas of the state. He stressed that he did not want to tax more Alaskans. He noted that no taxes would be imposed on the first $15,500 of earned income; for each $1,000 above $15,500, a $25 tax would be imposed. He expressed discomfort with the idea of taxing people at lower incomes than $15,500. He lamented that areas in the budget that could withstand further cuts were limited, and he expressed concern that liberty and dignity for Alaskan residents could be cut along with funding. 3:16:44 PM Representative Pruitt offered a personal anecdote related to the possible impacts of an income tax. He argued that a person making $42,000 per year was not privileged, but rather was a "regular Joe" out working in the world who would be taxed $692.50 under the legislation. Vice-Chair Gara clarified that he did not say that everyone who would pay taxes under the bill came from a place of privilege. Representative Pruitt returned to the $692.50 figure. He referred to seniors on fixed incomes in Alaska. He noted that the figure would be spread out over the course of 12 months, roughly $58 per month, would be a burden. He spoke to seniors on fixed incomes of $30,000 per year who would struggle under the legislation. He offered another anecdote related to a senior's fixed income budget. He lamented that property taxes in Anchorage had recently increased. He worried that an income tax would negatively affect recruiting people in certain professions to work in the state. He noted that the Alaska Permanent Fund Corporation already struggled with hiring people from out-of-state. He queried that overall effect that an income tax would have on the state's economy. He expounded on the reasons he believed that an income tax was a bad idea. 3:24:33 PM Co-Chair Seaton stated that the hope was to strike a balance between the bill and the Permanent Fund reduction bill. He stated the money from the tax would be directed at education. He was perplexed to hear members stating the committee had not heard from economists. He stated the committee had heard from Institute of Social and Economic Research (ISER) and among other experts. He remarked that some public testimony had underscored that further cuts were one of the worst things that could happen to the economy. He shared that the bill represented one piece of a four-part fiscal plan. He spoke about services such as road maintenance, troopers, the university, and others that were struggling under funding cuts. He reminded members that individuals earning under $30,000 would be exempt. He noted that the tax rate would be 2.5 percent, $25 per $1,000 over $30,000. He stressed that social security for low-income seniors would be exempt under federal law. He stated that exempting the permanent fund dividend, and the $4,000 personal exemption, would help lower-income Alaskans. He responded to the statement that 80 percent of the tax would come from the Railbelt, but pointed out that 80 percent of the state's population lived in the Railbelt. He stressed that the bill was not a geographically discriminatory piece of legislation. He believed that Alaskans should be willing to pay for services, such as road maintenance, in order to protect roads from deterioration. He felt that the bill represented one component of a plan to solve the fiscal problem. He stated if only a portion of the deficit was solved it meant the legislature would be faced with making further cuts. He spoke to potential impacts around the state. He stated it came down to what the future of the state should look like. He believed that the credit legislation that had passed could not solve the problem on its own. 3:30:46 PM Representative Tilton remarked the members had different philosophies on how the fiscal gap should be handled. She said that state government could be funded sufficiently with a $400 million cut. She echoed concern for hoe the tax could affect seniors on a fixed income. She worried about how the tax would affect the private sector. She asserted that she was supportive of funding for education, but that "an income tax was an income tax, no matter what you call it." 3:33:27 PM Representative Guttenberg agreed the situation was difficult. He shared that even in time of financial security he worried about not building out sustainable infrastructure. He lamented that people took joy in the building and ribbon cutting connected to increased infrastructure, but that major maintenance of those structures was less attractive. He thought that a restructuring of the permanent fund would spread the burden unfairly across the population. He believed that an income tax would level out the financial burden to Alaska's residents. He noted that many on his constituents in rural Alaska, even during times of financial stability, had not received the services they had needed. He lamented the historical inequities in state spending. He stressed the need for a stable economy. He hoped that industry would commit to investing in the state. He felt that the most important issues facing the state were controlling the size of government and stabilizing the economy. He believed that the solution to the fiscal crisis was multi-faceted. He felt that the legislature was running out of time to act on the issue. He expressed concern that the state was currently unable to take advantage of economic opportunities through the University because the legislature was making deep cuts to their budget. 3:41:26 PM AT EASE 3:44:45 PM RECONVENED Representative Wilson MAINTAINED her OBJECTION. A roll call vote was taken on the motion. IN FAVOR: Gara, Grenn, Guttenberg, Kawasaki, Foster, Seaton OPPOSED: Ortiz, Pruitt, Thompson, Tilton, Wilson The MOTION PASSED (6/5). There being NO further OBJECTION, CSHB 115(FIN) was REPORTED out of committee with a "do pass" recommendation and with one new fiscal impact note from the Department of Revenue and one new fiscal impact note from the Department of Administration. Co-Chair Foster discussed housekeeping. He recessed the meeting to a call of the chair [Note: the meeting never reconvened].