HB 252-ELCTRNC TAX RETURNS; VESSEL PASSENGER TAX  3:56:35 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 252, "An Act requiring electronic submission of a tax return or report with the Department of Revenue; repealing the tax reduction for local levies for the commercial vessel passenger excise tax; amending the definition of 'voyage'; and providing for an effective date." 3:56:59 PM CHRIS HLADICK, Commissioner, Department of Commerce, Community & Economic Development, provided a PowerPoint presentation entitled, "Commercial Passenger Vessel Tax HB252," dated 2/10/16. Commissioner Hladick informed the committee HB 252 is an act requiring electronic submission of a tax return, repealing the tax reduction for local levies for the commercial vessel passenger excise tax, amending the definition of 'voyage,' and providing an effective date [slide 2]. He noted the cruise ship head tax was created by the [Alaska Cruise Ship Tax Initiative, Measure 2, approved 8/22/06 (cruise ship initiative)], and major changes to it made in 2010 were: tax reduced from $46 to $34.50 per passenger; increased number of ports that can receive $5 per passenger sharing; credit for municipal port fees added; tax restricted to voyages that were in Alaska waters for at least 72 hours [slide 3]. He further explained the proposed bill repeals credit for local head taxes of $8 in Juneau and $7 in Ketchikan, amends the definition of 'voyage' thereby restoring the tax to all trips greater than 72 hours, and requires electronic filing, including an exemption process [slide 4]. The Department of Revenue (DOR) estimates increasing the commercial passenger vessel tax will raise an additional $16.6 million per year, of which $14.8 million would be kept by the state, and $1.8 million would go to municipalities. The increase in municipal share is largely due to the change to the 72-hour rule [slide 5]. The assumptions behind the revenue estimates are as follows: 900,000 total passengers before the tax change; 12 percent increase due to the repeal of the 72-hour rule; $34.50 per passenger, for a total of $34.5 million; 3.5 ports per voyage receive $5 municipal share; and the number of voyages and passengers would stay roughly constant [slide 6]. In a similar manner to the other tax initiatives, DOR must update the Tax Revenue Management System (TRMS), the Revenue Online (ROL) filing, and create the tax return forms. There is a one-time implementation cost of $100,000 to recreate the tax forms, and reprogram and test the tax system, and there are no additional costs to administer the tax program [slide 7]. Slides 8 and 9 illustrated the fiscal year 2016 (FY16) budget, and the revenue from tourism adding $15 million to total reductions and new revenue. The impact of the cruise ship tax proposal would be that voyages are slightly more expensive for the passengers and/or companies [slide 10]. Commissioner Hladick began the sectional analysis [slides 11 and 12]: · Section 1 adds a $25 or 1 percent tax penalty for failure to file electronically · Section 2 requires electronic submission of tax returns, license applications, and other documents submitted to DOR; changes all tax statutes and applies to all tax types administered by DOR; provides a process to request an exemption if a taxpayer does not have the technological capability to file online · Section 3 amends the definition of voyage to mean any trip or itinerary lasting more than 72 hours · Section 4 repeals current law which allows for a tax reduction in the amount of certain local levies - this is the most important section of the bill · Section 5 adds transitional language allowing for regulations · Section 6 is the immediate effective date for the transitional regulatory language · Section 7 sets the effective date 4:01:28 PM REPRESENTATIVE LEDOUX recalled that when head taxes were first addressed by a previous legislature there was a question about the constitutionality of head taxes. COMMISSIONER HLADICK deferred to the Department of Law. 4:02:12 PM CHRIS PELOSO, Assistant Attorney General, Environmental Section, Civil Division (Juneau), Department of Law, in response to Representative LeDoux, informed the committee that in 2009 there was a lawsuit filed by the Alaska Cruise Association (ACA) following the establishment of the original head tax by the cruise ship initiative. In 2010, the lawsuit was dropped because there was a settlement agreement between the state and ACA that the state would lower the tax rate from $46 to [$34.50], and provide an exemption to municipalities. Mr. Peloso opined that if the state makes further changes, the settlement agreement is still valid because the settlement is related to legislative action taken in 2010. However, he cautioned that ACA may revisit its stance which was based on "an obscure constitutional provision called the Duty of Tonnage - the tonnage clause. Without endorsing their argument, their argument was that any fee ... any tax collected by the state that doesn't go towards docks or other ship expenses is unconstitutional." REPRESENTATIVE LEDOUX questioned whether the debate was related to interstate commerce laws. MR. PELOSO stated that the tonnage clause is in Article 1, Section 10 of the U.S. Constitution, and there are also interstate commerce issues. He advised that the issues raised in 2009 would be the same whether the head tax is $46 or [$34.50]. REPRESENTATIVE LEDOUX surmised that if the state raises the tax and nullifies the settlement, the state may win [a new lawsuit] and collect more tax, or may lose and get no tax. MR. PELOSO agreed with that result if the tax were held unconstitutional, however, he could not speak to whether the cruise industry would revisit a lawsuit, or to a court ruling in this regard. 4:05:51 PM REPRESENTATIVE LEDOUX observed that the state entered into a settlement agreement and asked whether that creates a problem with legally raising the tax. MR. PELOSO informed the committee that a court case does not affect legislative actions. All of the provisions of the settlement agreement have been fulfilled, thus HB 252 would not be in violation of the settlement agreement. In further response to Representative LeDoux, he advised that the cruise association dropped its lawsuit with prejudice, although there are potentially ways it could start a new lawsuit, and he could not speak for the cruise association. 4:07:34 PM KEN ALPER, Director, Tax Division, Department of Revenue, advised that the possibility of the state losing a lawsuit and being held to a retroactive liability are somewhat limited. He pointed out that during the years 2007-2010, the state was receiving about $25 million per year from the head tax, and the funds were defined in a section of the capital budget for projects expressly for dock and harbor projects, as related to the tonnage clause. Since enactment of the legislation in 2010, the state receives about $2 million per year after the reduced tax and increased municipal sharing, and the money is easily identified as supporting dock and harbor projects. 4:08:40 PM REPRESENTATIVE HUGHES directed attention to slide 10, and urged for the administration to think about the proposal's impact to the people of Alaska. She remarked: My understanding was back after the initiative that the number of passengers did go down by 15, 20 percent, there were fewer ships coming into our ports and you might think that just impacted Southeast, but it actually impacted up in my area ... it impacted the whole state and it particularly impacted small business. REPRESENTATIVE HUGHES expressed her disappointment at the lack of analysis on the proposal's impact to communities, and then asked whether the money can only be used for ports and harbors or can be deposited to the general fund (GF). MR. ALPER explained that the lawsuit was never resolved, thus restrictions on the use of the funds are unknown; however, the state intends to use the money to pay for tourism-related expenditures, and could be targeted "towards things that would meet any sort of theoretical constitutional restriction on the use of the funds." REPRESENTATIVE HUGHES said there are strict federal requirements on the use of the funds. She asked, "What is being paid out of the general fund right now for those, those kind of things, my understanding it's, there's not, money coming out of the general fund for, being paid for those kind of things, and so now we're going to be doing things that we might not otherwise be doing." MR. ALPER explained that the state does not spend as much from the capital budget on grants to municipalities for dock and harbor projects as in prior years. He acknowledged that the state does spend money in support of tourism marketing, and in support of DCCED tourism activities. REPRESENTATIVE HUGHES expressed her concern that it is unknown whether these funds can be put in GF and used in a way to help close the budget gap. She requested additional specific information in this regard. 4:12:11 PM COMMISSIONER HLADICK agreed with Representative Hughes' request for additional information because as the city manager of Unalaska, he received grants for its harbor from the Department of Transportation & Public Facilities. CHAIR OLSON asked whether HB 248 or HB 252 are included in the Institute of Social and Economic Research (ISER), University of Alaska Anchorage, study of economic impact. MR. ALPER said yes, the ISER request for proposal (RFP) contained "the suite of possible revenue measures that we put together over the summer." CHAIR OLSON asked when the ISER report would be received. MR. ALPER responded that either an executive summary or a first draft is due [2/15/16]. In further response to Chair Olson, he said the executive summary would be a summary of impacts and a table of key data. 4:14:06 PM REPRESENTATIVE JOSEPHSON noted the "totally valid" comments about the impacts of the governor's plan on industry and on citizens, and pointed out that cuts also have tremendous impact, such as those to the University of Alaska, which has lost 500 employees. He returned to the settlement agreement between the cruise ship industry and the state, and observed that if the settlement was with prejudice, there could not be a retroactive rescission of the settlement agreement. MR. PELOSO agreed; however, another party that was not part of the lawsuit could file a similar lawsuit based on the original argument. REPRESENTATIVE JOSEPHSON asked what taxes were received by municipal and state governments prior to 2010, and after 2010. MR. ALPER stated that at the time the state was receiving the $46 head tax - approximately from 2007 through 2010 - the state received $15 million to $20 million per year. He offered to document a complete history thereof. One of the changes in the 2010 amendment increased the number of ports that could receive the "shared $5" which totaled $15.5 million in the operating budget last year. He stressed that the important difference is to the portion that is kept by the state, which was made by the legislative change that reduced the tax to $34.50 and created the offset. For example, in 2008, a cruise ship passenger paid $61: $46 to the state, $8 to Juneau, and $7 to Ketchikan. The tax cut to $34.50, less the Juneau and Ketchikan taxes, meant the state is now receiving $19.50. Almost all of the reduction of $26.50 per passenger came out of the state's portion of the tax. 4:18:19 PM REPRESENTATIVE LEDOUX inquired as to how much municipalities receive each year through this tax. MR. ALPER offered to provide a report which shows each municipality that receive $5 per taxable passenger. He recalled that the total for the current year is $15.5 million, and the amount each municipality receives is disparate because the amount is based on the number of each municipality's visitors. In response to Chair Olson, he said he would provide a 5-year history of payments. REPRESENTATIVE LEDOUX posited that if the state incorrectly assumes that the cruise ship industry would not bring a successful lawsuit, the result would impact not only the state but each community as well. MR. PELOSO stated that is impossible to say what the repercussions of a lawsuit would be; however, a court may decide the tax is acceptable as long as the state ensures that the money goes to municipalities. REPRESENTATIVE HUGHES asked how much the head tax would affect fares on tourists from California or Washington. MR. ALPER said he was unsure about docking fees and head taxes outside of the state's jurisdiction, or how they are collected by the industry. [HB 252 was held over.]