SB 29-TAX EXPENDITURE REPORT  9:38:02 AM CHAIR WIELECHOWSKI announced the consideration of SB 29, a bill which seeks to focus greater public and legislative attention on "independent state expenditures," which the bill defines as tax credits, deferrals, waivers, exclusions, and deductions. These forms of indirect spending constitute a high percent of state spending, yet they receive relatively little attention in the annual state budgeting process and are rarely evaluated to determine whether they are meeting the goals for which they were initially enacted. The public also knows little about these expenditures, despite the fact that the state actually writes checks to reimburse companies for some types of tax credits. SENATOR PASKVAN moved to adopt the CS for SB 29, labeled 27- LS0305\I, as the working document before the committee. CHAIR WIELECHOWSKI objected for discussion purposes. SAM GOTTSTEIN, staff to Senator Bill Wielechowski, sponsor of SB 29, introduced the bill. He said that SB 29 deals with tax expenditures which are defined on page 4, lines 13 and 17. He termed tax expenditures "tax credits." The intent of the bill is to have information provided to the legislature and public in order to have a better understanding of where the state's money goes and whether money given for tax credits achieves its legislative purpose. According to the Center for American Progress, tax expenditures make up about 25 percent of federal government spending. In Alaska, according to the Department of Revenue (DOR), there were $863 million in tax credits in 2011 for the oil and gas industry. Alaska spends more on tax credits annually than the budget of DOR, DNR, DEC, LAW, Court System, and the Legislature combined. That amount is about 15 percent of Alaska's annual expenditures. He reported that only 9 states do not publish this type of disclosure information and Alaska is one of them. The majority of Alaska's tax credits have no disclosure. Oil and gas credits do not disclose the value of each credit, where it was applied, how many jobs it creates, or how much goes to wages. On the other hand, the Alaska Film Office has tax credit information on line. He concluded that the intent of the legislation is to get information about all tax credits out to the public. He said the sponsor's intent is to find the right balance between getting information and creating too much of a burden on DOR to find out the information. MR. GOTTSTEIN addressed the changes in the bill by section: Section 1 makes the short title of SB 29 the "Alaska Tax Break Transparency Act." Section 2 requires legislative intent language for any future tax expenditures in order to make it easier for DOR to figure out if a particular tax credit is achieving its legislative intent. Sections 3-5 are changed to more clearly refer to the Fall Revenue Sourcebook. Section 6 is the "meat and potatoes" of the bill. The first subsection deals with what would be published annually for each tax credit. It would have statutory authority and deal with the annual sum, how many taxpayers there were, what the estimate of tax credits for the following year would be, and the estimate of the public cost. In subsection (c) in Section 6, the goal is to have a one-time analysis of each tax credit over $1 million to determine whether the statute authorizing the tax expenditure has achieved its purpose. Page 4, lines 3-9, describes how that happens. If it is a new tax expenditure, the analysis will be done either seven years after implementation, or one year before the sunset of the tax expenditure. If it is an existing tax expenditure, there is a five- year window after the effective date to complete the analysis. Also in Section 6 is a requirement for an electronic copy of the report. Section 7 is the effective date of July 1, 2015. This date was chosen because DOR is working on creating an automated system, which was paid for from a $34.7 million appropriation from the legislature last year. 9:45:09 AM MATTHEW GARDNER, Executive Director, Institute on Taxation and Economic Policy (ITEP), Washington, D.C., testified in support of SB 29. He related that ITEP is a non-profit organization that focuses on federal and state tax policy issues with an emphasis on the goals of sustainability, transparency, and fairness in tax laws. He said that SB 29 would take an important first step toward achieving those goals by requiring regular scrutiny of Alaska tax expenditures that currently reduce Alaska tax revenue. He explained that the basic insight behind tax expenditures is that a law that cuts taxes for a specific individual or business is no different, for budget purposes, from a law that directly spends money on that business or person. The problem is that, while the legislative budget process imposes regular and strict scrutiny of spending that is done directly by government, in the absence of a tax expenditure report, little or no scrutiny is given to spending that is done through a tax cut. He emphasized that tax breaks are government spending and should be scrutinized the same way as appropriations. He noted that 45 states now require a tax expenditure report. Five states have enacted new legislation similar to SB 29. SB 29 goes the extra mile to evaluate tax breaks because it requires information on the equity and efficiency effects of the tax expenditure. Requiring an evaluation of the effectiveness of tax breaks requires a lot of work. Some states, such as Washington and Oregon, are doing very well with the reporting process, because they dedicate resources up front. Other states, such as New Jersey, have taken the first step of legally requiring an evaluation of the effectiveness of tax breaks, but have not followed through by funding them. SB 29 would make implementation easier than some states because it requires the evaluations to be staggered, which reduces costs and provides adequate time to complete each evaluation. MR. GARDNER suggested that SB 29 could go further in one area. It could decouple from federal tax breaks. Oregon is an example of a state that provides that tax expenditure reports not be limited to tax breaks created by state law. It also includes federally created tax breaks. SB 29 should require that new legislation creating or expanding a tax break must include a statement identifying the rationale behind the tax break. 9:50:56 AM MATT WALLACE, Executive Director, Alaska Public Interest Research Group (APIRG), testified in support of SB 29 because it would achieve transparency, accountability, and effectiveness in Alaska's budget and policy making. He related two reasons why this legislation is important. First, it promotes better policy making and provides information about whether it is worth it to provide or increase tax credits. Secondly, it makes sure the information about tax credits is available and transparent. JOHANNA BALES, Deputy Directory, Tax Division, Department of Revenue (DOR), answered questions related to SB 29. She agreed with the intent of the legislation to provide transparency and information about tax expenditures, but noted the large expense to do so. She referred to Mr. Gardner's comment about getting information from the Film Credit Program on-line, but pointed out that it would not provide the type of information this bill is looking for. She said she was aware that LB&A was doing a performance audit of the Film Credit Program and had assigned seven auditors to the project, which is expected to take approximately six months and use a significant amount of resources to obtain the information. She concluded that the legislation would be a highly expensive endeavor for the state. CHAIR WIELECHOWSKI noted that DOR was requesting 16 new full- time positions, including 8 full-time tax technicians to manually compile the aggregate tax expenditures, as well as 4 full-time auditors. He recalled several years ago when he filed a bill for an on-line checkbook, which was done for no cost. He pointed out that 45 other states are doing performance audits. He opined that the legislation was a good investment, but he hoped it could be done for less than has been proposed. SENATOR PASKVAN asked if Ms. Bales agreed with the coordination with the tax management system that the legislature put in the budget a year ago. MS. BALES said yes. Once that system is up and running, the ability to compile the information would simply be a report. At that point in time, tax technicians would no longer be needed to compile data. With the implementation date of July 1, 2015, the implementation would not be fully realized until after a contractor has been identified, or around 2017. In order to meet the requirements of SB 29, manual compilation of data would have to be done. SENATOR PASKVAN referred to oil production tax credits of $1 billion per year, and asked what would be a reasonable cost in order to get a better understanding of where that money is going. MS. BALES did not have an opinion, but said it was something to think about when undertaking a performance audit. She reiterated that it would be expensive. SENATOR PASKVAN asked if the DOR fiscal note was less than 1 percent of the oil tax credits. MS. BALES said yes. 9:59:36 AM SENATOR GIESSEL asked if Ms. Bales believed the bill would clarify where the Film Tax Credits would go. She said she thought that the film industry did not pay taxes and their tax credits were bartered to other companies. MS. BALES requested more information. SENATOR GIESSEL explained that the state gives the film industry a credit and those credits are sold to other companies. She asked how a performance audit would show that. MS. BALES explained that the report would show the number of taxpayers that are claiming the film credit. A performance audit would show the benefit to Alaska from a credit to the film industry. She noted that there are 16 Alaska-specific credits, 12 of which meet the $1 million threshold, so there would need to be 12 performance audits. SENATOR GIESSEL restated her concern. She described a scenario where the film industry credit was sold to another company and asked how that credit would show up in a performance audit. MS. BALES thought it would be shown in two ways in the audit. It would show up as a credit given to the company that purchased it and how it affected the film industry. SENATOR GIESSEL referred to charts on page 106 of the Fall 2011 Revenue Source Book and asked if they summarize the credits for that tax year. MS. BALES said that was correct. 10:04:08 AM CHAIR WIELECHOWSKI noted the original fiscal note for SB 29 was for $1.7 million and asked for 16 new full time positions. In the past few days, substantial changes were made to the bill in an attempt to keep expenses down, and the effective date was set at July 1, 2015, to give the Tax Division time to get their new automated tax system operational. That is the system the legislature appropriated $34.7 million for last year. The intent of that was to avoid most manual compilation and to rely on a much less expensive and much more efficient automated system. He explained that the revenue period for tax expenditures was changed from annually to 7 years following enactment for new expenditures, and within 5 years from 2015 for existing tax expenditures. The definition of tax expenditures was refined in order to exempt those that add up to less than $1 million annually and any federal tax expenditures Alaska has incorporated into its tax code. He concluded that the fiscal note is now more modest and reasonable. He requested Ms. Bales' estimation of costs for version I of the bill. MS. BALES predicted there would be a reduction in the amount for compilation; however, the performance audits costs may have been underestimated. Even though federal deductions are not included, she predicted performance audits would be more expensive because of the need to include lease expenditures and capital costs in the oil tax credit program. She pointed out that there are 22 tax programs with their own exemptions, deferrals, and deductions that go beyond federal corporate income tax deductions that the department "piggybacks on." Doing performance audits on those tax programs, within a five-year timeframe, would be expense. Also, she noted there was little guidance regarding standards for performance audits in the bill. She used the film production tax credit as an example and questioned what standards would be used to audit it. Even with the changes to the bill, significant resources would be needed. CHAIR WIELECHOWSKI said he would continue to work with DOR on the fiscal note. 10:08:46 AM SENATOR PASKVAN discussed costs that apply to an audit. He understood that DOR already has an internal duty to conduct audits and he hoped that DOR was not including those costs in the fiscal note. MS. BALES explained that DOR does financial tax audits. The bill would also require performance audits, which DOR does not do. Performance audits require a more subjective process and DOR would need more direction as to how to proceed. SENATOR PASKVAN inquired about the automated system that is going out to bid. He opined that the internal audit aspect of the tax credit systems would be more easily understood. MS. BALES said that was the expectation. SENATOR PASKVAN asked if determining whether a credit is meeting the intent was a legitimate function of government. MS. BALES said yes, but the legislation is outside the scope of DOR's mission, which is to collect taxes. Currently, performance audits are done by LB&A and have specific guidelines and standards. SENATOR PASKVAN requested clarification on whether the Tax Division has the authority to conduct performance audits, or whether another department should take on this work. MS. BALES said she has spoken with Chair Wielechowski about that issue. She said she was not saying performance audits should not be done by DOR. She voiced concern that the guidelines for performance audits are not included in the bill. Performance audits are done by LB&A and contain performance standards. SENATOR PASKVAN asked if Ms. Bales would be willing to transfer data to LB&A. MS. BALES said that is already done. SENATOR MEYER suggested this legislation could be considered for LB&A. CHAIR WIELECHOWSKI agreed to work further on this issue. He set SB 29 aside.