MINUTES  SENATE FINANCE COMMITTEE  April 14, 2004  9:05 AM  TAPES  SFC-04 # 79, Side A SFC 04 # 79, Side B SFC 04 # 80, Side A   CALL TO ORDER  Co-Chair Lyda Green convened the meeting at approximately 9:05 AM. PRESENT  Senator Lyda Green, Co-Chair Senator Gary Wilken, Co-Chair Senator Con Bunde, Vice Chair Senator Fred Dyson Senator Lyman Hoffman Senator Ben Stevens Senator Donny Olson Also Attending: Public testimony was presented in Juneau as reflected in the minutes. Attending via Teleconference: Offnet sites' public testimony was presented in the order reflected in the minutes. SUMMARY INFORMATION  HB 375-APPROP: OPERATING BUDGET/LOANS/FUNDS HB 377-APPROP: MENTAL HEALTH BUDGET The Committee took public testimony and held the bills in Committee. SB 366-STATE SALES TAX The Committee heard from the sponsor and took public testimony. A committee substitute was adopted and the bill was held in Committee. CS FOR HOUSE BILL NO. 375(FIN) am "An Act making appropriations for the operating and loan program expenses of state government, for certain programs, and to capitalize funds; and providing for an effective date." CS FOR HOUSE BILL NO. 377(FIN) "An Act making appropriations for the operating and capital expenses of the state's integrated comprehensive mental health program; and providing for an effective date." This was the third hearing for these bills in the Senate Finance Committee. Co-Chair Green announced that public testimony from offnet sites is scheduled for today. Testimony would be limited to two minutes. LOUISE NASSUK testified via teleconference from Craig to urge funding support for Alaska Legal Services as it provides important assistance to families in Rural Alaska. DIANE MILLER testified via teleconference from an offnet site in Teller to encourage funding to support Alaska Legal Services (ALS), particularly funding to maintain the Nome office of ALS. ALS has provided important assistance to people in the Bush. JOHN BIOFF, Staff Attorney, Kawerak Incorporated, testified via teleconference from an offnet site. He stated that in his position with Kawerak Incorporated, he provides legal assistance to twenty tribal councils in the Bering Strait area. In the course of his work, he is repeatedly asked by individuals to provide assistance with legal issues. These inquiries are referred to Alaska Legal Services as most of these people are low income and unable to afford an attorney. Therefore, he supported funding for Alaska Legal Services and of the continued funding of the Nome office in particular, as it provides a very valuable service to the region. Without it, people would not have access to legal assistance for such things as divorces, custody, and domestic violence issues. [NOTE: Testimony from Deborah Mach, City Clerk, City of Unalaska, was heard at this point. Her remarks are included in SB 336 testimony as they pertained to that bill rather than to HB 375 and HB 377.] SUSIE MACLAY testified via teleconference from an offnet site in Pilot Station to urge continued funding for the Tundra Women's Coalition. It provides "badly needed" assistance to families in Bethel and the Yukon Kuskokwim delta region. ANTONE ANVIL testified via teleconference from an offnet site in Bethel and voiced concern that insufficient funding is included in the FY 05 Operating Budget to support Alaska Legal Services. The service ALS provides is important to the people in the area. There being no further testifiers, Co-Chair Green ordered the bills HELD in Committee. AT EASE: 9:18 AM / 9:20 AM [NOTE: Co-Chair Wilken assumed chair of the meeting.] SENATE BILL NO. 366 "An Act relating to the levy and collection of sales and use taxes, to the levy and collection of municipal sales and use taxes, and to municipal sales and use taxes on alcoholic beverages; and providing for an effective date." This was the fourth hearing for this bill in the Senate Finance Committee. Co-Chair Wilken explained that this bill, which is sponsored by the Senate Finance Committee, would implement a four-percent Statewide sales tax on the sale, lease, rental and use of tangible personal property and services. He noted that the Version 23-LS1051\W committee substitute is before the Committee. Co-Chair Wilken noted that the purpose of today's meeting is to hear public testimony regarding the bill. Senator B. Stevens moved to adopt the Version 23-LS 1051\X committee substitute and objected for explanation. Senator B. Stevens explained that the Version "X" committee substitute would exempt motor fuel taxes as well as the tax on the sale and rental of real property, as identified in Section 17, Sec. 43.44.020 Exemptions subsection (14) and (15) on page seven, lines seven through nine. This language reads as follows. (14) the sale, transfer, or use of motor fuel taxed under AS 43.40.010; (15) the sale, lease, and rental of real property and the construction of improvements on real property. Senator B. Stevens also pointed out that the committee substitute would add a new subsection through which, at the request of the Department of Revenue, internet commerce could be addressed, as specified on page 16, lines three through five that reads as follows. (b) The Department of Revenue shall adopt regulations relating to sourcing, or the determination of where a sale occurred for sales and use tax purposed, that are, to the extent possible, consistent with the Streamlined Sales and Use Tax Agreement. Senator Hoffman asked whether Version "X" defines what constitutes real property. Senator B. Stevens communicated that while this definition is not specifically included in the bill, pertinent definitions are located in Section 17, subsection Sec. 43.44.199. Definitions. beginning on page twelve. Senator Hoffman acknowledged. Senator B. Stevens removed his objection to adopting the committee substitute. There being no further objection, the Version "X" committee substitute was adopted as the working document. [NOTE: The following testimony from Deborah Mach, City Clerk, City of Unalaska, which was inadvertently presented during the public testimony on HB 375 and HB 377, has been incorporated into the testimony on SB 366.] DEBORAH MACH, City Clerk, City of Unalaska, testified via teleconference from an offnet site in Unalaska to explain that as part of her job as City Clerk, she is responsible for the enforcement and collection of the local three-percent sales tax. She is opposed to this legislation for numerous reasons. Approximately ten to 15 percent of the 400 licensed businesses in the city are on the city's sales tax delinquency list. Monthly, if not weekly, communication is required with each of the 40 to 50 delinquent businesses. Some ultimately are sent to a collection agency. The implementation of a Statewide tax would only serve to increase the number of delinquencies that currently occur, and as proposed, the implementation of a Statewide tax would eliminate the City's ability to be involved. A previous version of the bill would have provided an opportunity for the State to contract with a local entity for enforcement efforts. However, this City/State coordination of efforts option is not included in the current version of the bill. This coordination of efforts "would make it work." Ms. Mach opined that it would be "impossible" for the State "to collect taxes better," than those communities that have been conducting this process for years, particularly in regards to those businesses which are delinquent. She voiced concern that local entities "would be forgotten" in the process were the State to assume this responsibility. Therefore, she questioned how the State would collect on delinquent sales taxes, as the State is so vast and does not have a road system. She feared that the majority of the enforcement effort would be focused on large communities such as Anchorage, which has never had a sales tax. She declared that, "small roadless communities would be the losers." To that point, she stated that, to many small communities, the sales tax is the primary source of local revenue. Ms. Mach also voiced concern that the exemptions specified in the bill are vague, and that the City of Unalaska is concerned that the State would exempt the sale of marine fuel from taxation. She stressed that Unalaska and many other coastal communities receive the majority of their sales tax revenue from this source. She also stressed that the proposed $60 tax limitation specified in this bill regarding commercial and industrial rentals would also limit revenue and result in serious negative consequences in communities that do not currently limit taxes on this operation. She pointed out that another area of concern is that sales tax collection enforcement and remittance of sales tax is not thoroughly included in the bill. Communities that currently collect a sales tax could provide valuable assistance in this regard. Ms. Mach voiced that there is also concern regarding the proposed sales tax collection process and the subsequent redistribution of that amount that would be remitted to local communities. [NOTE: In addition to the testimony Ms. Mach presented during the public testimony for HB 375 and 377, she also presented the following testimony during the hearing on SB 366.] Ms. Mach reiterated the concern that insufficient specifics regarding enforcement and remittance of the sales tax have been included in the bill. While voicing the understanding that regulations would be developed in this regard, she urged that the experience of municipalities be utilized in the development of regulations that would affect them. One area of concern not included in the bill, is the frequency regarding when the State would remit local tax revenue to a municipality. She asked whether this payment would be on a yearly basis or a monthly basis. This type of information is critical in insuring that a municipality could make payroll. She foresaw that municipalities would be lined up to get the Legislature to change portions of this law, which would not work for them. This legislation, like the versions before it, is lacking in that dialogue with people such as herself who have experience in sales tax matters has not been established. She concluded that, in her experience, "a State sales tax together with a local sales tax is not in the best interest of the State of Alaska and its municipalities as a whole." She urged the Committee to not support the bill. JOHN MCNAMARA, Regional Tax Director, AT&T, testified via teleconference from an offnet site in Denver Colorado and noted that rather than presenting a position on this legislation, the purpose of his testimony is to alert the Committee that, from the telecommunications industry perspective, there are some technical concerns that might compromise the industry's ability to comply with certain aspects of this bill as written. The resale of telecommunication services is one of the issues not addressed in the bill. The telecommunications systems used today are multi- faceted and involve a variety of provider and carrier "carrier access" agreements that equate to wholesale and resale type situations. The resale carrier access component of telecommunications should be exempt from the proposed tax as taxing it would create an unnecessary layering of the tax that would be difficult to comply with. It must also be noted that the industry is authorized by the Federal Communications Commission (FCC) to "surcharge any … discriminatory taxes against our carrier access expenses." Therefore, were the carrier access component taxed, the industry would pass that expense on to Alaskan consumers via an additional surcharge on their phone bills. Mr. McNamara also noted that the majority of states that tax the telecommunication industry itemize which services would be subject to the tax, such as intrastate calls, interstate calls, or international calls. Upon review, it appears that this bill would tax all of these services; however, he suggested that the bill be amended to clarify this point, as the intent "is not perfectly clear." Mr. McNamara stated that the third technical issue concerns "bundling," which is the sale of "taxable and non-taxable items at one fixed price." Bundling of services has become a popular industry and consumer tool. Numerous states have addressed this situation by allowing the industry to "disaggregate on our records" the taxable from the non-taxable components. The tax could then only be applied to those services that were taxable. The bill as written "takes the exact opposite approach saying that if you bundle those things, you have to apply the tax to everything." This approach would place the State is a position contrary to the national norm. In addition, were this tax applicable to wireless carriers, they would, under the provisions of federal the Mobile- Sourcing Act, also be able to pass the expense onto the consumer. Mr. McNamara appreciated the fact that sourcing, or Internet, taxation language was incorporated into the committee substitute. He also voiced support of the State's participation in the Streamlined Sales Tax project process, as it would be beneficial to businesses that have multi-state operations, such as the telecommunication industry. AT&T is currently required to file in excess of 39,000 tax returns pertaining to its operations in over 11,000 taxing jurisdictions in the United States. This would equate to one return every three minutes. Streamlining "would provide uniform definitions, uniform tax basis, uniform bad debt deductions, uniform rounding procedures, … where to source sales … uniform grid space requirements for exemption processes," uniform boundary change notifications, and other issues of importance to businesses that are required to develop tax returns in multiple taxing jurisdictions. Mr. McNamara noted that local State of Alaska AT&T personnel could work with the bill's sponsor to further its development, so that the telecommunications industry could comply with its requirements. Co-Chair Wilken voiced appreciation for Mr. McNamara's comments. Senator B. Stevens asked the number of tax returns AT&T files annually in the State. Mr. McNamara recalled that AT&T submits approximately 50 jurisdictional tax returns in the State. Senator B. Stevens understood that the implementation of this bill would allow AT&T to file one tax return. Mr. McNamara affirmed. The State's participation in the streamlined Sales Tax provision program would go "hand-in-hand" with this process. Co-Chair Wilken voiced that AT&T's participation in further developing the bill would be welcome. Gathering this type of information is one reason that public testimony is important to the bill process. Co-Chair Wilken noted that participating via teleconference are the communities of Kotzebue, Kenai, Ketchikan, Nome, Cordova and Mat- Su. DIANE KELLER, Mayor, City of Wasilla, testified via teleconference from Mat-Su, and reminded the Committee that the City has a broad- based two-point-five (2.5) percent sales tax with limited exemptions and a current point-five (0.5) mill property tax rate with a two-mill limitation. The City Council passed a resolution in support of the State's pursuit of alternative revenue sources including the development of a State sales tax. However, for the next twenty years, the City is responsible for a total of $18,635,000 in general obligation (GO) bond debt repayment for such things as a local road and sports complex as approved by Wasilla voters. She detailed the annual expenses the City is responsible for and shared that there is concern that, with the current property tax limitation and the City's current obligations, the proposed State exemption for such things as the motor fuel tax, combined with the State's proposal to collect the tax "would be catastrophic" to the City. The City would be required to increase the local sales tax level or the local mill tax. In addition, the City is worried that it might lose business to surrounding non- local-taxing communities. One full-time employee currently staffs the City's sales tax program and approximately $100,000 was recently expended to further the efficiency of the operation. Another area of concern is the timeliness of the State's sales tax remittance to the City as payroll and bills are required on a monthly basis. No disruption of this process could be tolerated. The City currently has a $500 tax limitation on purchases, as it is concerned that the community would lose business to surrounding communities such as Anchorage or Eagle River that have no sales tax. Therefore, were the sales tax "differentials" too large, the effect on Wasilla businesses could be devastating. Another area of concern is that the proposed one-year transition period that would be provided to cities that currently have local sales taxes is insufficient. She suggested that either this transition period be increased to five years or that the language in Sec. 17, subsection Sec. 43.44.060(b), as detailed on page nine, that applies to those cities having a three-percent or less sales tax, be altered as those cities "do not have the means to quickly adjust to the consequences of the bill." Were the State to adopt a streamlined sales tax, she urged that local community participation be sought in order "to better educate the State" about the impact the bill would have on local communities. Senator Bunde, reiterating that the State has a projected budget deficit, asked whether Ms. Keller could suggest an alternate revenue source. Ms. Keller suggested that the State sell some of its massive land- holdings. This would benefit the State and its residents by infusing land into the property tax base. In addition, the revenues generated from the sales would remove the State's need to withdraw funds from State accounts. This avenue would have less impact than a State sales tax. Senator Bunde commented that this is an interesting concept; however, he noted that this would provide future rather than immediate revenue. Ms. Keller responded that the implementation of this legislation would also take a minimum of one to two years. She urged the Committee to consider the impact that this legislation would have on local communities. Co-Chair Wilken asked Ms. Keller to submit her testimony in writing. Ms. Keller stated that she would provide a written copy of her testimony after revising it to comply with language in the "unexpected" Version "X" committee substitute. Senator B. Stevens assured that multiple versions of the bill would be forthcoming, as, in response to citizen, community, and business concerns, the legislation is a work in progress. Ms. Keller acknowledged the process and asked that the City of Wasilla be provided further opportunities to comment regarding how the bill would affect the community. LOUIE COMMACK, JR, testified via teleconference from an offnet site in Ambler in regards to HB 375 and HB 377 and urged that the Senate reinstate the requested Alaska Legal Services (ALS) funding level in the FY 05 Operating Budget as it is important to Bush area residents. He noted that the closing of the Kotzebue ALS field office incurred a hardship on area residents. JOHN WHEATLEY, Legislative Chair, Associated General Contractors (AGC), testified via teleconference from an offnet site in support of broad based taxes to assist in balancing the State's budget. While AGC supports the use of a broad based tax, specifically a sales tax, it continues to support continuing efficiencies including government cost savings, and other revenue sources, including the use of the Alaska Permanent Fund. He urged Members to further this bill. GARY GRAHAM, Business Owner, Commercial Fisherman, Former Commercial Pilot, and Member of the Cordova City Council and District Representative, Alaska Municipal League (AML) Board of Directors, testified via teleconference from Cordova and stated that, as a result of its financial situation, the City of Cordova has eliminated all travel funds. He presented an impassioned plea on behalf of the residents of Cordova for the Legislature to consider alternate options, including a State income tax, in lieu of a State sales tax, as it would serve "to cripple and perhaps bankrupt" several communities in Alaska including Cordova. This version of the bill would devastate the City, especially in light of the fact that the City is considering implementing a one-percent sales tax to fund "the City's financially strapped medical center." The imposition of this tax would serve to increase the City's sales tax to seven percent. Were this legislation adopted, the total State/City sales tax would amount to eleven percent. He urged the Committee "to scrap" this bill as a Statewide income tax rather than a sales tax would be the more appropriate and accepted manner through which to address the State's fiscal gap. The City currently has a 14-mill property tax and that each one-percent sales tax equates to $400,000 in revenue to the City. Senator Bunde expressed that an income tax would not be "a silver bullet," as only 52-percent of the people in the State work. Of that number, 48-percent, or less than 25-percent of the State's total population, earn more than $30,000 and would likely be subject to an income tax. Twenty percent of that 25-percent "would end up paying 80-percent of the tax." He stated therefore, that there would also be problems associated with developing an income tax program to address the State's fiscal gap. Mr. Graham acknowledged Senator Bunde's remarks and voiced appreciation for the efforts exerted by the Legislature in attempting to address the State's financial situation. LARRY SEMMENS, Certified Public Accountant, Finance Director, City of Kenai, and Former Controller and Finance Director, Kenai Peninsula Borough testified via teleconference from Kenai. One component of his job at the Kenai Peninsula Borough was being responsible for the collection and administration of the Borough's sales tax program. The City of Kenai is concerned about the impact of a State sales tax on the City's ability to finance city services due to the exemptions proposed in the bill. He spoke to his concern about "the State's ability to administer a sales tax statewide" in that the process, rather than the ability of the staff, is cumbersome. He likened the Borough to being "a microcosm of the State" and shared the difficulties it experienced such as that oftentimes "businesses in very remote areas of the Borough simply ignored the tax as there was no way the Borough was going to send an auditor out to some remote area across Cook Inlet to collect a couple of thousand dollars in sales tax as it was not cost effective." He stated that the State would experience these same types of problems. "The administration of the Sales tax would be very costly." The computer system that would be required must be tailored to the State's needs and would therefore be very expensive. SFC 04 # 79, Side B 09:54 AM Mr. Semmens spoke of the difficulty and time-consuming efforts exerted regarding the two different computer sales tax system rewrites in which he had participated. One attraction of the sales tax is that the level of the tax could be controlled by taxpayers; however, the tax would place a heavier burden on low and middle income individuals and would become "increasing regressive" on these individuals as higher taxation limits were implemented and large purchases were not taxed at the same level as smaller less expensive purchases. Mr. Semmens responded to Senator Bunde's comments regarding who would pay a State income tax by commenting that approximately 50- percent of the State's residents who do not work "would not be paying a whole lot of sales tax either" as they might be utilizing such things as assistance programs that are exempt from the sales tax. Therefore, a sales tax would not serve "to spread that cost either." He cited an Alaska Municipal League [unspecified] report that was conducted by the University of Alaska and the Department of Revenue that projected that tourism would generate approximately ten-percent of the State sales tax revenue whereas non-resident workers might pay up to 25-percent of a State income tax revenue. That comparison, he stated, should encourage further consideration of a State income tax. A State income tax would qualify as a deduction on the federal income tax whereas a sales tax would not. He calculated that, to generate the same amount of revenue for the State, residents would pay more were a sales tax imposed than were a deductible State income tax imposed. While the idea that the State sales tax revenue would be shared with the local communities is attractive, other revenue sharing programs such as veteran and senior citizen property tax exemptions, road maintenance funding, and municipality assistance programs that had been implemented by the State are now defunct. Therefore, the sharing component of this bill could be eliminated in the future were the State to experience financial difficulties. He spoke against the implementation of a State sales tax and echoed the Mayor of Wasilla's concern about the impact on municipalities' ability to finance local service projects. He commended Legislative action on reviewing revenue- generating options but noted that other alternatives would be preferred to a sales tax. Senator Bunde responded that while a State income tax is deductible on federal income tax, the argument "is illusionary", as an individual must prepare an itemized income tax return in order for the State income tax to qualify. The majority of Alaskans do not itemize. In addition, the belief that non-resident income tax would generate sufficient revenue for the State is also illusionary as only approximately ten-percent of the wages earned in Alaska are attributable to non-Alaska residents. Non-resident Alaskan workers earn approximately $14,000 to $15,000 a year and as a result would not pay much were an income tax imposed. Senator Bunde asked Mr. Semmens what revenue-generating alternatives he would recommend. Mr. Semmens suggested that either a limit be placed on the Permanent Fund Dividend or, as he understood the original intent of establishing the Permanent Fund to be, some mechanism be developed that would allow the earnings of the Permanent Fund to be utilized when "the oil revenues ran out." Secondly, he would also implement an income tax, and thirdly, were additional revenue required he would support a State sales tax. Senator Bunde clarified that numerous Legislators support using the earnings of the Permanent Fund, as was originally intended. Senator B. Stevens asked why the Kenai Peninsula Borough does not implement an income tax if it is so effective. Mr. Semmens was unsure as to whether the Borough had the authority. Senator B. Stevens suggested that the Borough's Legislative representatives further the idea that a local income tax be allowed to support local government. He argued that while it is acceptable for a local entity to impose a local sales tax to support local government, local governments oppose the State's desire to impose a State sales tax to support State services. Mr. Semmens responded that there are better alternatives to a Statewide sales tax at this time, as the implementation of such a tax would have significant impact on municipalities. He commented that he is "not ignorant of the fact that there are economies of scale" in the proposal and that the State's administration of a sales tax program might provide additional opportunities. However, due to a variety of local taxing structures and codes, and the fact that some municipalities have local sales taxes and other do not, "the ability to craft sales tax language that would be revenue neutral for municipalities" while at the same time generating required revenue for the State to make it worthwhile would be very difficult. LINDA FREED, City Manager, City of Kodiak, testified in Juneau that the City "is philosophically opposed to the implementation of a Statewide sales tax. The City Council believes that there are other better revenue options available to the State that do not negatively affect" municipalities across the State "specifically the earnings of the Permanent Fund and an income tax." She stated that 70-percent of the City's operations have been supported for more than 30 years by the revenue generated from its local sales tax, which is its largest revenue source. She noted that as other revenue sources, including State funding, have declined, the money generated from the local sales tax becomes very significant. The City utilizes these funds to support its harbors, street construction and maintenance, parks and recreation services, the police department, fire and ambulance service, public works operation, and museum and library. She stated that the local "sales tax program has been crafted to be sensitive to local needs." There is concern that a Statewide sales tax could not be sensitive to the multitude of local municipal issues. Ms. Freed echoed other's concerns regarding the State's ability and commitment to collection, enforcement, and auditing of each community were a statewide tax imposed. The City of Kodiak has absorbed the financial burden induced by reduced State and federal funding because of its ability to develop a local sales tax program. In addition, the City was able to completely fund a new ice rink via a local sales tax. A City of Kodiak Resolution Number 04-5 [copy on file], dated January 22, 2004, in opposition to a State sales tax was distributed to the Committee. JACK SHAY, Assembly Member and Former Mayor and School Board Member, Ketchikan Gateway Borough, and Board Member, Alaska Municipal League testified in Juneau and noted "the irony" in the fact that, were a State sales tax implemented, the Municipality of Anchorage and other Railbelt communities would be "volunteering to pay most of this tax burden that would be represented by the four- percent sales tax." He stated that the Alaska Municipal League has reviewed the idea of a State sales tax for many years and has weighted in opposition to the sales tax proposal in its present form as research indicates that in excess of 3,000 indirect jobs would be lost were this tax imposed due to decreased purchasing power of State residents. Small business operations would be negatively affected, as, were local municipality taxes factored in, the State would have some of the highest sales taxes in the nation. This would result in "retail leakage" as consumers increase out-of- state purchasing, including internet sales. Mr. Shay, noting Senator B. Stevens question regarding a local government implementing a local income tax, stated that local citizens are already paying local property taxes combined with other things such as local sales, tobacco, fuel, and alcohol taxes. Mr. Shay shared that, as an alternative to the State sales tax, the Alaska Municipal League (AML) supports using the earnings of the Permanent Fund under such methodology as the Percent of Market Value Plan (POMV) while protecting the citizens' Permanent Fund Dividends. Other options could include increasing the motor fuel tax, implementing a visitor tax, and increasing user fees. He appreciated Legislator's efforts to address the State's fiscal challenge. The aforementioned study indicates that the establishment of an income tax would result in the loss of 1,875 jobs, which would be less of an impact than a sales tax, and that use of the Permanent Fund earnings would incur zero job losses. He informed the Committee that AML represents approximately 96-percent of the State's municipalities and about 98-percent of the people. In response to a question from Co-Chair Wilken, Mr. Shay noted that he was speaking on behalf of both the Ketchikan Gateway Borough Assembly and AML. Senator Bunde pointed out that regardless of what taxation methodology is utilized to generate revenue, the ultimate source of all taxes is the people. There is no magic solution. Co-Chair Wilken spoke regarding the concept of retail leakage, and voiced that it should be recognized that were the decisions to buy outside of the State solely a financial decision, people would only make such out-of-area purchases were the cost of purchasing and shipping the item less than the cost of buying it locally including sales tax. DENISE MICHELS, Mayor, City of Nome, testified via teleconference from Nome, in opposition to the bill. The City's local five-percent sales tax generates revenue that is used to pay for local services and improvements. She voiced concern that were a Statewide Sales tax implemented, local voters might choose to lower the local tax rate and thereby undermine the City's ability to pay off its debt services and fund City operations. The City has developed a taxation system that works well for the community, and the City does not currently exempt many of the items exempted from taxation in this bill. She voiced support of POMV as an alternative source of funding for the State. MITCH ERICKSON, Representative, Nome Chamber of Commerce, testified via teleconference from Nome and voiced appreciation for the efforts being exerted to develop methods through which to address the State's fiscal gap. Nonetheless, the proposed State Sales Tax "is not the avenue to take." He noted that the City of Nome's current five percent sales tax places the City at a disadvantage with the City of Anchorage and the Internet that impose no sales tax. He stated that while many people do not factor in the added cost of shipping, the by-pass mail status that the City has reduces the true costs of shipping substantially. He urged that other revenue sources be considered. Co-Chair Wilken asked whether bypass mail would include UPS, FED EX shipping, and priority mail. Mr. Erickson understood that it does not. ROY ECHERT, Borough Manager, Ketchikan Gateway Borough, testified via teleconference from Ketchikan and informed the Committee that he has 27-years of municipal management experience, the majority of which has occurred in other states in the country. He is personally opposed to a State income tax and he reminded that it could only be deducted from the federal income tax were a person to itemize their tax return. He would support a State sales tax, "but only if" input from those experienced in its administration is incorporated into its development. He voiced appreciation for Senator B. Stevens's comments that this bill is a work in progress and opined that the process is being professionally and thoughtfully addressed. However, he stressed that cooperative efforts with local municipalities must occur in order to make it truly successful. Mr. Echert identified two components of the bill that should be altered: the State collection of the taxes and the Streamlined Sales Tax Act (SSTA). The SSTA was initiated by large corporations that have "a vast amount of bookkeeping" such as AT&T, and in particular, WalMart that has a uniform pricing code policy. Currently, every business is required to program its operations to meet the local government tax requirements whereas SSTA would provide a uniform tax basis. The incorporation of the SSTA should be closely reviewed, as its adoption would allow for "the same sales tax" in every city in every State that adopts it. This tax would be remitted to a central collection agency in Massachusetts and then divvied out to the Member states and municipalities "after a huge administrative fee" is subtracted. In addition, neither the frequency of this distribution nor any auditing procedure is specified. The loss to the States would amount to millions of dollars; the municipality would loose hundreds of thousands or millions of dollars by joining SSTA. Mr. Echert shared that during his experience as a City Manager in Alabama, which is a state that administers a state sales tax, the city lobbied for the local collection of the local sales tax, as a leakage in the full amount of sales tax being collected was identified, as the amount was lower than it should have been. When the City began to do its own collection, the amount of sales tax revenue collected by the two-person sales tax department increased by 70-percent. This equated to approximately "three-quarters of the local sales tax" being uncollected by the State. Numerous other cities followed suit in the local sales tax collection process and not one of them experienced less than a 30-percent increase in their collection. In order to devote the same level of effort to the collection of the tax as local governments provided, the State would have been required to add an additional 1,500 State employees. This was not fiscally possible. Mr. Echert continued that the State of Alabama currently has a three-tiered collection process wherein the State, the local entity, or a private heavily regulated contractor could collect the tax. The process is working well. Mr. Echert stated that Alabama has voted against participating in the SSTA for the past four years, as it would be "a disaster for the State." Testimony supporting this position from the Alabama Legislature could be provided. Mr. Echert commended the Legislature for addressing the State's financial concerns and offered his further assistance in developing the bill. He reiterated his opposition to participation in the SSTA as it ultimately benefits large corporations and would have a negative affect on the State. CATHLYNN GREENE, Sales Tax Clerk, City of Kotzebue, testified via teleconference from Kotzebue and, on behalf of the City Council, stated that the City opposes the adoption of a Statewide Sales Tax. She noted that local concerns include the collection and enforcement of the tax as well as the standard exemptions that conflict with existing local sales tax exemptions and would result in huge local revenue losses. The local sales tax has been elevated as high as tolerable, and were a State tax implemented, the only solution would be to lower the local sales tax level. At the present time, the local tax raises approximately fifty percent of the City's general fund revenue. The local tax supports such things as police, fire and emergency services. DOCTOR DOUG STARK, Member, Homer City Council, testified in Juneau and reviewed his extensive local government work history, including his Doctorate in Public Administration. He stated that, while the Council has not enacted a Resolution specific to the proposed sales tax, there is no support for a Statewide sales tax as there are too many variables from community to community to develop a one bill fits all position. From an administrative, political, and financial standpoint, this proposal could not be a viable alternative through which the State could raise the revenue required. Another major revenue generator would be a State income tax; however the belief that this could be a federal tax deduction is unfounded, as most residents in the State do not prepare itemized tax returns and would not qualify. He stated that there is "great inequality" in a State income tax as most would not pay any and others would pay a substantial amount. Doctor Stark stated that a variety of smaller taxes would be preferred as this would be the best manner to capture the widest scope of State individuals without a significant impact on anyone. While he supports the POMV, there is concern about the probability of its being enacted, as the State's citizens generally do not support using the earnings of the Permanent Fund to support State government, even though the original intent of the Permanent Fund was to provide a revenue source to the State during "rainy days." He stressed that after dividends and inflation proofing were provided, only the earnings and not the corpus, would be utilized to support the State and possibly provide "municipal dividend funding to substitute for the elimination of revenue sharing and municipality assistance in the last couple of years." He avowed that "the earnings of the Fund would be increasing substantially" over the next few years and that this would be a good and politically viable solution to the State's needs, as it does not require a State Constitutional Amendment. He urged the Committee to consider this action. TIM BORSEY, Small Business Owner, Mayor, City of Skagway, and Member, Board of Directors, Alaska Municipal League, testified in Juneau as a small business owner, in opposition to a Statewide sales tax. He stressed that retail leakage, especially when an expensive item is being purchased is a serious and real issue. While businesses often follow manufacturer's suggested retail prices in order to remain competitive, wages and other business overhead expenses are high in the State. This equates to a lower profit margin. It is hard to compete with large corporations and the purchasing of goods in Canada. People do make buying decisions based on price and the addition of a State four-percent tax in addition to the four-percent City of Skagway local sales tax would result in consumers purchasing products elsewhere. He noted that "savvy" Internet companies reach out to Alaskans and often provide reasonable shipping rates. He concluded that the implementation of a State sales tax would not be in the best interest of small business. CRAIG DUNCAN, Finance Director, City & Borough of Juneau (CBJ) noted that he supports many of the comments opposing this legislation. The CBJ has developed a budget that is an approximate 50/50 split balanced by property taxes and a five-percent local sales tax component that includes a permanent one-percent tax and two separate and temporary one-percent taxes. The implementation of a four-percent State Sales Tax would "suddenly change" this balance. The resulting nine-percent tax would jeopardize the ability of the CBJ to get voter approval to extend the temporary sales taxes to fund local projects. It has been determined that a tax amount exceeding five percent is unpalatable. A nine-percent tax "would be regressive," would harm local business, and would "drive sales to the internet" and to Seattle. Sales taxes are regressive, people do not like taxation, and would attempt to avoid taxation even where it to cost more to avoid it. To further complicate the issue, the nine-percent sales tax could result in an approximate 20-percent budget deficit as this sales tax revenues lost could not be recouped by an increase in property taxes, as the City is limited to a maximum mill rate of 12-percent. The City does not support this sales tax proposal as it would be financially regressive for the City and would "have a devastating affect on our economy and would drive business south…" rather than promoting buying locally. Co-Chair Wilken calculated that were this legislation implemented, the City's current five-percent tax would increase to nine-percent. One percent of the State's four-percent would be rebated to the City and the City would not be required to staff a sales tax department. He asked whether the City has determined how this would affect the City's financial situation. Mr. Duncan responded that the City conducted an analysis based on an earlier version of the bill; it has been difficult to quantify as numerous and on-going changes are occurring. He noted that over the years a tax structure has been developed, through trial and error, that specifies 40 local sales tax exemptions. The current structure has been crafted based on twenty years of analysis and what would be acceptable to residents. Mr. Duncan stated therefore that the differing components of this bill include such things as the sales tax limitation and the exemptions, specifically the motor and heating fuel tax exemption and the variance between the proposed senior citizen exemptions and what is currently in place at the City level. In summary, while the one percent rebate is an incentive, an exact projection is difficult to accomplish. The big concern for the City is whether local voters would extend the local temporary sales taxes, as he reiterated, a sales tax exceeding five-percent would be unacceptable to citizens. Co-Chair Wilken asked whether the savings generated by not being required to staff a sales tax division combined with the one- percent rebate would allow the 12-percent mill rate to be lowered. Mr. Duncan clarified that the City currently charges a 10.5 mill rate. The two temporary one-percent local taxes generate approximately $12 to $15 million dollars, which equates to approximately five mills above the cap, and accounts for approximately 15-percent of the City's annual budget. Were this tax not re-approved, it would negatively impact education, which equates to one-third of the City's budget, and police and fire services, which equate to 15-percent and five-percent of the budget, respectfully. SFC 04 # 80, Side A 10:41 AM Co-Chair Wilken asked whether the CBJ provides a senior citizen tax exemption, and if so, how does one qualify for that exemption. Mr. Duncan expressed that in order to qualify for the City's sales tax exemption, the senior citizen is required to provide documentation that they are age 65 or older. Once the documentation is provided, a card is issued that must be displayed when making a purchase in order to avoid paying the local tax. Senator Bunde, understanding that Fairbanks does not have a local sales tax, asked the property mill rate in the Fairbanks North Star Borough. Co-Chair Wilken responded that the 14-mill rate level includes a City of Fairbanks mill rate. Senator Bunde recalled that a compilation of local mill rate levels and sales taxes had been developed in previous years. Such a chart would allow for a comparison of local tax burdens. Co-Chair Wilken agreed. He noted that the CBJ is one of several communities in the State that is "really taxed." Mr. Duncan stated that the City's temporary taxes are used to support such things as roads, streets, sidewalks, and recently, a hospital expansion. Where these capital project elements removed and the operating component "provided to our mill levy" then the CBJ per capita tax burden level would compare to the Municipality of Anchorage property tax mill rate level. He reminded; however, that the CBJ property tax mill rate level is limited to twelve mills. Senator Bunde, referencing the fact that education is the CBJ's largest expense, commented that education is the State's second largest expense. DORIS BAILEY, Deputy Mayor, City & Borough of Sitka, testified in Juneau and declared that when she voted on establishing the Permanent Fund in 1976, it was understood that the Fund would be used to support both Permanent Fund Dividends (PFDs) and State government when oil revenues declined. She "strongly supports" the POMV concept that would guarantee PFDs to citizens and would allow the Legislature to use some of the earnings to support State operations. She attested that multiple rather than a single solution would be required to address the State fiscal crisis. Ms. Bailey stated that, like Juneau, Sitka has a very carefully crafted list of sales tax exemptions, including one that exempts senior citizens from the tax. Some of the incentives provided by the State and local communities are necessary to offset the State's high cost of living that might otherwise force seniors to move elsewhere. She is concerned that were this legislation enacted without some senior citizen consideration, seniors living in Sitka would be exposed to a ten percent sales tax comprised of a six- percent local tax combined with the four-percent State tax. Many of Sitka's senior citizens are low income and would be burdened by this tax. Multiple options including the sales tax, the POMV, an income tax, and other increased fees should be explored to address the State's fiscal gap; the State sales tax should be the last recourse. She urged that the affect of this bill on low income and elderly people be a consideration. There being no other testifiers, Co-Chair Wilken announced that public testimony has concluded. Senator B. Stevens communicated that of the 16 testifiers, one special interest testifier was neutral, one private industry representative was supportive, one Chamber of Commerce representative spoke against the bill, and thirteen testifiers representing local governments spoke against the bill. He stated on the record, that rather than being a tax on local governments, "this is a bill that affects the consumers of the State." He stated that "a government verses government debate" occurred today regarding who has access to the State's citizens' money. Additional public testimony opportunities would occur as the bill continues to be developed. Senator Hoffman declared that the local government concerns are valid, as local taxation has traditionally and historically been utilized as a revenue source to support local government. He stated that the proposal to implement a streamlined State sales tax could be viewed as eliminating a local community's ability to fairly and equitably collect revenue to support local governmental operations. In addition, some of the exemptions might not properly align with a local situation or produce the level of funding that a local community might require, especially in light of the fact that there is concern that the State might not be able to pursue collections as well as the local government could. Senator B. Stevens voiced appreciation for the concerns and the debate; however, he pointed out that this is not a new concept and that of the 45 states that have a statewide sales tax, 34 have multiple taxing jurisdictions such as county, city, and borough taxes in addition to the State tax. He declared that an appropriate plan could be developed as exampled by the testifier who had experienced this endeavor in Alabama. The State has a long way to go to address its projected fiscal gap, and entities such as AML have "adamantly" requested that the fiscal gap be addressed. This is a mechanism that could generate revenue "to meet the demands that are put on us as a government to provide the public services that people demand." Senator Bunde pointed out that "there was a small but well thought out support" for utilizing the earnings from the Permanent Fund to address the State's fiscal crisis. He declared, "that it would be so logical that those funds" be utilized prior "to reaching into citizens pockets for any type of taxes." Further consideration should be provided to balance the needs of citizens, local governments, and the State. Co-Chair Wilken reminded that there is currently a $1.6 billion balance in the Constitutional Budget Reserve. Co-Chair Wilken ordered the bill HELD in Committee. ADJOURNMENT  Co-Chair Gary Wilken adjourned the meeting at 10:56 AM.