Legislature(2021 - 2022)GRUENBERG 120
01/27/2022 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB32 | |
| HB37 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 32 | TELECONFERENCED | |
| + | HB 37 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HB 37-INCOME TAX; PERMANENT FUND; EARNINGS RES.
4:00:15 PM
CHAIR KREISS-TOMKINS announced that the next order of business
would be HOUSE BILL NO. 37, "An Act relating to deposits into
the dividend fund; relating to income of and appropriations from
the earnings reserve account; relating to the taxation of income
of individuals, partners, shareholders in S corporations,
trusts, and estates; 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." [Before the committee was CSHB
37(W&M).]
4:00:38 PM
REPRESENTATIVE WOOL, Alaska State Legislature, prime sponsor,
introduced HB 37. He stated that the legislation includes two
primary components: a permanent fund dividend (PFD) formula
rewrite and a revenue component in the form of an income tax.
He said the bill was designed to help improve the states fiscal
situation by providing revenue and implementing a sustainable
dividend formula. He turned attention to a PowerPoint
presentation, titled House Bill 37: Income Tax and POMV
Allocation Towards a Sustainable Fiscal Solution [hard copy
included in the committee packet]. He began on slide 2, titled
Where We Are, which read as follows [original punctuation
provided]:
After oil prices collapsed in late 2014, Alaska needed
to accomplish four things in order to establish a
sustainable budget:
1.Major budget cuts (mostly implemented 2015-2018).
2.Structured use of Permanent Fund earnings (SB26
passed for FY2019).
3.Revised Permanent Fund Dividend formula that works
with new POMV and our fiscal reality. (Formulas were
passed by both the House and Senate in separate
versions of SB26, but neither survived the conference
committee. Other formulas have been since proposed in
several bills.)
4.New revenues to fill any remaining gap.
Thus far, only #1 and #2 have been accomplished. My
proposal resolves the rest.
4:02:41 PM
REPRESENTATIVE WOOL continued to slide 3, titled 2021 Committee
Process Told the Story, which read as follows [original
punctuation provided]:
Revenue declines, beginning in 2014
Budget cuts and major draw-down of savings
Introduction of POMV as a central revenue feature
Ongoing structural deficits
Lack of resolution of the Dividend question
Alaskans pay the lowest state and local taxes among
the 50 states
Once a consensus is reached that we need additional
revenue, new questions emerge:
Pros and Cons of Income Tax vs. Sales Tax vs. Other
How much revenue to raise / how large should the
dividend be?
Structural and technical details of the bill
4:03:44 PM
REPRESENTATIVE WOOL turned to slide 4, which featured a graph of
the unrestricted general fund (UGF) budget and revenue from FY
12 to FY 23. He noted that the bars represented the budget, and
the curve represented revenue.
4:04:00 PM
KEN ALPER, Staff, Representative Adam Wool, Alaska State
Legislature, on behalf of Representative Wool, prime sponsor,
pointed out that deficit years were indicated by the presence of
white space behind the bars (budget), or when spending was
higher than revenue. He stated that FY 14 through FY 18 had
multi-billion-dollar deficits, which were resolved through the
use of savings. Further, he noted that the dark blue portion
represented the percent of market value (POMV) draw that began
in FY 19.
4:04:34 PM
REPRESENTATIVE WOOL advanced to slide 5, which pictured a graph
of state savings. He highlighted the depletion of the statutory
budget reserve (SBR) and the drainage of the constitutional
budget reserve (CBR). He reiterated that the savings accounts
were built up and then drained to balance the budget.
REPRESENTATIVE WOOL proceeded to slide 6, titled The Situation
Last Year, which read as follows [original punctuation
provided]:
When HB37 was introduced in 2021, the forecasts were
that the next several budgets could be approximately
balanced with a relatively small ($500 or less)
Permanent Fund Dividend.
HB37 made two major changes to balance Alaska's budget
for the foreseeable future and form the centerpiece of
a sustainable fiscal plan:
1.Restructuring the annual dividend formula to set
future dividends to about $1,000-$1,200 per Alaskan
2.New broad-based revenues raising approximately $500
million
The two pieces are dependent on each other: if higher
dividends are desired, revenues would similarly need
to be higher.
REPRESENTATIVE WOOL noted that a higher PFD would require more
revenue; however, he emphasized that the legislation would not
link the two provisions or make them mutually exclusive.
4:05:53 PM
CHAIR KREISS-TOMKINS inquired about the current status of the
Higher Education Fund.
REPRESENTATIVE WOOL recalled that last year, the Higher
Education fund was paid out to the recipients per statute and
then swept into the CBR. This year, he said, those same
scholarships were put into the general fund as a budget item.
He noted that the sweepability of the fund is currently being
litigated. If deemed unsweepable, it would return to an
existing fund and if it is deemed sweepable, the amount of
approximately $400 million would remain in the CBR.
CHAIR KREISS-TOMKINS suggested that assuming theres an
interested plaintiff, there could be a lawsuit filed for
conceivably every fund that the administration deemed sweepable.
MR. ALPER, returning to slide 5, noted that the graph had not
been updated to reflect 2022 figures. He pointed out that the
orange bar, which represented the Higher Education Fund, will
theoretically be swept into the CBR, meaning the orange portion
would be gone and the light blue portion (representing the CBR)
would increase unless the lawsuit goes in favor of the
plaintiffs.
4:07:51 PM
REPRESENTATIVE WOOL resumed the presentation on slide 7, titled
What is Different Since Last Year? which read as follows
[original punctuation provided]:
Three major changes have distorted the short-term
budget discussion:
1.Record FY2021 Permanent Fund earnings increased the
end-year fund balance to $82 billion. The forecast a
year ago was $66 billion. This increases expected POMV
draws substantially, by $150 million this year (from
$3.21b to $3.36b) increasing to $830 million in FY2028
(from $3.51b to $4.34b)
2.Oil prices have reached the highest levels since the
2014 crash, increasing forecasted FY23 unrestricted
petroleum revenue by $1,160 million(from $0.92b to
$2.08b)
3.Much of the latest round of federal COVID funding
can be used for "revenue replacement" rather than just
for direct pandemic impact; that's about another
$1,000 million of available one-time funding
4:09:25 PM
REPRESENTATIVE WOOL turned to slide 8, which featured a graphic
of the governors 10-year plan, which includes a 50/50
dividend and still results in deficits starting in FY 24. He
turned to slide 9, which read as follows [original punctuation
provided]:
So, do we still need revenue?
Probably.
2.Legislative Finance implies that the governor's 10-
year plan is undercounted by $200 to $400 million /
year
3.Beyond that, base education funding hasn't been
increased in 7 years. The capital budget is also
highly constrained for years
4.Markets can crash. Oil prices can go down
5.Once a major tax bill passes, it will likely take
about 18 months to begin collecting revenue
REPRESENTATIVE WOOL noted that even the Legislative Finance
Divisions (LFDs) budget, which used different assumptions than
the governors budget, increases the deficit going forward. He
reminded the committee that the market performed well this year,
which may not happen in the future. He reported that Callan
predicts 6.2 percent [inflation rate] going forward.
4:11:27 PM
REPRESENTATIVE WOOL advanced to slide 10, which featured two
graphs. The graph on the left depicted a historical view of
Alaska North Slope oil production, indicating that the peak was
in 1988 at about $2 million barrels per day. The graph on the
right highlighted the 2021 Fall forecast from the Department of
Natural Resources (DNR). The overall projection indicates that
oil production will be relatively flat over the next 10 years at
approximately 500,000 barrels per day. He added that the price
prediction is $71. He opined that going forward, the state
needs revenue. He further acknowledged that if a major piece of
legislation passes, it would take 18 months to start collecting
revenue. He continued to slide 11, positing that Alaska has
diversified its economy but not its revenue. He recalled that
in the 1970s, 1980s, and mid-1990s, GDP tracked oil and gas;
however, as the economy started to modernize with the
development of additional sectors, such as healthcare, tourism,
transportation, and financial services, oil and gas made up a
much smaller portion of GDP, which was on the rise. He shared
his belief that revenue should track GDP.
4:14:46 PM
REPRESENTATIVE WOOL progressed to slide 12, which featured a
graph that detailed the sectors with the largest growth in the
last twenty years. Slide 13 addressed Alaskas tax burden in
comparison to other states. He emphasized that Alaska is the
lowest at 5.8 percent, followed by Wyoming and Tennessee at 7.0
percent. He noted that if the PFD, at $1,606 in 2019, was
included as a negative tax, Alaskas effective state and local
tax rate would be about 1.7 percent.
4:15:27 PM
REPRESENTATIVE WOOL turned to slide 14, explaining that if
Alaska were to bring in an additional $700 million in new and
increased taxes, it would still have the second lowest tax rate
in the country. He noted that the proposed legislation would
bring in approximately $500 million in tax revenue.
CHAIR KREISS-TOMKINS, referring to the graph on slide 14, sought
to confirm that New Hampshire was the second lowest state after
Alaska in terms of per-capita taxation.
MR. ALPER confirmed that New Hampshire was the second lowest.
He reported that similar to Alaska, New Hampshire does not have
a state sales tax; additionally, New Hampshire has a partial
state income tax and a fair amount of state property tax and
local taxation.
4:16:12 PM
REPRESENTATIVE WOOL resumed the presentation on slide 15, which
provided a comparison of sales versus income tax. An analysis
by the Institute of Social and Economic Research (ISER), found
that Alaskans making less than $100,000 per year would pay less
under an income tax than with a sales tax. He continued to
slide 16, which analyzed who would pay an income tax. He
reported that 55 percent of Alaskans make under $50,000 per
year. He further addressed the claim that if an income tax were
implemented, not many people would pay it. An analysis of the
number of tax filers in Alaska indicates that 87 percent of the
adult population in Alaska would pay an income tax.
4:19:15 PM
REPRESENTATIVE WOOL highlighted the details of the bill on slide
18. He stated that the legislation would replace the current
dividend formula with a new formula based on 10 percent of the
annual POMV draw plus 30 percent of oil and gas royalties. He
reasoned that it makes sense to structure it in such a way
because Alaskas economy is heavy reliant on oil; therefore, if
oil were to increase, the dividend amount would also increase
and vice versa. He expressed concern that if oil were to
precipitously drop and the state was obligated to pay out a
large PFD, it wouldnt be possible. He reiterated that the
proposed legislation would tie slightly over half of the PFD to
oil revenue. He reported that per current forecasts, the
dividend will grow to $1,400 - $1,500 by 2030.
4:20:59 PM
REPRESENTATIVE WOOL advanced to slide 19, titled Permanent Fund
Changes, which read as follows:
Future dividends are tied to both our accumulated
savings (the permanent fund itself) as well as the
health of the industry (oil royalties)
Other Permanent Fund changes in the bill
Repeals the statutory 50% "corpus" deposit of
royalties from leases signed after 1979
O The 25% constitutional requirement remains:
25% of all royalties, bonus payments, etc. will
continue to be deposited.
O The additional 25% is approximately $75 million
in FY2023; this amount would remain in the general
fund available for appropriation
Repeals the "Amerada Hess" set-aside, where the
annual earnings on a specific $420 million settlement
from the early 1990s are excluded from the POMV and
dividend calculations
O About $27 million / year currently goes to the
Capital Income Fund
CHAIR KREISS-TOMKINS asked whether the bill sponsor had
encountered any opposition to moving Amerada Hess off the books.
REPRESENTATIVE WOOL answered no.
MR. ALPER observed that its slightly controversial because the
original court case from 1990, which set aside that money,
involved a jury pool that looks much different than Alaskas
present population. He noted that a built-in sunset provides
that eventually, when enough of those people have passed, this
thing will go away in another 20 or 30 years. He added that
for simplicity's sake, this provision was included in the bill.
4:22:26 PM
REPRESENTATIVE STORY asked whether deferred maintenance is
included in Amerada Hess.
MR. ALPER explained that the $27 million per year that comes out
of the $420 million settlement goes to the Capital Income Fund,
which has been a funding source for deferred maintenance over
the last several budget cycles. In past years, he said, it
financed capital projects of interest to the Co-Chairs of the
Finance Committees.
4:23:23 PM
REPRESENTATIVE WOOL resumed the presentation on slide 20, titled
Income Tax, which read as follows [original punctuation
provided]:
Flat rate 2.5% tax based on federal "Adjusted Gross
Income" (AGI)
Metric that is the most widely used among states with
income taxes
Includes all income Alaska-source: wages, self
employment, earnings of partnerships and S-corps,
capital gains, retirement, etc.
"Adjustments" to income (i.e. non-taxed items)
include retirement contributions, student loan
interest, and alimony payments.
So-called "itemized" deductions, like mortgage
interest, are taken after AGI and would therefore be
taxed
"Standard Deduction" tied to federal code: First
$12,550 (single), $18,800 (head of household), and
$25,100 (joint) is not taxed
PFD payments are also non-taxable income
Largely eliminates the tax burden on lower-income
Alaskans and provides a form of "means testing" for
the dividend
REPRESENTATIVE WOOL turned to slide 21, titled Revenue and
Impacts," which read as follows [original punctuation provided]:
The LB&A Committee in 2020 hired the Institute on
Taxation and Economic Policy (ITEP) last fall, to look
at several different "flat rate" income tax options
The original bill (2.5%, $10k/$20k standard
deduction) was "Option 2"
The consultant estimated $581 million annual revenue
(Fiscal note: $580 million)
The amended bill, with a higher standard deduction,
is estimated at $545 million
REPRESENTATIVE WOOL proceeded to slide 22, titled Even after
paying a tax, most Alaskans would still receive a dividend,
which read as follows [original punctuation provided]:
The forecasted FY2023 POMV draw is about $3.36
billion
A dividend based on 10% of that plus 30% of oil
royalties would be a $774 million appropriation,
working out to roughly a $1,148 dividend per person
For the majority of Alaskans, their tax burden will
be less than their dividend, meaning they will still
receive a net payment from the state
REPRESENTATIVE WOOL, referencing the chart on slide 22 that
analyzed the tax liability for different household types
and income levels, pointed out that a single parent with
one kid who makes $25,000 or less would pay a tax of $98
and retain a dividend of $2,198. A married couple making
$50,000 would owe a tax of $565, retaining $1,731 net
dividend. He noted that the bill would allow people to
check a box when filing for the PFD, which would allow
their tax to be taken out of their PFD. Finally, a married
couple with two kids making $200,000 would owe $4,258 in
taxes, retaining $334 net dividend.
4:27:21 PM
REPRESENTATIVE WOOL concluded on slide 23, which read as follows
[original punctuation provided]:
A $2,500 dividend, as proposed by the governor, is
risky and unaffordable.
A $500 dividend, which is what we can afford without
taxes or major budget cuts, is too low to be
acceptable to most Alaskans.
A moderate tax bill, such as the one I introduced, is
the cleanest way to resolve the entire fiscal deficit.
The two pieces are roughly equal in size and impact:
Adds approximately $600 million / year in new revenue
o$545 million in tax revenue plus $75 million in
additional UGF royalties
Clarifies and reduces the state's commitment to PFDs
New dividend payment would be about $774 million in
FY2023
Budget would be balanced at any oil price greater
than about $50 / bbl
This enables us to afford the dividend into the future
while maintaining a stable state budget
CHAIR KREISS-TOMKINS sought to confirm that Representative Wool
had indicated that a $500 PFD is too low.
REPRESENTATIVE WOOL confirmed that he believes a dividend of
$500 is too low. Additionally, he opined that new revenue is
necessary. He reiterated that the bill would not link the
proposed income tax to the PFD. He said the PFD would be a
budget item, similar to education, public safety, and
corrections. He explained that an income tax would track GDP;
therefore, if Amazon were to move to Anchorage creating 20,000
new jobs, the state would receive extra revenue to cover the
increased need for roads, schools, and public health, for
example. Additionally, he pointed out that the governor is
taking a flat budget and adding 1.5 percent for inflation while
LFD is adding 2.5 percent for inflation plus several additional
factors. He opined that there are other needs aside from a flat
budget, such as the base student allocation (BSA), K-12
education, Medicaid costs, medical costs, the capital budget,
defined benefits, and deferred maintenance needs. He believed
that building up the budget wouldnt be a bad thing, as long as
a larger revenue portfolio that included a broad-based tax was
part of it.
4:30:44 PM
REPRESENTATIVE STORY recalled from an earlier presentation that
businesses would invest more if a stable fiscal plan was
implemented, which is critical to the future of this state, she
opined. Additionally, she highlighted the benefit of an
increased capital budget and $600 million in revenue if this
bill were to pass. She believed the proposed measure would
provide assurances to the quality of life in Alaska. She
thanked the bill sponsor.
REPRESENTATIVE WOOL acknowledged that a balanced fiscal plan
would bring stability and predictability that would, in turn,
attract business and people to the state.
MR. ALPER highlighted an oddity in the fiscal note due to a
miscommunication about the effective date with the Department of
Revenue (DOR). He said if there is a desire to move this bill,
the sponsor would be highly amenable to correcting the
retroactive nature of the effective date and make it take effect
in the future.
4:33:39 PM
REPRESENTATIVE VANCE directed attention to slide 14, which
references [House Bill 115], the income tax bill from 2017. She
asked whether CSHB 37(W&M) is similar to that piece of
legislation and how it differs.
REPRESENTATIVE WOOL explained that House Bill 115 implemented a
progressive tax whereas the current bill proposes a flat tax of
2.5 percent.
MR. ALPER noted that much of the technical language in CSHB
37(W&M) is similar to House Bill 115; however, the tax rates and
the structure of the tax is much different.
4:35:06 PM
REPRESENTATIVE EASTMAN inquired about the concept behind slide
14. He asked, Are we talking about when something is taken and
then used for government, spent by government, goes to a
government program, for example?
REPRESENTATIVE WOOL answered yes, moneys that are paid by an
individual to a governing body to be used for schools, police,
roads, etcetera.
4:35:54 PM
REPRESENTATIVE EASTMAN recalled hearing discussions around the
capitol building about the oil belonging to the people. He
asked what the graph on slide 14 would look like if it were
adjusted for the oil being taken from the people and then given
to government, for example.
REPRESENTATIVE WOOL said he did not have that data. He opined
that if the oil belongs to the people, there are other
considerations to think about, such as the tax paid by the oil
companies. He said he would follow up with his response after
analyzing the numbers.
REPRESENTATIVE EASTMAN said he would be interested in seeing
that.
REPRESENTATIVE WOOL in closing, acknowledged that people want
stability and predictability. He pointed out that the state
budget has been cut by 20 percent for the past five years and
expressed concern that more is being spent on prisons and cops
than on schools. He believed that if going forward, revenue
increased and the budget stabilized, investments in education
would ultimately lower the cost of corrections and public
safety. He expressed his hope that in the future, Alaska would
have an educated working class who could help build up the GDP.
4:38:25 PM
CHAIR KREISS-TOMKINS announced that CSHB 37(W&M) would be held
over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 37 Version B.PDF |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Sectional Analysis Version B 01.20.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Sponsor Statement HSTA 01.20.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Fiscal Note DOA 01.11.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Fiscal Note DOR PFD 01.22.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Fiscal Note DOR Tax 01.23.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Fiscal Note PF PFD 01.24.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| HB 37 Hearing Request HSTA 01.20.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |
| SB 32 Fiscal Note UA-SYSBRA-01-24-22.pdf |
HSTA 1/27/2022 3:00:00 PM |
SB 32 |
| SB 32 Fiscal Note EED-SSA-12-20-21.pdf |
HSTA 1/27/2022 3:00:00 PM |
SB 32 |
| HB 37 PPT presentation for HSTA 01.27.22.pdf |
HSTA 1/27/2022 3:00:00 PM |
HB 37 |