05/13/2021 11:30 AM House WAYS & MEANS

        HB 37-INCOME TAX; PERMANENT FUND; EARNINGS RES.                                                                     
                                                                                                                                
12:34:18 PM                                                                                                                   
                                                                                                                                
CHAIR SPOHNHOLZ announced that the  final 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."                                                                       
                                                                                                                                
12:34:58 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ADAM   WOOL,  Alaska  State   Legislature,  prime                                                               
sponsor, introduced HB 37.   He paraphrased the sponsor statement                                                               
[included in  the committee packet],  which read in  its entirety                                                               
as follows [original punctuation provided]:                                                                                     
                                                                                                                                
     House Bill  37 resolves Alaska's fiscal  challenges and                                                                    
     balances the budget.                                                                                                       
                                                                                                                                
     For six  years, facing severely declining  revenues and                                                                    
     massive budget shortfalls, Alaska  has managed to delay                                                                    
     a  permanent fiscal  solution through  budget cuts  and                                                                    
     drawing down  over $16 billion  in savings.  Now, these                                                                    
     savings  are  gone  and  there   is  limited  room  for                                                                    
     additional  major  cuts without  substantially  harming                                                                    
     core state functions.                                                                                                      
                                                                                                                                
     Alaska is the  only state without a  broad-based tax on                                                                    
     its  residents  and  Alaskans pay  the  lowest  overall                                                                    
     state  and local  taxes in  the U.S.  Forty-five states                                                                    
     have a state sales tax,  and forty-three have some form                                                                    
     of  an income  tax. Since  1980 we  have been  uniquely                                                                    
     fortunate,  with ample  oil and  gas  revenues able  to                                                                    
     fund  ongoing  government   operations,  endow  various                                                                    
     savings funds, and build the  Permanent Fund so that it                                                                    
     can  now  play  a   substantial  role  in  our  state's                                                                    
     revenue.                                                                                                                   
                                                                                                                                
     Since  its recent  peak in  2012, oil  revenue is  down                                                                    
     90%.  Even   with  major   new  projects   our  revenue                                                                    
     forecasts  are   not  encouraging.   Current  petroleum                                                                    
     revenue is  as low  as it has  been since  1978. Nobody                                                                    
     wants to  implement a tax  on Alaskans, but we  are out                                                                    
     of time and out of options.                                                                                                
                                                                                                                                
     As  we  take  this  step towards  new  revenue,  it  is                                                                    
     essential to  also resolve the  issue of  the dividend.                                                                    
     For the Alaskan  people to trust and accept  a new tax,                                                                    
     we  must ensure  that  any new  revenues  are used  for                                                                    
     essential services and are not  used to simply transfer                                                                    
     these  funds to  others  through  increased PFDs.  HB37                                                                    
     does both things.                                                                                                          
                                                                                                                                
     HB37 adds a flat rate  2.5% income tax based on federal                                                                    
     Adjusted Gross Income. There  is a "standard deduction"                                                                    
     of non-taxable  income, of $10,000 for  individuals and                                                                    
     $20,000 for  joint filers, which reduces  the burden on                                                                    
     the lowest  income Alaskans. The  tax will  raise about                                                                    
     $600 million per year,  with nonresident workers paying                                                                    
     about 10%  of the total.  The bill also  establishes an                                                                    
     80/20  split of  the annual  "Percent of  Market Value"                                                                    
     draw from the  Permanent Fund, with 20%  of each year's                                                                    
     funding  designated for  the PFD.  That would  provide,                                                                    
     initially,  a  dividend  of  about  $1,000  that  would                                                                    
     steadily grow  in years to  come. Alaskans, as  part of                                                                    
     the PFD  application process, would  be able  to assign                                                                    
     some or all of their dividend towards the tax.                                                                             
                                                                                                                                
     This would mean, in practice,  that most Alaskans would                                                                    
     not pay  any tax out  of pocket. For example,  a family                                                                    
     of 4  making $100,000/  year would retain  about $2,000                                                                    
     in PFDs after  paying the tax. If the  same family made                                                                    
     $200,000  their tax  and dividends  would balance  each                                                                    
     other and they would pay nothing.                                                                                          
                                                                                                                                
     It is  time to  have an  honest conversation  about how                                                                    
     Alaska will  fund its operations into  the future. HB37                                                                    
     can be  the key  component to get  us there.  Thank you                                                                    
     for your consideration.                                                                                                    
                                                                                                                                
12:38:11 PM                                                                                                                   
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
12:38:51 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  WOOL  resumed  his introductory  statement.    He                                                               
reiterated that the  dividend was created to share  the wealth of                                                               
the oil  economy; however,  he believed  its purpose  has morphed                                                               
into  fulfilling "other  functions,"  such as  providing cash  to                                                               
individuals  in  cash-strapped economies.    He  stated that  the                                                               
proposed  legislation  would  establish  a dividend  that  is  20                                                               
percent of  the POMV draw,  equating to approximately  $1,000 per                                                               
person.  He explained that the  bill would institute a small flat                                                               
income  tax  of  2.5  percent;  further, it  would  allow  for  a                                                               
standard   deduction  of   non-taxable  income   -  $10,000   for                                                               
individuals and $20,000 for joint  filers, which would reduce the                                                               
burden on  the lowest-income Alaskans.   He shared,  for example,                                                               
that if  someone only  incurred $10,000,  he/she would  be exempt                                                               
and  entitled to  a full  PFD.   He  noted that  as income  level                                                               
increases, more is  taken out of the PFD, and  the higher earners                                                               
would have to pay to the State  of Alaska.  He referenced a chart                                                               
in the presentation  (slide 24), indicating that  a single person                                                               
making $50,000  would receive a  $960 dividend  and owe a  tax of                                                               
$975,  thus owing  a total  of $15  [he/she would  not receive  a                                                               
dividend, as it would go towards  the tax owed].  He continued to                                                               
explain that  a married  couple making  $100,000 would  receive a                                                               
dividend of  $1,920 and pay 1,950  in tax, thus owing  $30 to the                                                               
state.   A  married  couple  with two  children  would receive  a                                                               
dividend of $3,840 and pay  $1,900 in tax, thus retaining $1,940,                                                               
which essentially equates to two PFD checks.                                                                                    
                                                                                                                                
12:42:56 PM                                                                                                                   
                                                                                                                                
KEN  ALPER,   Staff,  Representative  Adam  Wool,   Alaska  State                                                               
Legislature, introduced a  PowerPoint presentation, titled "House                                                               
Bill 37" [hard copy included  in the committee packet], on behalf                                                               
of  Representative Wool,  prime sponsor.   He  began on  slide 2,                                                               
explaining  that HB  37 consists  of two  core components,  which                                                               
together, would  balance the budget  for the  foreseeable future.                                                               
The  first key  component  is  an individual  income  tax of  2.5                                                               
percent  of  federal Adjusted  Gross  Income  (AGI).   The  first                                                               
$10,000 of  income ($20,000  for joint  filer) would  be exempted                                                               
from the  tax.   The PFD income  would also be  tax exempt.   The                                                               
second component is a restructuring  of the annual POMV draw from                                                               
the  permanent fund,  so that  20 percent  of the  draw would  be                                                               
designated to pay PFDs.  He  continued to slide 3, which recapped                                                               
process of events that lead up  to the present scenario.  Slide 3                                                               
read as follows [original punctuation provided]:                                                                                
                                                                                                                                
        • Revenue declines, beginning in 2014                                                                                   
        • Budget cuts                                                                                                           
     • 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 technical details of the bill                                                                              
                                                                                                                                
12:45:40 PM                                                                                                                   
                                                                                                                                
MR.  ALPER turned  to  slide 4,  which featured  a  model of  UGF                                                               
spending and revenue  since statehood in nominal  dollars.  Slide                                                               
5  displayed  the   same  model  per  capita   and  adjusted  for                                                               
inflation.   The  graph  indicated that  the  current budget  has                                                               
decreased to  approximately 1970's  levels, which was  before the                                                               
oil boom.  Slide 5 provided a  focused look at the last 10 years,                                                               
showing  the dramatic  drop in  revenue that  coincided with  the                                                               
crash  in oil  prices, which  was partially  compensated by  POMV                                                               
draws.  He  noted that agency spending has  maintained flat while                                                               
statewide  spending is  down dramatically  with the  reduction in                                                               
payments to the  pension system.  The capital  budget has dropped                                                               
by over 90 percent and the dividend has fluctuated.                                                                             
                                                                                                                                
12:48:41 PM                                                                                                                   
                                                                                                                                
MR. ALPER  advanced to slide  7, emphasizing that  permanent fund                                                               
earnings  would make  up to  roughly  two-thirds of  Unrestricted                                                               
General Fund  (UGF) revenue in  the foreseeable future.   Slide 8                                                               
indicated  that  even  with  higher oil  revenue  in  the  spring                                                               
forecast,  the  governor's  10-year   plan  shows  large  ongoing                                                               
shortfalls   of  approximately   $300-400  million.     Slide   9                                                               
highlighted the three main assumptions  in the 10-year plan that,                                                               
if  not  met,  would  impact these  future-year  shortfalls:  oil                                                               
prices steadily  increasing towards  $71/bbl in 2030;  three more                                                               
years of  likely unobtainable operating  budget cuts  and ongoing                                                               
minimal  capital budgets;  the  governor's proposed  change to  a                                                               
50/50  POMV  split beginning  in  FY  23, yielding  dividends  of                                                               
around $2,400.                                                                                                                  
                                                                                                                                
12:50:57 PM                                                                                                                   
                                                                                                                                
MR. ALPER continued to slide  10, which illustrated that Alaska's                                                               
current  revenue structure  hasn't  kept pace  with its  changing                                                               
economy.   He opined that some  form of broad-based tax  would be                                                               
the most  efficient way to  fund the  state based on  its growing                                                               
economy.  Slide  11 provided a model from LFD  that showed a lack                                                               
of new revenue depleting the ERA by  FY 29.  Slide 12 weighed the                                                               
pros and  cons of a  sales tax  versus an income  tax, indicating                                                               
that a sales tax tends  to disproportionately impact lower income                                                               
households, while the effective tax  rates are much higher at the                                                               
top  20 percent  of income  rates for  an income  tax.   Slide 13                                                               
relayed that the  great majority (81.5 percent) pay  less with an                                                               
income tax versus  a sales tax.  He noted  that only those making                                                               
more than  $100,000 would pay more  under an income tax  versus a                                                               
sales tax.                                                                                                                      
                                                                                                                                
12:57:04 PM                                                                                                                   
                                                                                                                                
MR. ALPER  turned to  slide 14, which  listed several  reasons an                                                               
income  tax might  be preferable  in Alaska.   Slide  14 read  as                                                               
follows [original punctuation provided]:                                                                                        
                                                                                                                                
        • A sales tax tends to be regressive; as incomes                                                                        
          increase people use more of their earnings for                                                                        
          savings,  investment  and out-of-state  travel.  A                                                                    
          flat  rate  tax  on  income   might  be  a  better                                                                    
          counterbalance  to  dividend  cuts which  has  the                                                                    
          most impact on low-income Alaskans and children.                                                                      
        • Sales taxes are relied on by ~105 municipalities                                                                      
          each  with different  rules.  Adding  a state  tax                                                                    
          introduces  a lot  of  questions:  Does the  state                                                                    
          take over  statewide collection? Do we  force caps                                                                    
          on   local   rates,  unified,   exemption   rules,                                                                    
          transaction caps, etc.                                                                                                
        • Regional price   disparities,    which   are   a                                                                      
          relatively   unique   Alaska   phenomenon,   would                                                                    
          disproportionately hurt rural residents.                                                                              
        • Our history with sales tax legislation included                                                                       
          aggressive exemption  seeking by  various interest                                                                    
          groups.                                                                                                               
                                                                                                                                
12:57:38 PM                                                                                                                   
                                                                                                                                
CHAIR SPOHNHOLZ announced that HB 37 was held over.