Legislature(2023 - 2024)DAVIS 106
03/27/2023 06:00 PM House WAYS & MEANS
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Audio | Topic |
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Start | |
Presentation(s): Municipal Taxes | |
HB109 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
+ | TELECONFERENCED | ||
*+ | HB 142 | TELECONFERENCED | |
+= | HB 109 | TELECONFERENCED | |
*+ | HB 110 | TELECONFERENCED | |
+ | TELECONFERENCED |
HB 109-REDUCE CORP. NET INCOME TAX RATE 7:09:40 PM CHAIR CARPENTER announced that the next order of business would be HOUSE BILL NO. 109, "An Act reducing the corporate net income tax rate; and providing for an effective date." 7:10:01 PM [Chair Carpenter passed the gavel to Vice Chair McCabe.] 7:11:43 PM REPRESENTATIVE CARPENTER, as prime sponsor, paraphrased the sponsor statement [copy included in the committee packet], as follows [original punctuation provided]: Alaska's economy is lagging that of the nation. Our GDP (economic) growth over the past decade has been the worst in the country. Sixty-eight thousand more people have left Alaska, than have moved here from other states, over the last decade. In our modern economy, people are mobile, and will move for employment opportunities. The House Ways and Means Committee has been tasked with improving Alaska's economy. Reducing the cost of doing business in Alaska is a good place to start. Corporate income taxes are levied in 44 states, and twenty-nine states have single-rate corporate tax systems. While often thought of as a major tax type, states' corporate income taxes accounted for an average of just over seven percent of state tax collections and four percent of state general revenue in fiscal year 2021. And while these figures are not high, they are among the reasons corporations decide where to conduct business. Alaska's 9.4% corporate income tax (CIT) currently has the fourth highest tax rate and the highest graduation of rates in the nation. Only New Jersey, Minnesota and Illinois have higher rates. HB109 would reduce Alaska's rates to a single rate and the lowest rate in the nation for states with corporate taxesfor now. North Carolina currently has the lowest CIT rate at 2.5% but will phase out its tax by 2030. Graduated corporate rates are inequitablethat is, the size of a corporation bears no necessary relation to the income levels of the owners; low-income corporations may be owned by individuals with high incomes, and high-income corporations may be owned by individuals with low incomes. A single-rate system minimizes the incentive for firms to engage in economically wasteful tax planning to mitigate the damage of higher marginal tax rates that some states levy as taxable income rises. A low, flat-rate corporate tax will significantly level the playing field between C-corps and S-corps and limited liability companies. Low corporate tax rates have been proven to increase productivity which leads to improved economic output for the state. Corporate income taxes are also volatile, as they are taxes on production. When corporate income tax rates get high enough, the business will produce less in that state. This is because the business, as opposed to the customers, are the less elastic side of the market. Customers, the more elastic side of the market, may decide to no longer buy from the business at the higher price. Elasticity also increases the more time passes after a price change. As time goes on, the corporate income tax will mean that a business hires fewer workers and/or moves the business out of the state because the income tax has made the cost of doing business in the state prohibitively high. As businesses leave the state, income tax revenue decreases in the years that follow. This makes revenue volatility for income taxes relatively high compared to that of sales and use taxes. Economically competitive states, like North Carolina, have been reducing rates, flattening brackets, or phasing out their corporate taxes. South Dakota, another Economically competitive State, has no corporate tax. 7:16:49 PM KENDRA BROUSSARD, staff, Representative Ben Carpenter, Alaska State Legislature, on behalf of Representative Carpenter, gave a PowerPoint presentation, titled "Corporate Income Taxes and Economic Growth" [included in the committee packet]. On slide 2, she explained the definition of corporate income taxes. She said that Alaska levies a corporate income tax (CIT) on certain corporations doing business in the state, under AS 43.19 and 43.20. She continued that corporate tax rates are graduated, with a maximum rate of 9.4 percent applying to taxable income above $222,000. She added that S corporations and limited liability companies which file federally as partnerships are generally exempt from Alaska's corporate income tax. A non-oil and gas corporation computes its tax liability based on the federal taxable income of its water's edge combined report, with Alaska adjustments. For example, the Alaska tax code allows special treatment for certain dividends and royalties received from foreign corporations. She continued that U.S. income is apportioned to Alaska based on three factors: sales, property, and payroll, while Alaska taxable income is determined by applying the apportionment factor to the corporation's modified federal taxable income. Corporate income tax for oil and gas corporations is calculated differently and reported separately. MS. BROUSSARD stated that, generally, a corporation is subject to tax on its current-year Alaska taxable income, and any net operating losses may be carried forward indefinitely to offset future tax liabilities; however, as part of the federal CARES Act passed in 2020, corporations may carry back net operating losses from tax years 2018, 2019, and 2020, for up to five years and receive refunds for previous federal taxes paid. Alaska adopts most provisions of the federal corporate income tax code, including the provision allowing the five-year carry back for net operating losses; thus, the carry back provision applies to Alaska corporate income tax as well. 7:19:07 PM MS. BROUSSARD, moving to slide 4, showed the non-oil CIT revenues as $125 million in fiscal year 2024 (FY 24). She moved to slide 4 and said the FY 24 petroleum CIT revenue is forecast to be $320 million. Slide 5 showed taxable income rates as prescribed in AS 43.20.11 (e). She paraphrased from slide 6, which read as follows [original punctuation provided]: Alaska currently has the fourth highest tax rate and the highest graduation of rates in the nation. Only New Jersey, Minnesota and Illinois have higher rates. This bill would reduce Alaska's rates to a single 2% rate and the lowest rate in the nation for states with corporate taxesfor now. North Carolina currently has the lowest CIT rate at 2.5. They will phase out its tax by 2030. 7:20:25 PM REPRESENTATIVE GROH, concerning slide 5, questioned why the rates on the table are different than what is in the proposed bill. He pointed out that the slide shows a maximum rate of $90,000 or more, but in the proposed bill the rates go up to $222,000 or more. REPRESENTATIVE CARPENTER responded with the acknowledgement that the proposed bill and slide do not match, and he offered to follow up to the committee. 7:21:27 PM MS. BROUSSARD moved to slide 7 to show a map illustrating corporate income tax rates in every state. The color gray represents no such taxes, while states with this tax are yellow to red, representing lower to higher taxes, respectively. She pointed out that Alaska is shaded red, with the fourth highest rate in the nation. She paraphrased from slide 8, which read as follows [original punctuation provided]: Graduated corporate rates are inequitablethat is, the size of a corporation bears no necessary relation to the income levels of the owners; low-income corporations may be owned by individuals with high incomes, and high-income corporations may be owned by individuals with low incomes. A single-rate system minimizes the incentive for firms to engage in economically wasteful tax planning to mitigate the damage of higher marginal tax rates that some states levy as taxable income rises. 7:22:18 PM MS. BROUSSARD moved to slide 9 and explained the proposed legislation. She stated that if the taxable income is less than $25,000, then the tax would be zero. If the taxable income is $25,000, then the tax would be two percent of taxable income. She moved to slide 10 and pointed out that the proposed legislation would not change income tax education credit in AS 43.20.014. Addressing why the proposed legislation is needed, she moved to slide 11, which read as follows [original punctuation provided]: Alaska's economy is lagging that of the nation. Our GDP (economic) growth over the past decade has been the worst in the country. Sixty-five thousand more people have left Alaska for, than have moved here from, other states over the decade. In our modern economy, people are mobile, and will move for employment opportunities. The House Ways and Means Committee has been tasked with improving Alaska's economy and reducing the cost of doing business in Alaska is a good place to start. 7:23:37 PM MS. BROUSSARD moved to slide 12 and expressed the opinion that Alaska is not doing well economically, as the state's gross domestic product (GDP) growth is the worst in the nation. She pointed out that people are leaving the state, as seen on the graph on slide 13. Slide 14 read as follows [original punctuation provided]: Corporate income taxes are levied in 44 states, and twenty-nine states have single-rate corporate tax systems. While often thought of as a major tax type, states' corporate income taxes accounted for an average of just over seven percent of state tax collections and four percent of state general revenue in fiscal year 2021. And while these figures are not high, they represent a substantial increase over prior years, and are among the reasons corporations decide where to conduct business. Corporate income taxes accounted for 2.26 percent of general revenue in FY 2020. 7:24:39 PM MS. BROUSSARD, moving to slide 15, said that Alaska's CIT is at 9.4 percent. Slide 16 and slide 17 read as follows [original punctuation provided]: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on peoplethe owners, customers, or workers of the corporation. [slide 17] The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the taxthe customers and workers of corporationsare often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters. 7:24:55 PM MS. BROUSSARD moved to slide 18 and suggested that a low flat- rate corporate tax would level the playing field between C corporations and S corporations and limited liability companies. She explained that low corporate tax rates have been proven to increase productivity, leading to improved economic output; however, as time goes on, a corporate income tax could result in a prohibitively high cost for doing business in the state. Businesses would then leave the state, and income tax revenue would decrease. She explained that this would make a high revenue volatility for income taxes, relative to sales and use taxes. She continued onto slide 20 and reiterated that volatility would be created because corporate income taxes would tax production. She warned that when corporate income taxes are too high, businesses will produce less in the state. Concerning markets, she said that businesses are on the less elastic side than consumers, because at the higher prices, consumers may decide to no longer buy from businesses. After a price change, she suggested that elasticity would also increase with time. 7:26:57 PM MS. BROUSSARD, moving to slide 21, said the figure shown illustrates the volatility of state tax revenue. On slide 22, she elaborated that economically competitive states, like North Carolina, have been reducing rates, flattening brackets, or phasing out corporate taxes. She noted that South Dakota has no corporate tax. She expressed the opinion that this is because taxes have economic consequences. 7:27:49 PM REPRESENTATIVE MCKAY pointed out on slide 21 that South Dakota has no CIT, but according to a previous presentation made to the committee, the state does have a tax. He offered the understanding that the revenue generated was about $1.8 billion with a tax on goods and services. REPRESENTATIVE CARPENTER responded that the question draws a point directly on the committee's discussions around a fiscal package, which would reorder thinking on state finances and revenue generation for the state government. He spoke about growing economic activity and said the state's CIT policy is a hurdle for investors coming to the state. He elaborated that a complete fiscal package addressing the hurdle by shifting the burden of the tax to a broader economic factor would reorder how the state is receiving money. He continued that this would improve the state's ability to grow the economy. He explained that, as the non-government economy grows with a sales tax, the state revenue would increase. He explained that, if the non-oil economy grows and generates more revenue, without CIT there would be no connection to the state revenues. He deduced that a broad-based tax coupled with a decrease in the CIT rate would have the net effect of making Alaska a more advantageous place to invest in. He stated that the proposed legislation is a CIT rate reduction bill, and it is being presented in the context of a fiscal plan with more than one action. 7:31:15 PM VICE CHAIR MCCABE suggested that in the end the people pay the tax, and if CIT is too high, the people would still pay one way or another. If the tax were to be lowered, he suggested that businesses would come to the state, and as businesses grow the people would pay a sales tax. REPRESENTATIVE CARPENTER commented that consumers ultimately pay the tax, whether it is CIT, sales tax, or income tax. He said that CIT is not a direct tax on a person; however, it is a tax someone is paying because the consumer pays it. 7:33:07 PM REPRESENTATIVE ALLARD said that, even if people were enticed to come to the state, and the CIT is too high, the consumer would pay. REPRESENTATIVE CARPENTER suggested that the term "sin tax" is used for a reason. He explained that the theory is if there is a tax on what is unwanted, there will be less of the unwanted thing; therefore, if the state is taxing corporate investment at a high rate, then the state is likely to get less. He further said that if the state is trying to encourage corporate investment, the tax should be reduced, and then the state would reap the benefit of more business activity. He suggested that if the tax burden is replaced with a broad-based tax, it should not be a tax so narrow that it negatively impacts economic growth. If CIT is reduced and the lost revenue is replaced with a broad tax, he suggested that the benefit would be a possibility for economic activity where there was none before. 7:35:25 PM VICE CHAIR MCCABE questioned whether corporations are taxed on all income, even when doing business in another state. REPRESENTATIVE CARPENTER responded that the state would tax corporations just on its operations within the state. 7:36:57 PM REPRESENTATIVE GRAY said that according to Forbes in 2021, Alaska was last in GDP growth while South Dakota was ranked forty-seventh. He asked whether ranking forty-seventh is the goal. REPRESENTATIVE CARPENTER responded that moving up one in the ranking would be an improvement. He expressed that the goal is not just to move up three percentage points, rather it is to look for some positive direction, since the status quo is not doing this. 7:37:50 PM MS. BROUSSARD, continuing the presentation, explained that the next few slides address the result of the Tax Cuts and Jobs Act of 2017. She said slide 23 shows data on tax cuts from 2017. On slide 24, she pointed out that GDP grew higher in the U.S. than Europe. Data on slide 25 showed that poverty and unemployment rates went down after the tax cuts. Slide 26 showed that U.S. real median income went up after the tax cuts, while unemployment rates for Hispanics went down. Slide 27 showed that U.S. unemployment went down after 2017, as did the rate for those with less than a high school diploma. She moved to slide 28, which showed that more money was generated after 2017. She moved to slide 29 to show a graph on the Organization for Economic Cooperation and Development (OECD) corporate tax rate versus OECD corporate tax revenues as a percentage of GDP from 1981 to 2018. She explained that the rate went down while the percentage went up. Slide 30 showed that six-month real GDP growth rates annualized, comparing the administrations under President Ronald Regan and President Barack Obama. She concluded on slide 31, stating that the goal of HB 109 would be to make Alaska yellow on the map. 7:40:12 PM REPRESENTATIVE GROH asked about the comparisons in Alaska's brackets and CIT in other states. He stated if two businesses both make $10,000 in profit, while one is located in Hawaii and the other in Alaska, under current law, he questioned which business would pay more in CIT. REPRESENTATIVE CARPENTER said that the CIT rate in Hawaii is 6.4 percent, while the top tax bracket in Alaska is 9 percent. He expressed uncertainty as to the tax graduation in Hawaii. REPRESENTATIVE GROH clarified that for Alaska, the figure would be zero, while in Hawaii the business would pay $440; therefore, the taxes would be lower under the proposed regime. As for a business generating $60,000 in revenue, the business would pay about half the taxes than in North Carolina. He pointed out that the Alaska brackets are not the highest at every level. For example, if a business makes $700,000 in Alaska and a business does the same in Iowa, the taxes on the business in Alaska would be lower than in Iowa. Regarding the proposed legislation, he expressed uncertainty whether there has ever been a fiscal note which has this sort of loss in revenues while adding 25 percent to the deficit. He requested an explanation of the fiscal note. REPRESENTATIVE CARPENTER responded that there are companies in the state paying 9 percent tax, while the largest corporations are the ones fitting the tax rate bracket. He stated that there were 21,152 CIT payers in 2022. He stressed that the point of reducing the bracket from 9 percent to 2 percent is not about the rates companies are paying within the brackets, rather it is about all companies paying a flat two percent; therefore, all companies would be benefited except the ones paying 2 percent to begin with. He said that the proposed legislation would mean a reduction of $300 million in revenue this fiscal year. REPRESENTATIVE CARPENTER, regarding the fiscal note, pointed out that the FY 24 appropriation column shows a $169 million reduction in the budget, and in the out years starting with FY 25, a $328 million reduction in revenue to the state. He expressed the opinion that the state would have to "grapple" with this if CIT were reduced. He suggested the proposed fiscal package would reduce taxes in one area, and it would pick up taxes in a different area. He continued that the shift would have a corresponding positive impact on economic growth. Conversely, if the state were to reduce to just CIT, the deficit would grow. He continued that if the state were to reduce CIT, and the state experienced economic growth into the future, the state would see a corresponding positive impact to the economy because of this change. 7:47:24 PM VICE CHAIR MCCABE asked, with the fiscal note estimates, what will happen without outside factors, like a new company coming into Alaska. He argued that a hypothetical savings cannot be represented by corporations foreseeing a lower CIT. He continued that fiscal notes show what will happen right now without outside intervention. He suggested that fiscal notes are cut and dry, and do not show the hidden benefit or cost. REPRESENTATIVE CARPENTER concurred that fiscal notes are just the numbers. He pointed out that the change between the reduction in revenue from FY 25, FY 26, and FY 27, for example, would go from $328 million to $333 million to $350 million, respectively. He stressed that CIT is volatile, so it is unknown what exactly would happen. He deferred further explanation to the Department of Revenue. 7:50:29 PM BRANDON SPANOS, Deputy Director, Tax Division, Department of Revenue, stated that he wrote the fiscal note and economists performed the revenue impact analysis. He said the starting point on the revenue impact was the revenue sources. He elaborated that 2 percent would be applied to all and the graduated rates would go away. He explained that the figure is estimated to go up every year because CIT, under current law, shows growth; therefore, HB 109 would create a reduction in CIT. VICE CHAIR MCCABE reiterated whether the fiscal note estimates would assume no new corporations coming to Alaska. MR. SPANOS responded yes, in that the division did not analyze the impact of new companies coming to the state because of a lower tax rate. VICE CHAIR MCCABE asked if it is possible to perform the Monte Carlo method on such a topic. MR. SPANO answered that the division would need to know the assumptions. He said it has contracted with a company named Chainbridge to do analysis, and there is an associated cost. If there is funding in the budget, the division could request an analysis. He said another option is to analyze recently reduced CIT rates in other states to see the tax effects. VICE CHAIR MCCABE responded that he is not requesting economic modeling at this time. 7:53:46 PM REPRESENTATIVE GRAY pointed out that 70 percent of the state's CIT comes from oil, as the state receives $320 million in oil and gas taxes. He asked whether the GDP growth would increase if the state cut the revenue from oil. He further asked if there is a mechanism for the state to reduce CIT for all non-oil businesses to 2 percent and keep the current $300 million in revenue from oil and gas. REPRESENTATIVE CARPENTER responded that, to the extent the legislature can set the rates, this is something which could be considered. He advised that he is not suggesting this, as it would be unfair to single out specific corporations. He suggested that there may be other ways to do this. He continued that the oil and gas sector is challenged with growth in Alaska, and growing the non-oil private sector economy is the goal. He pointed out that most Alaskans work in the non-oil private sector, and this is where most opportunities are. He considered that many Alaskans work in the oil and gas sector, and he expressed the desire not to penalize this industry to grow another portion of the state's economy. Furthermore, he expressed the opinion that the oil industry should not be singled out to pay more in taxes because it is already heavily taxed. REPRESENTATIVE GRAY referred to California's high state tax. He said that the state's CIT rate is 8.84 percent, and it charges every company a flat rate. He continued that, according to Forbes, California was 3rd in GDP growth in 2021. He pointed out that while this state is highly taxed, it still manages to be in the top three for GDP growth for a decade. REPRESENTATIVE CARPENTER responded that a CIT reduction would be one part of the plan. Furthermore, Alaska has different disadvantages compared to California, namely, the cost of electricity. He said that economic growth in Alaska is more than just reducing CIT, it is also providing economic activity with a reduction in the cost of energy. 8:00:38 PM REPRESENTATIVE GROH asked Mr. Spanos about the other factors companies should consider, other than CIT, when opening a business in Alaska. MR. SPANOS answered he is a tax administrator and is not qualified to answer the question. REPRESENTATIVE GROH expressed concern about "giving away" more than $3 million in tax revenue. 8:02:41 PM REPRESENTATIVE CARPENTER expressed the opinion that the state would not be giving away $320 million in tax revenue. He clarified that a CIT reduction would have a corresponding impact on the state's private sector economy. He expressed the belief that Alaskans would like to see this happen. He suggested a conversation on how to address the deficit question. 8:03:47 PM VICE CHAIR MCCABE announced that HB 109 was held over.
Document Name | Date/Time | Subjects |
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HB0109A.PDF |
HW&M 3/27/2023 6:00:00 PM HW&M 4/3/2024 6:00:00 PM |
HB 109 |
HB 109 Bill Sponsor Statement.pdf |
HW&M 3/27/2023 6:00:00 PM |
HB 109 |
HB 109 Sectional analysis.pdf |
HW&M 3/27/2023 6:00:00 PM |
HB 109 |
HB109-DOR-TAX-03-17-23 Fiscal Note.pdf |
HW&M 3/27/2023 6:00:00 PM |
HB 109 |
HB 109 Presentation.pdf |
HW&M 3/27/2023 6:00:00 PM |
HB 109 |
HB0110A.PDF |
HW&M 3/27/2023 6:00:00 PM HW&M 3/29/2023 6:00:00 PM |
HB 110 |
HB 110 Sponsor Statement PFD Bill.pdf |
HW&M 3/27/2023 6:00:00 PM |
|
HB 110 Sectional Analysis PFD statute.pdf |
HW&M 3/27/2023 6:00:00 PM |
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HB110-DOR-PFD-03-24-23 Fiscal Note.pdf |
HW&M 3/27/2023 6:00:00 PM |
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HB110-DOR-APFC-03-24-23 Fiscal Note.pdf |
HW&M 3/27/2023 6:00:00 PM |
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HW&M Municipal Taxes - Alaska Municipal League Presentation.pdf |
HW&M 3/27/2023 6:00:00 PM |