Legislature(2023 - 2024)DAVIS 106
03/27/2023 06:00 PM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| 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 final 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
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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.
CHAIR 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
CHAIR 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 |
|---|---|---|
| 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 |
|
| HB110-DOR-PFD-03-24-23 Fiscal Note.pdf |
HW&M 3/27/2023 6:00:00 PM |
|
| HB110-DOR-APFC-03-24-23 Fiscal Note.pdf |
HW&M 3/27/2023 6:00:00 PM |
|
| HW&M Municipal Taxes - Alaska Municipal League Presentation.pdf |
HW&M 3/27/2023 6:00:00 PM |