Legislature(2017 - 2018)CAPITOL 106
03/22/2017 08:00 AM House EDUCATION
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| Audio | Topic |
|---|---|
| Start | |
| HB146 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 146 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HB 146-SCHOOL TAX; PFD PAYMENT FOR SCHOOL TAX
8:04:58 AM
CHAIR DRUMMOND announced that the only order of business would
be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 146, "An Act imposing a
school tax on certain income of residents, part-year residents,
and nonresidents; relating to a payment against the school tax
from the permanent fund dividend disbursement; and providing for
an effective date."
8:05:28 AM
REPRESENTATIVE MATT CLAMAN, Alaska State Legislature, sponsor,
introduced SSHB 146, paraphrasing from a prepared statement,
which read as follows [original punctuation provided]:
Alaska faces major financial challenges. Our goal in
proposing [Sponsor Substitute for] House Bill 146, a
School Tax, is a responsible action plan to meet those
challenges. The Alaska Constitution, Article VII,
Sec. 1 requires the legislature to "establish and
maintain a system of public school." The public
supports a strong public school system, and an
investment in our students is an investment in our
future.
When asked about the possibility of a broad-based
school tax, many people wanted to know what such a tax
would look like. The School Tax in HB 146 sets a tax
based on adjusted gross income on federal tax returns
for every person who earns income in Alaska. All
Alaskans and out-of-state residents who work in Alaska
would help solve our financial challenges. The
minimum tax would be $100 a year, for those who make
$20,000 or less. In this way, the school tax is
similar to the school head taxeveryone contributes.
The tax then increases on a graduated scale based on
income. Those making between $50,000 and $75,000 a
year would pay a school tax of $750. The revenue
collected from the school tax would be designated to
support public education in Alaska. It is not a
dedicated tax fund, which would violate our
constitution. (Because it is well below the budget
amount, there would be no need to argue the
designation as well.)
The values of the tax range from 1% in the lowest
bracket to 3.4% at the uppermost bracket. There is
also a cap on the uppermost level, allowing the
highest earners to reinvest in the economy and support
a positive investment climate.
We based our values off a $1000 permanent fund
dividend. Everyone is able to contribute, while
individuals who depend on the PFD still receive a
reasonable portion. To make payment of the tax
simple, the bill includes a provision allowing use of
future Permanent Fund Dividends to pay the tax.
I would like to close by saying that this school tax
bill responds to public concern about the funding of
education in challenging times. It is a transparent
way to produce new revenue and create a responsible
action plan for Alaska. At full implementation, the
school tax bill is projected to raise $540 million
approximately one third of the state funding for
education. We believe that if the public has a more
direct investment in funding education, they will
become more involved in the education that we deliver.
The school tax is not a proposal to increase education
funding. The intent is to raise revenue to help close
the budget deficit, designate those funds to support
education, and reduce the undesignated general fund
appropriation for education on a dollar-for-dollar
basis.
8:08:31 AM
OWEN PHILLIPS, Staff, Representative Matt Claman, Alaska State
Legislature, provided the sectional analysis for SSHB 146,
paraphrasing from a prepared statement, which read as follows
[original punctuation provided]:
First, I would like to provide a brief sectional
analysis of the bill. Please note that while this is
a Sponsor Substitute, the only change from the
original bill is the title. The old title did not
include out-of-state residents or specify income.
Section 1 concerns the use of the permanent fund as
payment for the tax. This section directs the
department of revenue to prepare the permanent fund
application to allow an applicant to hold their PFD to
pay the tax.
Section 2 is the meat of the bill. Its features
include:
Requiring residents and non-residents with income
from a source in state to pay the school tax.
A school tax based on adjusted gross income,
broken into progressive levels. The lowest, less than
$20,000, are still required to pay $100this will
include those individuals who only collect a PFD. At
the top of the scale, there is a cap for taxpayers
whose adjusted gross income is greater than $250,000.
This cap will allow individuals to reinvest in the
economy, making a positive investment climate.
For the purposes of this bill, adjusted gross income
for a resident is their total adjusted gross income,
whereas non-residents or part-time resident's adjusted
gross income is calculated from that earned from an
in-state source.
The tax is assessed per tax return, meaning that joint
filers will pay based on total adjusted gross income.
The bill allows the department of revenue to establish
procedures for collection of the tax, including
regulations for use of the PFD.
There are also lines that explain repercussions for
failure to pay on time and a procedure for requesting
extensions.
Regulations include:
Annual interest rate of 18% on delinquent taxes
Assessment of fees up to $2,500 for collection of
delinquent taxes
90-day extension, with departmental discretion
Determination of adjusted gross income for joint
filers who are not both state residents
Section 3 allows the department of revenue to adopt
regulations to implement this act.
Section 4 sets an immediate effective date for section
3.
Section 5 sets an effective date of Jan 1, 2018 for
the rest of the act, which includes the tax component
of the bill. I will note that this effective date
accounts for the lower revenue calculation in the
first year of implementation on the fiscal note from
the DOR, OMB: 2476.
8:12:15 AM
REPRESENTATIVE JOHNSTON said she has heard holders of fishing
permits are concerned that the state may view them as tax
collectors [should the bill become law].
REPRESENTATIVE CLAMAN said a payroll tax is not part of SSHB
146. The bill would impose a single payment, based on income,
and would establish collection fees of up to $2,500, plus
interest for nonpayment; fishing boat owners would not be asked
to collect the school tax [from their employees].
REPRESENTATIVE PARISH noted that the delinquent tax collection
fee of not more than $2,500, plus an 18 percent interest rate,
seems very "aggressive." He asked whether alternative
disincentives have been considered.
REPRESENTATIVE CLAMAN explained the sponsors of the bill did not
wish to establish a monthly payroll tax collected by employers
and administered through the Department of Revenue (DOR), thus
the proposed penalty is a meaningful consequence of nonpayment.
He pointed out one could avoid payment of the tax by not
applying for a Permanent Fund Dividend (PFD) [administered by
the Permanent Fund Dividend Division, DOR].
REPRESENTATIVE PARISH observed residents' PFDs are already in
the possession of the state, which provides a mechanism of
collection prior to the issuance of the dividend, and thereby
voids the need for a stiff penalty and interest. Further, he
suggested the penalty should be relative to a person's annual
income, and free from manipulation by officials. He proposed
that in place of a penalty plus interest, a future PFD could be
garnished with an interest rate of not more than 10 percent.
REPRESENTATIVE CLAMAN pointed out the bill provides the option
to pay the school tax through one's PFD, which would negate any
inability to pay and no penalty or interest would accrue.
Nonpayment would occur if a resident declined the deduction from
his/her PFD.
REPRESENTATIVE PARISH related the time value of money can be of
particular concern for someone "living sort of at the margins,"
and suggested one may have an urgent need for one's dividend.
To allow for the unexpected that happens to families and
individuals, he urged for a mechanism to defer the payment of
penalties and interest to a future PFD.
8:20:50 AM
REPRESENTATIVE KOPP recalled Alaska used to have an education
head tax. He expressed concern about enacting an income tax -
during a time the state is experiencing a recession - and asked
how the structure of the bill as an income tax would strengthen
the state's economy. Further, he asked whether the bill would
replace general funds (GF) for education on a dollar for dollar
basis, or add $500 million for education.
REPRESENTATIVE CLAMAN responded that the bill differs from an
income tax in three areas:
• the bill is modeled after the previous school head tax, to
which everyone contributed, beginning at a minimum amount
of $100
• at an income level of $250,000, unlike an income tax, there
is a cap which would make capital more available for
reinvestment into the economy
• the bill provides a plan to help close the state's deficit
by infusing new revenue
REPRESENTATIVE KOPP surmised funding from the bill is
permissive, to avoid the state's constitutional dedication to
provide public education, and the legislature could spend the
funding as needed.
REPRESENTATIVE CLAMAN agreed and added the bill does not
represent an increase in education funding. Presently, the
state's undesignated GF contribution to education is
approximately $1.4 billion-$1.5 billion, but the bill would
establish a designated general fund, reducing the undesignated
allocation on a dollar for dollar basis, and ensure members of
the public their school taxes would be applied to public
education.
8:26:57 AM
CHAIR DRUMMOND asked whether the bill has been sufficiently
compared to HB 115 [passed by the Alaska House of
Representatives 4/15/17 and failed passage in the Alaska State
Senate 5/12/17].
REPRESENTATIVE CLAMAN advised SSHB 146 is an alternative to HB
115. The intent of SSHB 146 is to create a tax that is not
based on a formula and is collected by a different approach.
CHAIR DRUMMOND observed for those at a low [income] level, the
proposed tax functions as a head tax, and asked if children,
whose sole income is a PFD, would be assessed the tax.
REPRESENTATIVE CLAMAN related his personal experience that in a
family of four, with two children under eighteen years-of-age,
if each child filed separately and paid the tax separately, the
husband and wife would file jointly and pay a school tax based
on their joint income. If the family were advised to file one
tax return, they would pay one school tax based on their joint
tax return.
CHAIR DRUMMOND directed attention to the fact that an increase
in income from $100,000 to $101,000 would cause the school tax
to increase from $1,000 to $2,500, and an increase in income
from $150,000 to $151,000 would cause the school tax to increase
from $2,500 to $5,000. She questioned why the increases do not
follow a curve.
REPRESENTATIVE CLAMAN stated one of the goals for the bill was
to create a simple mathematical structure that is transparent to
the public.
REPRESENTATIVE PARISH surmised for the purpose of this bill a
resident is someone who collects a PFD, and a nonresident does
not; he inquired as to the status of a part-year resident.
REPRESENTATIVE CLAMAN said DOR would address this issue through
regulations, as it does for income that is earned by seasonal
employees. He advised the [Alaska Court System] and DOR have
defined a resident for the purposes of the PFD based on
residency of one year; however, he predicted that for the
purposes of SSHB 146, the tax would be based on the amount of
income earned in the state.
8:33:50 AM
KEN ALPER, Director, Tax Division, DOR, in response to
Representative Parish, said the most important definition within
the bill is not residency, but "income from a source in the
state." He clarified for the purpose of the school tax it
doesn't matter if a person is a resident or a nonresident; DOR
would require a mechanism to determine the amount of one's
income that originated in Alaska, and thus determine the bracket
upon which to base the tax.
REPRESENTATIVE PARISH directed attention to [SSHB 146 on page 2,
lines 15-16] which read:
(1) the adjusted gross income of a
(A) resident is the total adjusted gross income
of the resident;
REPRESENTATIVE PARISH said the foregoing language does not
stipulate that the total gross income must be earned in the
state. He asked whether DOR would agree that an Alaska resident
who earns money outside of the state would be taxed on the
income earned outside the state.
MR. ALPER reminded the committee the last income tax in Alaska
was repealed over 35 years ago, thus the tax division has no
specific expertise on personal and related income taxes. In
fact, the tax division is in the process of assembling an
implementation plan and consulting services as is reflected in
the Fiscal Note Identifier: HB146-DOR-TAX-03-17-17. However
generally speaking, all a resident's income would be taxed, and
a credit would be given for the state income tax paid by the
Alaska resident to a nonresident state.
REPRESENTATIVE PARISH expressed his understanding a Californian
is taxed on income that is earned while he/she is working in
both in Alaska and California.
MR. ALPER explained [the foregoing statement is true] because
Alaska doesn't have a personal income tax. Were SSHB 146 or a
similar bill to pass in Alaska, a California resident with
income earned in Alaska would receive a credit against his/her
California state income tax; comparably, an Alaska resident
earning income in a state without a personal income tax would be
taxed on his/her total income.
REPRESENTATIVE PARISH pointed out the bill does not collect
revenue from another state.
MR. ALPER remarked:
I think it's actually the opposite. The [subsection]
you pointed out - [subsection] (c), [paragraph] (1),
[subparagraph] (A) - [directs that] we would tax the
resident's income wherever it was located. What may
be missing from this bill is the mechanism for the
credit for taxes paid to other states.
REPRESENTATIVE PARISH asked about the language in the bill [on
page 2, beginning on line 17, [subsection (c), paragraph (1),
subparagraph (B)] which read:
(B) nonresident or part-year resident is the adjusted
gross income of the nonresident or part-year resident
that is attributable to a source in the state;
MR. ALPER confirmed the tax division does not have ability to
collect tax on a nonresident's out-of-state income; similarly,
an Alaska resident earning income in California cannot be taxed
on his/her income earned in Alaska.
8:39:12 AM
MR. ALPER directed attention to Fiscal Note Identifier HB146-
DOR-TAX-03-17-17 and informed the committee at the time the
fiscal note was issued, the tax division was unaware the bill
did not provide a payroll tax or a withholding component.
Without a payroll tax or withholding component, the estimated
cost of staffing will be lower, and there will not be revenue
expected in the amount of $270 million for Fiscal Year 2018 (FY
18). In response to Chair Drummond, he said a new fiscal note
is forthcoming.
8:40:00 AM
REPRESENTATIVE JOHNSTON asked for the method of modeling used by
the tax division for the projected revenues, and for the year on
which the labor force statistics were based.
MR. ALPER expressed his belief the last complete labor dataset
available to the tax division was based on Internal Revenue
Service (IRS) tax returns filed by Alaskans in 2014, and the
same modeling was used for the Out-Year Cost Estimates [for FY
19-FY 23] analyses. In further response to Representative
Johnston, Mr. Alper offered to confirm the foregoing.
CHAIR DRUMMOND asked whether the bill puts a significant burden
on the tax division.
MR. ALPER said the tax division currently administers about 25
different tax programs; corporation income taxpayers reflect the
largest group of about 13,000, many of which are type S
corporations that file "information" returns. SSHB 146 would
affect approximately 350,000-400,000 taxpayers; therefore, the
bill would create "an order of magnitude change" to the current
responsibilities of the tax division. Further, he pointed out
at the $250,000 income level, the bill would garner revenue in
an amount similar to HB 115; however, SSHB 146 establishes a
capped tax rate in that the bill does not capture income from
the higher income earners. Therefore, the percentage of the
total revenue coming from very high income levels is lower than
that of traditional income taxes.
8:44:00 AM
CHAIR DRUMMOND assumed type S corporations would need to file
Schedule C, or similar, tax returns in order to pay the school
tax.
MR. ALPER explained a type S corporation does not pay an income
tax because it does not legally retain income, but its income is
distributed to corporate owners. Individual owners then pay
personal income tax based on their share of the earnings;
although there have been attempts to expand the corporate income
tax, and thereby tax type S corporations, this is best
accomplished by an income tax.
CHAIR DRUMMOND questioned the status of an owner of a type S
corporation who lives out-of-state.
MR. ALPER clarified if the income originates in Alaska, it would
be taxable under SSHB 146 or a similar bill; [if the bill
becomes law], the tax division would need to undertake a
rigorous regulatory process to address all the aspects of the
legislation.
CHAIR DRUMMOND questioned whether the bill would impact the
local share that communities pay into school operating budgets
through property or sales taxes, or other means.
MR. ALPER said municipalities with a property tax assess millage
rates to support school district funding, and the amount of
funding is adjusted by the foundation formula. He opined
revenue from SSHB 146 would replace a portion of the general
fund contributions, following along the current formula
structure.
8:47:56 AM
[SSHB 146 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB146 ver D.pdf |
HEDC 3/22/2017 8:00:00 AM |
HB 146 |
| HB 146 Sectional Analysis 3.20.2017.pdf |
HEDC 3/22/2017 8:00:00 AM |
HB 146 |
| HB146 Sponsor Statement 3.20.2017.pdf |
HEDC 3/22/2017 8:00:00 AM |
HB 146 |
| HB146 Supporting Document - Letters of Support 3.20.2017.pdf |
HEDC 3/22/2017 8:00:00 AM |
HB 146 |
| HB146 Opposing Document - Letters of Opposition 3.20.2017.pdf |
HEDC 3/22/2017 8:00:00 AM |
HB 146 |