Legislature(2023 - 2024)DAVIS 106
04/17/2023 06:00 PM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| HB156 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 156 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 156-INCOME TAX
6:08:00 PM
CHAIR CARPENTER announced that the only order of business would
be HOUSE BILL NO. 156, "An Act relating to the taxation of
income of individuals, partners, shareholders in S corporations,
trusts, and estates; repealing tax credits applied against the
tax on individuals under the Alaska Net Income Tax Act; and
providing for an effective date."
6:09:51 PM
REPRESENTATIVE ALYSE GALVIN, Alaska State Legislature, prime
sponsor of HB 156, introduced HB 156 via a PowerPoint
presentation, titled "HB 156: Income Tax" [hard copy included in
the committee packet.] She commented that the presentation has
been pared to focus specifically on HB 156. Overviewing the
presentation, she pointed out that HB 156 would create a broad-
based revenue source by implementing an income tax. On slide 3,
she said the proposed legislation would implement a 2 percent
income tax on Alaskans earning more than $200,000 per year and a
[$20 head tax] on all other Alaska wage and income earners. She
estimated that this would generate approximately $120 million to
$150 million per year in revenue. She suggested that this would
give the legislature a different way to discuss the revenue,
rather than cutting the permanent fund dividend (PFD). She
suggested that an income tax rather than a sales tax would best
fit the Alaska economy and state revenue needs, as it would
stabilize the unpredictable revenue from oil prices.
6:12:33 PM
REPRESENTATIVE GALVIN expressed the opinion that HB 156 would
not raise any revenue for the fiscal year 2024 (FY 24) or solve
Alaska's fiscal crisis on its own; however, a broad-based income
source is an important part of a sustainable, long-term fiscal
plan. She suggested that the state has approached a fiscal
cliff and pointed out how the proposed legislation could offer a
solution, as seen on slide 5. She stated that a long-term
structural budget deficit can no longer be filled solely by
draws from savings or PFD cuts; therefore, a broad-based revenue
source should be considered a part of a sustainable fiscal plan.
She argued that a broad-based revenue source would provide a
stabilizing source of revenue, not be dependent on volatile oil
prices, and grow the state's economy. She also suggested that
an income tax could have benefits over other broad-based tax
options, such as a sales tax.
REPRESENTATIVE GALVIN moved to slide 6 and stated that there has
been a general agreement by many economic experts that a broad-
based revenue is needed in Alaska. She argued this point by
referencing the Fiscal Policy Working Group's (FPWG's) final
report on slide 6, which recommended that the legislature
consider adding annual revenues as a part of a comprehensive
solution. She pointed out that FPWG did not make a specific
recommendation for the type of revenue; however, it recommended
the adoption of a broad-based revenue measure, in addition to
other revenue measures, as part of a comprehensive solution.
She stated that many tax and economic experts have also
recommended an income tax over a sales tax. She listed the
reasoning behind the opinion, as follows: a sales tax would be
more regressive than an income tax because it would hurt poorer
families; a sales tax would create complications for the over
100 municipalities with a current local sales tax; and a sales
tax would disproportionally hurt rural residents because of
regional price disparities. Addressing the burden on
nonresidents, she said that an income tax would affect visiting
workers while a sales tax would affect tourism.
6:15:23 PM
REPRESENTATIVE GALVIN referred to slide 8 which showed a study
on the regressive nature of a sales tax by the Institute on
Taxation and Economic Policy. She described the graph, which
showed how generating $500 million with a sales tax versus an
income tax would impact taxpayers based on economic status. She
recognized that the figures in the graph were slightly different
than HB 156, but the general idea remains the same, and she
opined that from the figures in the graph "taking 212 percent
from the poorest Alaskans affects their lives far more than
taking an extra 2.8 percent from the highest earning Alaskans."
Explaining the visuals on slide 9, she said there are many
models for income taxes. Once a model has been chosen, she
conveyed that it can be further modified by changing the "gears"
within the model, depending on the model's desired function.
REPRESENTATIVE GALVIN described the variety of income types
which could be included in an income tax, as seen on slide 10.
This included the following: wages, retirement income, business
income, investment income, and other income sources, such as the
PFD, unemployment allowances, and farming income. She stated
that most state income taxes are built off the federal tax
system, as this simplifies the choices and the impacts on
taxpayers. On slide 11, she explained the federal tax process
and how it has been used to inform state income tax
calculations. She provided three options to identify income
derived from the federal tax process: adjusted gross income
(AGI), federal taxable income, and federal taxes due.
6:18:33 PM
REPRESENTATIVE GALVIN moved to slide 12 and showed the income
tax structural options chosen for HB 156. She said that the
federal AGI was used because this is what most states use. She
said that a standard deduction model was chosen, expressing the
opinion that this would garner maximum support, both from the
public and within the legislature. She expressed the belief
that the success of the proposed legislation would hinge on
this. Between the choices of a flat tax rate or a graduated tax
rate, she reported that HB 156 would include a flat tax rate and
an additional $20 head tax. She expressed the belief that the
combination of the flat tax rate and head tax would help create
the sense that all taxpayers are stakeholders in Alaska.
6:20:25 PM
REPRESENTATIVE GALVIN, moving to slide 13, pointed out support
for HB 156. She stated that, in response to discussions with
other legislators, this version of the bill has a lighter income
tax, as this would help obtain passage. To create a sustainable
fiscal plan the lighter income tax would be paired with other
sources of revenue, such as oil tax reform or a PFD reduction.
She expressed the opinion that the proposed legislation
represents a compromise which could gain the votes needed to
pass. She continued to slide 14, which included a bar chart
showing the current tax structure in the proposed legislation.
She explained that the $20 head tax would be on taxpayers making
less than $200,000 annually. She further explained that the
flat rate of 2 percent would only be applied to taxpayers who
have an income above $200,000, with only the amount above
$200,000 taxed. The $20 head tax would also be applied to the
total amount, and she referred to the bar chart to give
specific.
6:22:01 PM
REPRESENTATIVE GALVIN spoke about the technical provisions of HB
156 on slide 15, which read as follows [original punctuation
provided]:
Tax paid by nonresidents on income earned in the state
Tax is paid by Alaska residents on all their income
regardless of where earned
A credit is given for income taxes paid to other
states for income earned in that state(so no double
taxing of income)
Tax also applies to income earned by trusts and
estates, not on their asset value
Detailed provisions to establish what income is "from
a source in the state"
Employer withholding from wages with periodic payments
from employers to the state
Employers send employees annual wage statement similar
to the federal W-2
Annual tax returns due same day as federal return
Department of Revenue to establish regulations to
provide further details
Income tax exempted from general DOR requirement to
file electronically
Most state income tax payments are deductible from
federal taxes for those who itemize; thus a portion of
taxes paid will be saved due to reduced payments to
the IRS
6:24:22 PM
REPRESENTATIVE GALVIN, in response to Representative McCabe,
stated that she did not remember saying a nonresident income tax
would raise more money than a sales tax. She stated that it was
not her intention to imply this.
REPRESENTATIVE MCCABE emphasized that taxing nonresidents would
not create more revenue than a broad-based sales tax and
referenced FPWG findings.
REPRESENTATIVE GALVIN reiterated that she had not intended to
compare revenue generation from a sales tax and an income tax on
nonresidents, but rather she expressed the intention to compare
the impact on taxpayers. She expressed the opinion that Alaska
residents who live in communities that already have a municipal
sales tax would be burdened by an additional statewide sales
tax. In comparison, she shared her belief that nonresident
workers would not feel as burdened by an income tax, as the 2
percent tax would be much lower than other states, and she added
that this low rate would not deter out-of-state workers from
coming to Alaska. In response to Chair Carpenter, she confirmed
the revenue specifics of the proposed bill would be addressed
later in the presentation.
REPRESENTATIVE MCCABE referenced that HB 156 uses the federal
AGI model. He questioned whether the $200,000 is based on
individual or total household income.
REPRESENTATIVE GALVIN responded that it depends on how a
taxpayer files federal tax. She expressed the opinion that for
most people it would be very simple.
REPRESENTATIVE MCCABE posed a hypothetical situation in which a
married couple each made $199,000 in a year. He expressed the
assumption that in this scenario it would be better to file
separately.
REPRESENTATIVE GALVIN agreed with the assumption and referred to
an upcoming slide which discusses this problematic area of HB
156.
6:28:29 PM
REPRESENTATIVE GRAY referred to a point made on slide 15
regarding credits for Alaskan residents who work and pay income
tax in another state. He asked whether the income tax in the
proposed legislation would be applied to all nonresident
workers, "no matter what."
REPRESENTATIVE GALVIN confirmed that the Alaskan income tax
would apply to nonresidents, "no matter what."
6:29:20 PM
CHAIR CARPENTER clarified that it would apply assuming the
nonresident made over $200,000.
REPRESENTATIVE GALVIN replied yes. She shared her understanding
that there are a couple of sectors where there may be exceptions
but deferred to other experts for this information.
REPRESENTATIVE GALVIN continued to slide 17, pointing out that
86 percent of Alaskans would have no paperwork associated with
the proposed tax; however, they would see a $20 reduction note
on the first paycheck of the year. She continued that the 14
percent who pay the 2 percent tax would likely use the same tax
preparation method currently used for federal taxes. She added
that taxpayers could also choose a reduced PFD to pay the tax.
6:31:06 PM
REPRESENTATIVE GALVIN discussed possible amendments to HB 156,
on slide 18. She pointed out that the $200,000 deduction would
limit the impact of the income tax to about 14 percent of Alaska
income earners, and a $50,000 standard deduction would limit the
impact to 50 percent of Alaska income earners. She referred to
a graph on the slide which showed the estimated revenue
generated by the two different deduction limits and stated that
if HB 156 was amended to use a $50,000 standard deduction
instead, $240 million in revenue could be expected.
REPRESENTATIVE GALVIN explained that adjusting the head tax
could be another possible amendment, as seen on slide 19. She
pointed out that the $20 head tax is estimated to raise
approximately $10.5 million; however, if the head tax were
changed to $100 per person, there would be $52.5 million raised.
She suggested that raising the head tax may significantly affect
lower-income households; however, she stated that she had been
advised the $20 would not be enough. She continued to slide 20
with a graph categorizing the public comments received. She
reported that the majority of the comments were in support of
the proposed legislation, and it is "the will of the people" for
Alaska to institute a state income tax based on this model.
6:33:50 PM
REPRESENTATIVE GALVIN concluded the presentation on slide 21 and
pointed out that a sustainable fiscal plan for Alaska should
include a broad-based tax. She explained that an income tax
would be preferable to a sales tax for a variety of reasons, and
the proposed legislation would serve as a useful component to a
sustainable fiscal plan. She welcomed any proposed amendments
from the committee. She added that the presentation has an
appendix of additional slides with further context.
6:35:53 PM
The committee took a brief at-ease.
6:37:14 PM
BRANDON SPANOS, Deputy Director, Tax Division, Division of
Revenue (DOR), offered information on the fiscal note for HB
156. He reported that in the first full year of implementation
of an income tax, DOR estimates the revenue would be $120
million for FY 25. Because of quarterly payment plans, he
expressed the possibility that some of this revenue could be
shifted to FY 26. Because of the proportional nature of the
proposed tax model, he advised that the impact on households
would vary "widely." He also mentioned that some impact would
be mitigated by the deduction of state taxes from federal taxes,
and this would affect taxpayers who choose to itemize their
taxes. He explained that DOR based the proposed tax model on
aggregated federal income data for Alaskan residents, and it is
expected an income tax on nonresidents would raise Alaska's AGI
by approximately 5 percent. He added that this is a net income
estimation based on the total nonresident income, minus the
income of what Alaskans earned elsewhere. He emphasized that
the model does not account for population growth, inflation, or
economic impacts from the income tax itself. He mentioned that
the model was adjusted for the standard deduction and the PDF
exemption, and although the bill projects there will be changes
in taxpayer behavior in regard to how families file, the model
does not adjust for these changes.
MR. SPANOS, discussing the cost of implementation, reported that
this would be steep because of the robust nature of the proposed
broad-based tax. He stated that there would be a 12-month
minimum implementation process at an estimated cost of $9.5
million. This would include adding the income tax module to the
existing tax revenue management system by the current outside
contractor. These modules would also include software to
prevent identity theft, which is standard practice. He
continued that after implementation, an estimated $2.25 million
in support and maintenance would be required through FY 25;
however, this would decrease to $1.5 million from FY 26 onward.
He explained that implementing an income tax module would be a
multi-year process, beginning with establishing a tax
withholding system and the regulations, which would be needed by
January 1, 2025.
MR. SPANOS stated that because taxpayers would be allowed to use
their PFD to pay income tax, interfacing capabilities between
the systems would need to be added. He listed the additional
costs included in the fiscal note, such as travel for outreach
to Alaskan businesses and additional programming for integration
with national tax services. He reported that the second phase
would concern DOR staff and the outside contractor building the
following: the tax return itself, the online filing component,
examination modules, and communication between the existing
accounting, imaging, and collection systems. Noting the
exemption for electronic filing in HB 156, he said that DOR's
imaging system allows processing of paper returns. He expressed
the belief that the state has seen great success with online
filing in the past, and he expressed the hope of moving towards
more online filing with the new model, increasing taxpayer
compliance.
MR. SPANOS stated that the proposed legislation would create an
annual tax starting January 2026, to be filed by April 2026. He
spoke further on the return structure for the income tax,
stating that it would generate 400,000 plus returns. Although
only taxpayers with incomes over $200,000 would be taxed, he
expressed the understanding that all residents and nonresidents
would have a filing obligation. For cost estimation for
implementation, he reported that DOR had communicated with tax
administrators in Montana and Vermont because of their
comparable population to Alaska. He said that DOR used a per
capita adjustment of the staff needed for these states. It was
determined that DOR would need 70 staff; however, because of the
lack of experience and the anticipated volume of calls, the
higher end of the estimate was used. These new staff would be
split between the offices in Anchorage and Juneau, but he
informed that DOR would continue to look for ways to increase
automation and improve efficiency. He reported that the state
currently processes a much smaller number of paper tax returns
than estimated for the new tax model, and this would require a
larger staff in the imaging department. He explained that there
would be travel costs for public education and staff training
across the state. He continued that there would also be
additional costs for services, such as rent for additional
office spaces and costs for the contractor. He ended his
analysis of the fiscal note by pointing out the breakdown of the
70 employees DOR anticipates adding.
6:49:33 PM
CHAIR CARPENTER questioned whether the state is required to use
FAST Enterprises as the contractors for the programming, or
whether the project could go to an open bid.
MR. SPANOS replied that the state already has a contract with
FAST Enterprises; however, if the state is interested in using a
new program, there could be a public bid. He opined that
staying with the current program and having FAST Enterprises
create a new module would be more efficient than going to a
completely new program. He pointed out that the program is
already integrated across departments and creating a separate
system for an income tax would be less efficient.
6:51:22 PM
REPRESENTATIVE MCCABE inquired about the 62,100 nonresident
employees estimated to work in Alaska. He asked whether staff
would be specifically hired to manage these tax returns and
expressed the opinion that extra management would be required.
MR. SPANOS answered that the cost between a resident and
nonresident return has not been broken down. From an
administrative perspective, he said "a return is a return." He
stated that the breakdown between resident and nonresident in
the proposed legislation was necessary to establish whether the
state would have this authority. He expressed uncertainty
whether there was enough difference between a resident versus a
nonresident return to make one cost more than the other. He
offered the information to calculate the cost of processing just
nonresident returns.
REPRESENTATIVE MCCABE questioned whether the program DOR uses
already includes tax filing reciprocity between states.
MR. SPANOS replied that this is often done by a multistate tax
commission, but it can also be processed state by state. He
said the department already has reciprocal tax agreements for
the state's corporate income tax, so the multistate tax
commission would continue to be used, or each state could be
dealt with separately. He added that tax returns between states
are not directly shared typically, but there is a file share
system with other states or the Internal Revenue Service (IRS).
6:55:15 PM
REPRESENTATIVE TILTON referenced the portion of the fiscal note
that budgeted money for integrating the PFD system with the DOR
tax system to allow taxpayers to use the PFD to pay income tax.
She questioned whether this would also cover proposed changes to
the PFD application.
MR. SPANOS responded that this particular issue has not been
discussed recently; however, it had been discussed in previous
iterations of the bill. He inferred that the large fiscal note
referred to may be related to moving the entire division. He
assured the committee that the programming changes covered by
the fiscal note for HB 156 would be quite small, as it would not
require moving the entire division, but rather a way would need
to be created for reporting the PFDs used for income tax, and
the transfer of this money would need to be facilitated. He
expressed the assumption that DOR would absorb much of the
contractor's cost; however, he allowed that DOR may need to
contribute some of its own funds.
REPRESENTATIVE TILTON interjected that the proposed bill she was
referencing was not about moving divisions. She clarified that
she was referencing proposed legislation which would allow a
recipient to give a PFD back to the state's general fund.
6:58:25 PM
REPRESENTATIVE GROH expressed excitement by the content of the
proposed legislation. He referenced the graph relating Alaskans
would pay less in an income tax than a sales tax. He asked the
sponsor's opinion on why many Alaskans would prefer a sales tax
over an income tax, when they would end up paying more.
REPRESENTATIVE GALVIN hypothesized that it might be a lack of
understanding, as taxpayers may think of sales tax in daily
increments and not be considering the amount spent in a year.
She deferred the question to Gunnar Knapp.
7:01:01 PM
CHAIR CARPENTER reminded the committee that the topic is about a
comprehensive fiscal plan and to keep revenue comparisons in
mind. He pointed out that the estimated revenue from a
previously proposed state sales tax was $900 million. In
comparison HB 156 would generate about $120 million. He
inferred that these two options would have very different
impacts because of the amount of revenue each would be
generating.
REPRESENTATIVE GALVIN expressed agreement, and she reiterated
that changing the "levers" of the bill, such as implementing a 5
percent tax instead of a 2 percent tax, could get the revenue
generation of HB 156 closer to $900 million. She also posited
that there could be confusion among the public about the
differing fiscal plans, and this may be affecting support for
the proposed legislation.
CHAIR CARPENTER asked Mr. Knapp if he could provide insight on
the tax behaviors of Alaskans as it pertains to the two
different broad-based tax plans.
7:02:45 PM
GUNNAR KNAPP, Professor Emeritus of Economics, Institute of
Social and Economic Research, University of Alaska Anchorage,
expressed uncertainty concerning Representative Groh's earlier
question. He confirmed that he had heard the lower-income
taxpayers would prefer a sales tax, even though they would pay
less with an income tax, presuming an income tax would raise the
same amount as a sales tax. However, he expressed uncertainty
concerning the origin of the idea.
REPRESENTATIVE GROH suggested that many Alaskans think the
alternative to a broad-based tax would be "painless budget cuts"
and referenced discussions to support his claim that "this isn't
the case." Another alternative he mentioned was the toll system
currently in place across many of Alaska's highways. He
requested a discussion on taxpayers' perceptions about
alternatives to a state-wide income or sales tax.
REPRESENTATIVE GALVIN replied that there may be a lack of
awareness [from the public] on the size of the state's budget
deficit. She inferred that there are also decisions waiting to
be made within [the legislature] about the money to "filling the
hole." The answer, she suggested, depends on the direction [the
legislature] goes and which services and issues will take
priority. As far as options for creating revenue, she stated
that most Alaskans do not understand what the revenue from oil
and gas has been covering. She provided a breakdown of the
state's current revenue streams, stating that oil and gas has
made a third, another third has come from the savings earned on
the Permanent Fund, while the last third has come from smaller
state fees and taxes, such as licenses and the cigarette tax.
She conveyed the belief that marijuana tax would solve the
revenue issue; however, it brought in only $50 million, much of
which was held for specific purposes. She said this was not
sufficient to fix the millions in the [budget deficit] Alaska
faces. She expressed the belief that [Alaskans] have "a shared
responsibility to come up with an answer," and an income tax
would create stakeholders who put hard-earned paychecks into the
state. She continued that this would force the government to
have a higher accountability for the services provided. She
recognized that there are different ways revenue could be
generated, but reemphasized the belief that, although a lot of
revenue could be generated through a sales tax, it may not be
the best way forward for the state because of its regressive
nature. She noted the three biggest expenditures were the PFD,
education, and health services. She reiterated that building a
bigger sense of ownership within the public of Alaska's spending
decisions was crucial.
7:10:32 PM
MR. KNAPP added that the question is broad, but the core of the
issue is every state must provide government services, and there
has to be a way to pay for them. The most common way to pay for
these state services is with a broad-based income or sales tax,
and he stated that almost every state besides Alaska has
implemented one, if not both. He opined that Alaska has been
fortunate for the last 40 years, as oil and the PFD revenue has
been high enough to make a broad-based tax unnecessary; however,
the current decline in oil revenue has made Alaska face the hard
reality that paying for government services and the accustomed
PFD will require a new revenue source. Unless the state decides
to cut the budget or the amount of the PFD, which he suggested
the government has been unable or unwilling to do, a broad-based
tax would be the only way to make up for the loss in revenue.
He agreed with Representative Galvin's sentiment that a broad-
based tax would increase citizen engagement in the government.
7:13:36 PM
REPRESENTATIVE TILTON, regarding the promise of no additional
paperwork for Alaskans by removing the $20 head tax from the
taxpayer's first paycheck of the year, posited that the burden
of the first tax would then fall to the employer. She requested
clarification on this process.
REPRESENTATIVE GALVIN deferred to Mr. Spanos.
7:15:02 PM
MR. SPANOS confirmed that it would be the employer's
responsibility to remit the tax. He added that in the case of a
taxpayer with multiple jobs, an employer would have to rely on
the employee to disclose whether a first paycheck of the year
had been received from a different employer. He stated that
there would be two options for DOR to regulate this. The
regulation could require the employer to withhold the $20 head
tax for every new employee, and the taxpayer would need to file
a return to get a refund if it had already been paid.
Alternatively, the regulation could provide that an employee,
upon being hired, sign an affidavit that the $20 for the year
had been paid. He spoke on the benefits of each option, stating
that the first example would generate more revenue and would be
easier for DOR to administer, while the second example would be
less burden on the taxpayer.
REPRESENTATIVE TILTON questioned how tax disputes would be
resolved between employers and employees.
7:17:29 PM
REPRESENTATIVE GALVIN deferred the question to Alexi Painter.
CHAIR CARPENTER asked Mr. Spanos if he could answer the
question.
7:17:45 PM
MR. SPANOS replied that this issue is new and would require some
brainstorming from DOR. He reported that at the federal level
the dispute is handled by the employer. Employees fill out a
tax form at the beginning of employment, which dictates the
amount withheld. An employee would bring any issues with this
directly to the employer. He expressed the opinion that DOR
would not be involved in these disputes.
REPRESENTATIVE TILTON redirected her question to disputes
specific to the $20 reduction note on the paycheck. In the case
that an employee never had the $20 withheld, she asked how this
liability dispute would be addressed.
7:20:11 PM
REPRESENTATIVE GALVIN deferred the question to Alexei Painter.
She reiterated the intention to lessen the paperwork burden on
taxpayers. She offered to work with the various state
departments to make this happen.
CHAIR CARPENTER interjected that the question is interesting
since many people work multiple jobs. He questioned how
different employers would discern this.
7:20:44 PM
ALEXEI PAINTER, Director, Legislative Finance Division,
Legislative Affairs Agency, responded that other bills with head
taxes were designated to be implemented through the Department
of Labor and Workforce Development (DLWD). He explained that
this was because DLWD already has the structure in place for the
unemployment tax. He added that DLWD is not equipped to handle
the same process for an income tax. He suggested splitting the
model in the proposed bill into two separate taxes, allowing the
head tax to be administered through the DLWD structure and using
the structure in HB 156 for income tax. He said that there
could be some efficiencies for employers from this course of
action since the DLWD system is already used for the
unemployment tax.
CHAIR CARPENTER pointed out that two different taxes would be
implemented by two separate departments. He questioned which
department, DLWD or DOR, would be responsible for identifying
how the state would collect the money.
MR. PAINTER explained that currently the bill puts all the tax
management on DOR. He suggested that the legislature could
separate the head tax to reduce the amount of work for the
employers. He added that an income tax would still create a
filing obligation for individuals.
7:23:08 PM
REPRESENTATIVE TILTON pointed out a potential fiscal note from
DLWD if the tax was split.
MR. PAINTER concurred; however, he expressed uncertainty whether
creating a fiscal note involving DLWD would create enough
efficiencies for net savings for the state.
7:24:01 PM
REPRESENTATIVE MCCABE referred to the earlier statement that an
income tax would be less regressive than a sales tax for lower-
income workers. He then referenced ISER's report which stated
that PFD cuts would be more impactful to the lower-income
workers, while the effects of an income tax on all Alaskans
would be more than a sales tax. He quoted from the ISER study
which relates that the difference is the tourists would pay a 10
percent sales tax versus nonresident workers who would pay up to
7 percent income tax. He posited that this information may be
why Alaskans "instinctively know that a sales tax is actually
less regressive than an income tax." In response to a question
from Chair Carpenter, he replied that the ISER study he
referenced was entitled "Short-run Economic Impacts of Alaska
Fiscal Options." He reported he was referencing the executive
summary on pages 1 and 2.
7:27:43 PM
MR. KNAPP, in response to a request to speak to the study,
acknowledged that there were two separate issues. The first
issue compared the regressive nature of the different methods
for filling the fiscal gap. He explained that cutting the
amount of the PFD is highly regressive because this would be
taken from a person's yearly income, and this would be a much
higher percentage for low-income individuals than those with a
higher income. He stated that data shows a sales tax would also
be more regressive in comparison to an income tax. He stated
that the various forms of filling the fiscal gap would all have
different impacts on Alaskans, and he emphasized that who will
be impacted is an important point to consider. He continued
that the second issue in the study related to the money coming
from nonresidents, which is an important but different question.
He explained that a sales tax would include revenue from
tourists and nonresident workers, while an income tax would only
collect revenue from nonresident workers. He stated that the
study suggested the state would receive more revenue from
nonresidents through a sales tax; however, he opined that the
most important factor should not be the amount raised from
nonresidents, rather what the tax burden would be on Alaskans.
REPRESENTATIVE MCCABE referenced the table on page IIV of the
report, which shows the difference between a 2.5 percent income
tax and a 3 percent sales tax in revenue generated from
nonresidents. He said that the difference is "huge." He
expressed the idea that Alaskans instinctively understand this
amount to be significant. He further implied that the focus on
an income tax as the least regressive option may be overlooking
the "high regressivity" of [reducing] PFDs.
7:33:46 PM
CHAIR CARPENTER reminded members that the conversation is about
one particular bill and how it could be part of a larger fiscal
plan.
REPRESENTATIVE GALVIN expressed agreement that PFD reductions
would be the most regressive action the legislature could take,
and this is why she supports an income tax, to minimize the need
for a reduction to PFDs. She restated that the proposed model
would allow for adjustments to increase revenue. She
acknowledged that, as the proposed bill stands, it would include
a $200,000 "floor," and this would not make as much as a sales
tax. She pointed out that the amount of revenue brought in by
nonresidents would not affect the regressivity of a tax on
Alaskans. She expressed the understanding that Alaskans would
like these out-of-state workers who make the highest pay to
contribute in some way. She expressed the goal of putting the
proper systems in place to ensure Alaskans are getting these
jobs instead, but in order to do this the state would need a
stable fiscal plan which does not depend on volatile oil prices.
CHAIR CARPENTER asked the committee to consider whether the goal
would be to raise revenue or to promote economic growth. He
stated that the regressivity of a tax would be a good measure if
the goal is revenue, but other measures should be looked at if
the goal is economic growth.
7:37:50 PM
REPRESENTATIVE GROH expressed "his excitement" over his
interpretation of Representative McCabe's previous statement,
suggesting that Representative McCabe would be joining his
efforts in raising taxes in order to avoid cutting PFDs.
REPRESENTATIVE MCCABE interjected that Representative Groh's
comment was uncalled for.
REPRESENTATIVE GROH continued by requesting that Representative
Galvin and Mr. Knapp speak about the ideal role of the proposed
legislation in providing an overall fiscal fix. He further
requested that a concise explanation be given to help the
committee and the Alaskan public understand.
7:39:06 PM
REPRESENTATIVE GALVIN shared the view that the proposed
legislation would be a starting point in considering a fiscal
plan which looks at regressivity, raising revenue, having state-
wide accountability for this revenue, and keeping Alaskans in
state without driving them further into poverty.
MR. KNAPP expressed agreement that this bill would be a starting
point for the state to look at a broad-based tax as a way to
generate revenue. He stated that other forms of revenue have
proven to not be enough, and the proposed income tax would be a
way for Alaskans to "start helping to pay for what they receive"
from the state government, which is the status quo in almost all
other states.
7:41:17 PM
CHAIR CARPENTER asked whether the information on slide 8
represented what the bill would do.
REPRESENTATIVE GALVIN responded in the negative, as slide 8 does
not represent the bill; instead, it is a "broad stroke"
comparison between two broad-base revenue measures and how each
would impact Alaskans across various levels of income.
CHAIR CARPENTER sought to confirm that Representative Galvin's
explanation of slide 8 showed what an income tax would look like
for all categories of earners.
REPRESENTATIVE GALVIN responded in the affirmative. She circled
back to the topic of regressivity and gave an anecdotal example
of a family of four who makes $31,000 a year. In order for the
state to raise $500 million, it would require a $2,400 cut to
this family's PFDs, which she expressed as exceptionally
regressive and why the state needs to look at other ways to
raise this money.
7:43:07 PM
REPRESENTATIVE ALLARD stated that a family of four making
$31,000 would already be on several state services and receiving
aide in the form of food stamps. She inferred that a family in
these circumstances would not be purchasing high priced items,
like a car, which would incur a high sales tax. She questioned
whether a sales tax would actually be as regressive to lower-
income Alaskans as depicted on slide 8.
REPRESENTATIVE GALVIN replied that all families buy goods, and
the sales tax would apply to all goods. She reiterated that it
is relatively more of a burden to pay a sales tax to lower-
income families.
REPRESENTATIVE ALLARD emphasized the use of the word
"relatively."
REPRESENTATIVE GALVIN said that all taxpayers would feel a
burden from a sales tax, but a millionaire would feel this
burden relatively less than a lower-income person.
REPRESENTATIVE ALLARD expressed the opinion that nonresidents
work in Alaska because there are Alaskans who are unable or
unwilling to do these jobs. She questioned whether imposing a
tax on out-of-state workers would "scare them off," leaving a
vacancy in the job market Alaska would be unable to fill.
REPRESENTATIVE GALVIN responded by comparing tax rates across
the country. She reported that Alaska would have a 5.8 percent
combined state and local tax rate, and the state with the next
lowest has 7 percent. She suggested that the low tax rate
combined with the natural beauty of the state would be a selling
point for sought after professionals, such as engineers. She
reiterated that Alaskans should have these jobs, and [the
legislature] should work toward this.
REPRESENTATIVE ALLARD opined that Alaskans have chosen to not
take these jobs, and this is why nonresidents fill the jobs.
She stated that making money is the appeal, as being in Barrow
or Prudhoe Bay in the winter may not be "the dream gig." She
expressed concern about the $200,000 deduction creating a
situation where "the 20 percent" would pay for "the 80 percent,"
and this would be discriminatory to high income earners. She
included dual military families among those who may be impacted.
She concluded that an income tax with this model would not be a
sound fiscal plan.
7:47:26 PM
REPRESENTATIVE GRAY quoted former Alaska Governor Jay Hammond's
thoughts on the repeal of Alaska's income tax in the 1980s,
which stated that removing the tax would sever the connection
between "the citizen's pocketbook" and the state's budget,
reducing the total revenue and eliminating the primary
"restraint on government spending". He suggested that
heightened government spending had come to pass and asked how
the proposed $20 head tax may work toward keeping state spending
in check.
REPRESENTATIVE GALVIN noted that there is no recent data on
taxes in Alaska. She referenced studies done in other countries
around the benefits of an income tax. She suggested these
studies align with the thoughts of Governor Hammond. She
stressed that even if the state decided to choose another broad-
based tax over an income tax, taxpayers are still going to be
taxed, which she identified as a common misunderstanding. A
family of four may spend thousands of dollars annually "buying
stuff" all of which would be subject to a sales tax. Regarding
the fiscal plan as a whole, she questioned the committee on
which [tax mechanisms] are going to keep Alaskans engaged in the
process. She stated that if the legislature decides to use
broad-based taxes as one of these mechanisms, she recommended
that close to 50 percent of Alaskan families who make $50,000 or
less be considered and how the different aspects of a tax would
affect them. She reminded the committee that the $20 head tax
would be enough to pay for implementing the tax plan set forth
in HB 156, and then the 2 percent tax would all be additional
revenue. She emphasized that the proposed bill is not intended
to "pick at people," rather, she expressed the belief that it
would be an easily implemented plan to start the discussion on
how Alaskans would handle sharing the fiscal responsibility.
7:51:18 PM
MR. KNAPP added that Alaska used to have head tax dedicated to
schools, which was also deducted from a first paycheck. He
expressed the opinion that Governor Hammond's idea that a public
contribution to government increases the value of expected
services is still relevant today. He pointed out that every tax
has associated flaws, and the administration of the tax will
dictate the economic impacts, but neither an income nor a sales
tax is "the ideal solution". Regardless of which tax is used,
he emphasized the importance of thinking carefully about the
available "levers." He reiterated that the essential difference
between the two types of taxes will be who bears the most burden
from the tax. He reinforced the idea that the tax model can be
adjusted by maneuvering the "levers" within it to fit different
standards.
CHAIR CARPENTER asked Mr. Knapp to expand on how a person's
income dictates who creates business and economic growth.
MR. KNAPP spoke on the many different elements of economic
growth. He mentioned that there are economic growth
implications for both income taxes and sales taxes, and although
there is an assumption an income tax is bad for economic growth,
the answer to this question is very complex.
CHAIR CARPENTER commented that perhaps his question was too
specific, as it had not been directly addressed.
7:56:11 PM
REPRESENTATIVE TILTON referred to slide 10, which listed the
various types of income to be considered with an income tax.
She questioned which income sources would be considered in the
proposed legislation. Additionally, she asked whether taxpayers
who receive income exclusively from sources other than
employment would be required to pay the head tax.
REPRESENTATIVE GALVIN replied that the income considered taxable
was defined in the bill and listed several examples, including
salaries, business ownership or partnership, and the ownership
of a S corporations. She also noted a possible amendment to
remove social security as taxable. She asked for clarification
on Representative Tilton's second question.
REPRESENTATIVE TILTON restated her question by confirming that
the head tax would be taken out of the first paycheck of
actively working taxpayers. She questioned whether those whose
income does not come from employment would have to pay the $20
head tax and how the state would go about collecting it.
REPRESENTATIVE GALVIN responded that these people would need to
pay the head tax, as all taxpayers still need to file taxes,
even when actual paychecks are not received. She explained that
there were several ways for the taxpayer to make the payment
once taxes are filed.
8:00:02 PM
REPRESENTATIVE MCKAY made comments on previous parts of the
discussion, including Alaskans' ability to be hired and the PFD
being the current string between citizens and state spending.
He continued by providing information from his experience in the
oil industry in regard to the taxable incomes list on slide 10.
He insisted that the list would need to be vetted. He expressed
concern on taxing S corporations, as all the oil and gas
operations in Cook Inlet are S corporations. He quoted data
from the Department of Natural Resources to explain the amount
of oil needed to provide for the state and the amount it costs
to drill the oil wells for this production. He cautioned that
further taxing these corporations could prevent them from
working in Alaska, and this would lead to huge job losses with
the potential of the state running out of gas. He argued that
the list of taxable income should be thoroughly vetted to avoid
such unseen consequences.
REPRESENTATIVE GALVIN expressed agreement that including S
corporations on the list of taxable income is misleading, and
she stated she had questioned this. She continued that the
income tax would only apply to the owner of an S corporation
with income above $200,000. She further clarified that this
bill would tax individuals and not corporations, and the types
of businesses listed were included because business owners
making more than $200,000 would be taxed 2 percent on the amount
above $200,000. She assured the committee that she had asked
the same questions about the implications of the proposed bill
because tax law is complicated. She stated that the intent is
not to scare people away from the state. She expressed
agreement with Chair Carpenter's earlier question about economic
growth, as this is important. She added that regressivity plays
an important role in economic growth because consumption is a
big economic driver, and taking money directly from the poorest
Alaskans would impact consumption. She wrapped up her comments
by mentioning Warren Buffet's theories on middle-income workers
and how the proposed legislation could be one tool to help reach
the goal of a vibrant economy with Alaskans all prospering.
8:06:24 PM
CHAIR CARPENTER announced that HB 156 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0156A.PDF |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB 156-Sponsor Statement.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB 156-Section Analysis.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Revenue Forecast 2023.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| ITEP Alaska Fiscal Solutions 4.10.21.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB156-Fiscal Note.pdf |
HW&M 4/17/2023 6:00:00 PM |
HB 156 |
| 2021_Fiscal_Policy_Working_Group-Final_Rep.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| ITEP_Alaska-Distribution-Analysis-2020.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Matthew Berman_ADN_2023April.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Telling_The_Story_Of_Taxes_In_Alaska.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB156-Emailed_Comments.pdf |
HW&M 4/17/2023 6:00:00 PM |
HB 156 |
| HB 156-Initial Presentation-Final2 4-17-23.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |