Legislature(2017 - 2018)HOUSE FINANCE 519
06/12/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Concepts and Revenue Impacts of Employment and Self-employment Tax | |
| SB12 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE BILL NO. 12
"An Act imposing a limited educational facilities,
maintenance, and construction tax on net earnings from
self-employment and wages; relating to the
administration and enforcement of the educational
facilities, maintenance, and construction tax; and
providing for an effective date."
1:35:49 PM
ARNOLD LIEBELT, STAFF, REPRESENTATIVE PAUL SEATON,
explained he had been asked to put together a presentation
of the concepts embedded in SB 12, which had been part of
the governor's request. In the current meeting, the
intention was to look at the fiscal impacts of SB 12,
thought to create $100 million in additional annual
revenue.
Vice-Chair Gara clarified the legislation had been put
forward by Senator Click Bishop.
Mr. Liebelt replied in the affirmative.
1:37:11 PM
Mr. Liebelt provided a PowerPoint presentation titled
"Concepts and Revenue Impacts of Employment and Self
Employment Tax" dated June 12, 2017 (copy on file).
Mr. Liebelt began by reviewing slide 3 titled "SB 12 -
Employment Tax for Educational Facilities":
"An Act imposing a limited educational facilities,
maintenance, and construction tax on net earnings from
self-employment and wages; relating to the
administration and enforcement of the educational
facilities, maintenance, and construction tax; and
providing for an effective date."
· The bill as written does the following:
· Imposes a tax on wages and net earnings from self-
employment (payroll tax)
· Estimated to generate $60 million annually, with $5
million from non-residents
· Intent is to designate the funds to the Educational
Facilities, Maintenance and Construction Fund (AS
37.05.560)
· Creates tax brackets with corresponding flat tax
(not percentages)
· Applies to residents and non-residents with income
from a source in the state
· Does not apply to capital gains, investment income,
retirement or other unearned income
Mr. Liebelt clarified he was just looking at the framework
of the bill as it was currently written.
Co-chair Seaton recognized Representative Louise Stutes in
the audience.
Representative Wilson asked about how much money was in the
Educational Facilities, Maintenance and Construction Fund.
Mr. Liebelt did not know the amount but the amount
available for appropriation was zero.
1:38:54 PM
Representative Wilson asked how much was taken out of the
fund for those projects each year. Mr. Liebelt did not know
the answer to her question.
Representative Wilson requested that Co-Chair Seaton's
staff get that information for the committee.
Vice-Chair Gara asked about which forms of income would be
counted. He surmised that income from stocks would not be
counted. Mr. Liebelt answered in the affirmative.
Vice-Chair Gara asked about S corporation income from
profits. Mr. Liebelt thought it would depend on how that
income would be defined.
1:40:02 PM
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON,
responded that SB 12 had been written using the Internal
Revenue Service (IRS) definitions of net earnings from
self-employment. There was some mention of partnership
income and some partners were S corporations but there were
a lot of specific exemptions for that type of income. It
was difficult to fully answer the question without closer
analysis.
Co-Chair Seaton reminded members the hearing was not on
SB 12, but on the concepts therein.
Representative Thompson commented that he had been an owner
of a corporation. He spoke of a bonus check, rather than a
dividend payment as a stockholder, which was included in
the W-2 tax form. He remarked there were a lot of grey
areas.
1:41:48 PM
Mr. Liebelt addressed a graph on slide 4 titled "Impact of
Tax in Alaska Senate Bill 12." He pointed to the blue
table, which showed the tax that would be owed based on
income. The far left of the graph showed the percentage of
impact on one's income, from 0.0 percent to 0.6 percent.
Anyone making less than $20,000 per year would pay $50.
Anyone earning between $20,000 and $50,000 would pay $100.
Anyone earning $50,000 to $100,000 would pay $200. Those
earning $100,000 to $500,000 would pay $300, and those
earning over $500,000 would pay $500. He pointed to the
table showing the percentage of impact on wages, salaries
and self-employment income. The high impact was at 0.5
percent. He noted the increments listed at the bottom of
the graph. He pointed to spikes at $20,000, $50,000,
$100,000 and $500,000. Additionally, someone earning
$99,000 then crosses over into the threshold of $100,000,
they would go from paying from $200 to $300. The impact at
the $20,000 to $30,000 level would be greater than for
those at the $100,000 level. In general, it was a
regressive tax as it would have a higher impact at the
lower end than at the higher end of income.
1:44:07 PM
Representative Wilson referred to wages and income. She
wondered if everyone would be paying at least $50. She
wondered if the Permanent Fund Dividend (PFD) was
considered taxable income.
Mr. Liebelt responded that the PFD would not be considered
earned income. The taxable income in the legislation was
only concerned with wages or income from self-employment.
Representative Wilson asked about those receiving dividends
from corporations. She asked whether any of those would be
considered earned income.
Ms. Hansen responded that publicly traded corporations
would not be included. The IRS [Internal Revenue Service]
definition did mention partnership distributions, but it
contained several exemptions. It was her understand was
that the IRS was attempting to narrow the definition to
include specifically self-employment. It was a more
detailed answer than she could provide presently.
1:46:32 PM
Representative Wilson asked where military personnel would
fall in the graph. Mr. Liebelt did not have the data on
hand.
Representative Ortiz referred to slide 3. He asked about
the proportion of revenue coming from nonresidents compared
to a House bill passed earlier in the session.
Mr. Liebelt thought the percentage was similar.
Co-Chair Seaton clarified that most nonresidents would be
earning wages. Essentially the proportionality would be
comparable.
Vice-Chair Gara commented that the wealthiest would pay the
lowest per income versus the lowest earners would be paying
the highest tax. Mr. Liebelt answered in the affirmative.
Vice-Chair Gara would want to see that factor changed.
1:49:28 PM
Mr. Liebelt reported that the sponsor had put forward the
bill in order to have some options for broad-based taxes.
He noted that there could be different brackets looking to
make things more equitable. The amount of tax in those
brackets could be changed. There were many ways the
legislation could be sliced and diced. The legislation was
devised in order to address a specific fund.
1:51:03 PM
Co-Chair Seaton received a question from Representative
Saddler in the audience. They had asked if the legislation
could be repealed it through a referendum. He responded
that every action by the legislature could be addressed in
a referendum. He reported that Representative Justin Parish
and Representative Geran Tarr were in the audience. He
added that the bill could be changed within the committee.
His office had not calculated the comparison. The analysis
had been carried out by Institute on Taxation and Economic
Policy (ITEP) ["Comparing the Distributional Impact of
Revenue Options in Alaska" by Carl Davis and Aidan Russell
Davis, dated April 2017 (copy on file)].
1:52:50 PM
Representative Wilson wondered what the group was
comparing.
Co-Chair Seaton indicated that a number of tax structures
had been compared, including a self-employment tax and a
flat tax mechanism. It was based on the same set of
criteria. He reiterated that SB 12 was one way an
employment tax could be structured.
1:54:19 PM
Vice-Chair Gara thought it was obvious that the legislature
was "stuck on high center" on the issue of generating
revenue.
1:54:54 PM
Mr. Liebelt highlighted a bar graph on slide 5 also titled
"Impact of Tax in Alaska Senate Bill 12." He explained that
the slide was looking at the impact of a tax on various
income brackets. The income range included impacts at the
lowest 20 percent, and so on. There was no limit on the
right side. Everything above $115,000 was broken down to
between $115,000 and $228,000, between $228,000 and
$556,000, and above $566,000. This was done for comparative
purposes. The lowest 40 percent earners were impacted at a
higher level than those at the higher end of the spectrum.
1:56:37 PM
Representative Wilson thought it would be helpful to
include the dividend on the graph which would have an
impact only on residents. She wanted to see how lopsided it
became if the $1,000 decrease in the PFD was included. She
thought it was important to compare apples-to-apples by
including what was on the table. She wanted to know the
total impact of each range.
Co-Chair Seaton commented that the ITEP report did show the
impact on each range. It had it for the Permanent Fund
reduction. That chart had been distributed and could be put
on top of the current chart to show the impact. The lower
income ranges showed a great effect on their income. He
referred to her query about military personnel and pointed
to the $40,000 to $73,000 in the middle range under SB 12.
Representative Wilson was asking in order for the public to
understand.
Co-Chair Seaton noted the ITEP report from April was on the
legislative website. He noted it did not contain SB 12, but
did address the other tax proposals.
1:59:52 PM
Ms. Hansen clarified ITEP had analyzed how much money would
come from nonresidents but the chart showing impact only
spoke to Alaska residents. Showing both categories would
greatly distort the chart.
Representative Wilson commented that when talking about the
out-of-state workers, it was important to recognize that
the PFD did not affect those taxpayers.
2:01:13 PM
Mr. Liebelt discussed options for increasing revenue on
slide 6:
1. Increase the number of brackets and tax rate per
bracket
2. Change from flat tax rate to percentage
3. Include earnings from capital gains and other
investment income
Mr. Liebelt elaborated on some of the concepts from the
bill that could be implemented. He pointed to the small
table in blue. If there was a 2.43 percent rate on wages
and self-employment earnings, it would generate about $500
million per year. At 1.82 percent, it would generate about
$375 million, and at 3.65 percent it would generate about
$750 million per year. It was important to note that the
rate was not progressive and would impact everyone at the
same percentage amount. It only applied to sources of
income within the state, for both residents and
nonresidents.
Representative Ortiz asked if it was a flat tax. Mr.
Liebelt answered as long as it was understood that it only
applied to wages from self-employment.
2:03:27 PM
Mr. Liebelt reviewed a graph on slide 7 titled "Figure 14:
Comparing the Impact of a Payroll Tax to an Income Tax in
Alaska." He reported that 95 percent of wage earners would
be impacted to a greater extent by a payroll tax than by a
personal income tax. He pointed to the middle bar. An
income tax impacted the middle class more than others.
2:04:59 PM
Mr. Liebelt addressed a graph on slide 8 also titled
"Figure 14: Comparing the Impact of a Payroll Tax to an
Income Tax in Alaska." He reported that the slide included
payroll tax, investment gains, and capital gains as well as
other unearned income. Once the payroll and investment tax
rate was applied to the personal income tax, the impact
levelled out. There was an impact at 1.2 percent for the
lowest 20 percent tax bracket, up to 1.3 percent, to 1.7
percent and 1.6 percent in the middle ranges, then to 1.5
percent and 1.4 percent at the highest tax bracket.
2:06:04 PM
Co-Chair Seaton reported that the tax rate dropped from
2.43 percent [flat tax shown in the payroll tax scenario in
figure 14] to 2.1 percent [flat tax shown in the
payroll/investment tax scenario in figure 15] as the flat
tax between slides [figures] 14 and 15 [slides 7 and 8]. He
stated it broadened across income - it was not what had
been included in the governor's bill. He noted the
scenarios reflected an effort to make things more equitable
among various groups. This lead to a flat tax across all
incomes.
Representative Wilson asked about using $2,200 per person
as a dividend payment. She asked whether people would get
money back [from the reduced dividend in the previous year
through gubernatorial action].
2:07:21 PM
Ms. Hansen replied that for the ITEP report each revenue
generating option had been examined separately. The
analysis had used the projected dividend payment, rather
than rely on the unknown amount of payments to be
determined.
Co-Chair Seaton added that the report was based on the
statutory rate dividend of $2,200.
Representative Wilson thought the actual versus the
statutory dividend amount would impact the bars in the
graph.
Ms. Hansen responded that the tax amount would appear on
slide 8. The bar from the reduction of the dividend bar
onto the bar from tax and the combined effect would be
shown how much income would change if there were a tax and
there was a reduction in the dividend amount.
2:10:08 PM
Representative Wilson mentioned the PFD would be taxed in
HB 115.
Vice-chair Gara corrected that a PFD tax was not in the
legislation.
Ms. Hansen replied in the previous slide regarding tax on
wages and self-employment income, it would not affect the
bars at all. In the present slide, there would be some
effect depending on how the bill was written.
Vice-Chair Gara asked Ms. Hansen to speak to the
disproportional impact on lower income taxpayers from a
reduction in dividend payments, and how that compared to
Senator Click Bishop's bill [SB 12] and to the Senate
proposal for a $1,000 dividend.
Ms. Hansen responded that each would have to be equalized
to compare them, and it would be too abstract to present
orally.
Co-Chair Seaton reported that Figure 15 was based on the
ITEP report which kept all analyses comparable in
generating $500 million. He commented that the committee
was looking at the comparisons rather than specific
numbers. He thanked Representative Wilson for her emphasis
on the impact of taxes on taxpayers. He mentioned the
difficulty in determining the range of incomes within the
state. The information on the slide showed the impact on
different segments of the population. He encouraged people
to examine the report on the website. The report was only
20 pages long and contained information on how different
economic segments of the population were impacted.
2:14:46 PM
Representative Guttenberg mentioned that in SB 12 there are
five brackets. Most of the analysis in the presentation
contained seven brackets. He wondered how many brackets
were in the IRS codes to get up to $500,000 income.
Co-Chair Seaton clarified that the brackets shown were
looking at segments of the Alaska economy rather than
taxes. He specified that they were flat taxes and not
brackets at all.
Representative Guttenberg recognized that there were many
ways the calculations were arrived at. He wondered how many
brackets were involved.
Ms. Hansen offered that from memory she believed the IRS
had eight or nine brackets. Many states had many more than
that. She spoke of unemployment insurance that cut off at a
certain income. At the federal level there were layers in
curves and steps, and at state levels they differed.
Co-Chair Seaton reminded members that not all of the income
was taxed and that the impact on the lower income levels
would be higher if there were a $1,000 or $2,000 dividend
and not the proposed changes at present.
2:19:34 PM
Mr. Liebelt concluded with slide 9 pertaining to options
available to close the state's budget gap:
There are many options available to close the state's
budget fiscal gap using a broad based tax. Each option
will impact families at different income levels in
very different ways.
Examples:
· Personal Income Tax: More progressive. Higher
payments from higher income families
· Sales Tax: More regressive. Impacts lower income
families to a greater extent.
· Reduction to PFD: Most regressive. Greatest impact
to lower income, least impact to highest income
· Payroll Tax: Impacts middle class more than the
lowest or highest income brackets.
· Payroll and Investment Income Tax: Most equitable
across income brackets. Will impact lower income
earners more on their income, and higher income
earners more on their investments
Co-chair Seaton reiterated that the concepts within the
bill were what was being examined.
Vice-Chair Gara asked what it would take to write another
bill containing some of the concepts in the presentation.
Co-Chair Seaton thought it was possible.
2:21:40 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
responded that if the desire was to draft a bill similar to
SB 12 but which would reflect some of the concepts in the
presentation, it would not be a big lift for either the
Department of Law or Legislative Legal Services. The
concern regarding SB 12 was in the need to write the
necessary regulations in order to implement the bill.
Representative Gara asked whether Scorporation owners'
income would count under the definitions of the bill, or
whether it would continue to be exempt.
Mr. Alper relayed he thought those categories would not be
included in the bill as written.
2:24:28 PM
Representative Ortiz stated he did not like to talk about
taxes. He asked whether, based on current information on
the stock market and on oil prices and production, the
state could adjourn the current session with the prospect
of a fiscal plan without adding revenue.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
responded that following examination it was concluded that,
if all components were perfect, as in high oil prices and
production, perfect stock activity, there could be a
balanced plan within four or five years without adding
revenue. However, if things happened in a more consistent
fashion, there would be a $300,000 shortfall.
Representative Ortiz asked if PERS [Public Employees'
Retirement System] and TRS [Teachers' Retirement System]
and oil tax credit obligations were included. Commissioner
Hoffbeck responded in the negative.
2:27:01 PM
Representative Wilson spoke to self-employment and asked
whether the item appeared on the table in form C of the tax
form.
Commissioner Hoffbeck deferred to Ms. Hansen.
Ms. Hansen was still getting familiarized with the net
earnings deductions. There were several deductions and she
thought it would likely be that line.
Representative Wilson filed self-employment taxes and knew
what it looked like. She spoke to 20 deductions. She got
taxed on her income to offset putting money into social
security. It would be a very different calculation if she
were an employee. Those people who were self-employed may
pay less, but there were deductions to be calculated as
well.
2:29:05 PM
Co-Chair Seaton drew Representative Wilson's attention to
slide 3. He pointed to net earnings on self-employment.
Those would be after a subtraction of business costs.
Representative Wilson thanked Co-Chair Seaton for making
her point. As an employee she would not be able to deduct
certain things, but as a self-employed taxpayer, she could.
Co-Chair Seaton stressed that the legislature was looking
at the information at a high level and the bill structure
was not formed. He thanked Mr. Liebelt for the
presentation.
Co-Chair Seaton recessed the meeting to a call of the chair
[Note: the meeting never reconvened].
| Document Name | Date/Time | Subjects |
|---|---|---|
| Concepts of Employment Tax-Seaton.pdf |
HFIN 6/12/2017 1:30:00 PM |
HFIN Presentation Employment Tax |
| ITEP Davis HFIN 050117.pdf |
HFIN 6/12/2017 1:30:00 PM |
|
| Response to questions Empl. Tax HFIN 6.12.2017 .pdf |
HFIN 6/12/2017 1:30:00 PM |
Response HFIN Employment Tax |