Legislature(2005 - 2006)SENATE FINANCE 532
04/05/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB100 | |
| SB151 | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| += | SB 100 | TELECONFERENCED | |
| + | SB 88 | TELECONFERENCED | |
| *+ | SB 151 | TELECONFERENCED | |
| + | SB 70 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 151
"An Act excepting from the Alaska Net Income Tax Act the
federal deduction regarding income attributable to certain
domestic production activities; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Green explained that this legislation would decouple a
federal tax deduction from the Alaskan Net Income Tax Act.
DAN DICKENSON, Director, Tax Division, Department of Revenue,
explained that, beginning in 2005, the Qualified Production
Activities Income (QPAI) section of the federal American Jobs
Creation Act of 2004, would phase in tax relief to certain tax
payers by excluding a specified percentage of their net income
earned from extraction, production, and manufacturing activities in
the United States. Several handouts, including "The American Jobs
Creation Act of 2004", the "Tax Analysis Special Report" dated
February 21, 2005, and the "Primer: IRC 199 Qualified Production
Activity Income (QPAI)" dated April 4, 2005, [copies on file] were
provided to Members to provide additional information.
Mr. Dickenson stated that QPAI is "an attempt" by the United States
(U.S.) Congress "to advantage these kind of activities" that occur
in the nation "relative to those activities occurring abroad". The
affected industries in this State would include the construction
industry, the fishing and fish processing industry, the mining
industry, and the refinery/production and marketing activities of
the oil and gas industry. The QPAI would allow a three percent
deduction of their QPAI for the specified activities in 2005-2006,
a six percent deduction in 2007-2008, and a nine percent deduction
thereafter.
Mr. Dickenson stressed that the QPAI deduction would not be limited
to new activity. Companies would operate "exactly" as they had
before; however, under this new tax law, their "taxable income is
going to decrease", as a percentage of the specified activities
income "would be deducted, or excluded" from the calculation.
Alaska typically "adopts the federal tax code by reference" and, as
a result, the Alaska tax is based on the business's "worldwide or
U.S." taxable income. As of the year 2005, QPAI would lower a
business's taxable income by three percent. This would in effect
reduce the amount of money Alaska would collect in taxes.
Mr. Dickenson informed that the State has the option to decouple
from federal law. This has occurred in other areas of State law:
for example, Alaska's depreciation deductions differ from those of
the federal government. He pointed out that the impact of QPAI
would be more severe on Alaska than on any other state due to the
fact that "natural resources ? form the base" of the State's
taxable income. The State has limited service industry income in
its tax base.
Mr. Dickenson also observed that it is impossible for the State to
mirror the concept of the federal QPAI, which is to encourage
business activities in the United States rather than in other
countries, as the State is prohibited from passing a law that
would, in effect, lower a business's tax on an activity occurring
in Alaska rather than in another state.
Mr. Dickenson theorized that had the entire nine-percent deduction
been in effect in Fiscal Year (FY) 2004, the State would have
received approximately $24.7 to $27.4 million less revenue. He
reminded that the deduction would gradually increase from three
percent in the year 2005 to nine percent beginning in 2009. The
projected revenue loss, by year, is depicted on page two of the
aforementioned "Primer: IRC 199 Qualified Production Activity
Income (QPAI)" in the section titled "Projected State Revenue Loss
from QPAI Deduction". As reflected on that chart, the State would
lose approximately $100 million in tax revenues over the next
decade "as a consequence" of this federal tax.
Mr. Dickenson reiterated that this federal tax and its economic
policy goals could "not be replicated" by the State. In addition,
the income of foreign oil and gas corporations is viewed in terms
of corporations' worldwide income rather than their U.S. income. To
that point, the State is required to create a deduction table based
on those companies' worldwide income. "We believe that we would" be
required to allow QPAI-like deductions for activities done in
places outside of the United States such as Nigeria. The State
would be prohibited "from drawing that line between interior U.S.
and exterior U.S." activities in the same manner as allowed the
federal government.
Mr. Dickenson detailed that when the State audits a large
multinational oil company, it relies on the federal government to
conduct 95-percent of the work. While the State does not replicate
any audit work that the federal government conducts, it does audit
any income that might be attributed to Alaska or how a company
managed rules exclusive to Alaska. Were the State to accept the
QPAI deduction, it must be recognized that the federal government
would not be auditing a company's construction activities occurring
outside of the U.S.; therefore, the State would be required to
either conduct that audit or ignore it. To that point, the fiscal
notes accompanying this legislation do not reflect that, absent the
adoption of this legislation, more State resources would be
required as the State would be required to conduct audits "without
the support of the federal Internal Revenue System. This effort
would not be required were the legislation adopted.
[NOTE Co-Chair Wilken assumed chair of the meeting.]
10:04:50 AM
Mr. Dickenson noted that when this issue was discussed with
Governor Frank Murkowski, "his quick reaction" was that this was
"another unfunded federal mandate. Basically the feds have passed a
law, it has desirable policy goals for the federal government". The
State could recognize QPAI as being beneficial to taxpayers even
though the State would lose revenue. However, unlike most unfunded
federal mandates, the State, in this case, has the option to not
participate.
Mr. Dickenson clarified that were the State to decouple the QPAI
for State taxes, that action would "not make any changes to the
benefits the taxpayers receive when they file their federal income
taxes". The State's action would have no affect on the rules
governing a taxpayer and the federal government. Were the State to
decouple the QPAI section of the federal revenue code, the affect
on a taxpayer would be that the information filed on the taxpayer's
federal tax return would be used as the basis for their State
filing. This legislation would simply specify that one section of
the federal tax code would not apply in this State.
Mr. Dickenson qualified that this legislation would require some
transitional rules to be developed in order to avert confusion
regarding such things as estimated payments.
Mr. Dickenson remarked that the backup material in Members' packets
is extensive in comparison to "the brevity of the bill". The
aforementioned "The American Jobs Creation Act of 2004" handout
explains the history of the Act and briefly explains QPAI and the
other sections of the Act. Were this legislation adopted, with the
exception of the decoupling of the QPAI section, the other sections
of the Act would become part of State law. Another handout, titled
the "Tax Analysts Special Report" is a 24-page report that provides
information to companies about how to deal with the Act. The third
piece of material is a brochure notifying the Department's
Certified Public Accountants (CPAs), who are required to undergo
continuing professional education, about an upcoming conference
that would educate CPAs on how "to maximize U.S. tax benefits on
domestic production activities". Department participation in the
conference might be beneficial, as it would allow the State to
review tax codes and issues that could be relevant to the Alaska
Tax Code.
Mr. Dickenson stated that Chuck Harlamert with the Department's Tax
Code Division could address Members' technical questions.
10:09:26 AM
Senator Stedman voiced apprehension about whether this legislation
is "as simple of an issue as stated". His understanding is that
other than decoupling domestic production activities, no other
activity would be excepted from the federal Act. To that point, he
asked for further clarification regarding whether specific groups
of industries, such as the oil and gas industry for instance, have
been identified for exclusion.
Mr. Dickenson responded that the State has not identified any
particular industry: the oil and gas industry would be treated the
same as the fishing and construction industries. However, the
federal tax exemption's application to the oil and gas industry
would have significant impact as that industry "is paying the
majority of the dollars" under the State's tax system.
Senator Stedman asked for further information about how the State
would be affected by the federal nine-percent taxable income
reduction.
Mr. Dickenson explained that a company would calculate their
taxable income based on revenues less taxable expenses. The Act
would allow an additional deduction of up to nine percent of the
income derived from qualified production activity. This would
essentially allow some expenses to be "deducted twice". One
limiting factor is that expenses could not exceed 50-percent of the
business's W-2 wages.
10:12:02 AM
Senator Stedman asked whether this legislation would permit a
business to incorporate an appreciation schedule, referred to as an
Accelerated Cost Recovery System (ACRS), which would allow
appreciation to occur, for instance, over a 15-year period rather
than a 30-year period. Such compression would increase deductions.
Mr. Dickenson responded no, current appreciation schedules would
continue unaffected. The only other change specifically included in
this legislation would be an accelerated appreciation schedule in
regards to an Alaska gas plant "for federal purposes".
Senator Stedman asked, were this legislation to fail and the
federal Act to become effective in its entirety, whether a business
would be able to incorporate an ACRS instead of the regular
depreciation schedule.
Mr. Dickenson stated that neither the action of adopting or
rejecting this legislation would provide a business "access to
that".
10:13:38 AM
Senator Olson understood that the theory behind this federal Act
was to create jobs. He asked whether that theory would hold true
for Alaska, regardless of the outcome of this legislation.
Mr. Dickenson agreed that the purpose of the Act was to create jobs
in the U.S. There is "no sense" that this would result in jobs in
Alaska. The Act would essentially provide a "tax advantage if you
create jobs" in the United States. No tax advantage would be
provided were an entity to create jobs outside of the United
States. Alaska is prohibited "from drawing that same line". There
is no doubt that this legislation would provide the economic tools
to encourage new jobs in the nation; however, "the point is that it
doesn't help Alaska at all".
Senator Olson calculated that, absent this legislation, the State
would experience a $10,000,000 a year revenue loss for the next ten
years. He inquired to the cost associated with the implementation
of this legislation.
Mr. Dickenson expressed that this legislation would not incur any
expenses. To the contrary, costs would be incurred absent this
legislation, as the State would be required to conduct deduction
auditing on "QPAI-like activities that occur outside of the U.S".
Senator Bunde questioned the Department of Revenue indeterminate
Fiscal Note #1, dated March 22, 2005, [copy on file], as it does
not reflect the cost to the State were the legislation not enacted,
as specified in the Note's analysis on page two under the "Revenue
Discussion" heading.
Mr. Dickenson replied that the Department based its calculations on
FY 2004, "which was a very high" taxable income year. Future
taxable income level projections, which consider such things as
falling oil prices, are lower than FY 2004. Projections indicate a
range of losses from five million dollars in the initial years to
$16 million dollars in FY 2013. Losses could amount to $25 million
were a year similar to FY 2004 to occur.
Co-Chair Green commented that the fiscal note is "a little bit
misleading in that the information on page two must be brought into
consideration.
10:17:12 AM
Senator Stedman understood that this legislation would, in effect,
opt the State of Alaska out of this federal "economic stimulus
concept". To that point, he asked whether that action would affect
the accounting practices of such entities as "Sub-chapter "S"
corporations.
Mr. Dickenson reiterated that the State would be uncoupling from
only one section of a large multi-section piece of federal
legislation.
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department of
Revenue, expressed that while the QPAI section is "a major piece"
of The American Jobs Creation Act of 2004, it does not have any
specific affect on "S" Corporations under Alaska law. "Basically
the affect of this bill would be to reverse in your Alaska tax
return", one line item in the Other Deductions category of your
federal tax return. "Only corporations who pay tax now would be
affected; S Corps would not".
Senator Stedman noted that the State has two options: to uncouple
from the QPAI or to incorporate the federal Act in its entirety
into State tax code. The question is, "from the corporate
standpoint and from the State standpoint" which of these two
options would encourage development of refineries and other large
capital projects in the State.
Mr. Harlamert voiced being unaware of any element in this federal
Act that would incentivize construction of a refinery in Alaska; as
regardless of the location, be it in Alaska, Texas, or any other
state, the company would benefit from the federal tax exemption.
This benefit would also be allowed under Alaska tax code were the
State to adopt the Act in its entirety.
Senator Stedman asked which state would be in a better position to
attract development of a refinery: a state that has chosen not to
opt out or one that opted out.
Mr. Harlamert responded that that would depend on a mix of economic
factors including the specific state's taxation. Texas's income tax
laws, for example, differ from Alaska's. However, were the tax laws
identical and Texas to accept the Act in its entirety and Alaska to
uncouple the QPAI, the tax rate for the refiner would be lower in
Texas. However, it should be noted that even were the refinery
built in Alaska, the refiner would receive the same tax deduction
in Texas; the refiner would not receive the tax deduction in Alaska
regardless of whether the refinery was built in Texas or Alaska. In
conclusion, regardless of where the refinery was built, the refiner
would receive the same result under the State tax law.
Senator Stedman stressed that the encouragement of economic
development in the State is important. The concern is, therefore,
that the State not position itself at a disadvantage in that
regard.
Senator Bunde asked whether any taxpayer would be testifying
regarding this legislation.
Co-Chair Green replied that none have, of yet, signed up to
testify.
Senator Bunde stated that that could be an indication of "a lack of
concern" as he doubted their being unaware of the issue.
Senator Stedman requested that the bill be held in Committee to
allow for further discussion.
Co-Chair Green agreed.
Senator Olson referenced the "Status of QPAI in Other States"
section on page three of the Department's "Primer: IRC 199
Qualified Production Activity Income (QPAI)" report, and asked
whether the desire is to move the State from the "Conform to
Federal QPAI Deduction" column to the "Decoupled from Federal QPAI
Deduction" column.
Mr. Dickenson responded that would be correct.
Senator Olson commented that none of the states in the "Decoupled
from Federal QPAI Deduction" column resemble the State of Alaska.
Alaska is an oil producing state and has no personal income tax. He
inquired to the reason that Alaska should consider decoupling when
other oil producing states such as Oklahoma and Louisiana were
listed in the "Conform to Federal QPAI Deduction" column.
Mr. Harlamert expressed that the information reflected on page
three was voluntary, was not all-inclusive, and was not up-to-date.
One issue on which the State "stands alone in the nation for
applying worldwide combined reporting" is that major industries in
the State, specifically oil and gas companies, represent "80-
percent of the State's tax base". There is no other state in which
the implications of the bill would be "as dramatic as they are in
Alaska".
Mr. Harlamert continued that there "is a good argument for staying
in conformity with federal law ? [it] keeps things simple". Minor
timing differences should be avoided, as they would "generate
headaches for taxpayers and the State for years to come". However,
this legislation addresses "a permanent difference" ? the State
"would never be able to recoup the revenue" once its gone. The
affect of this Act would be more dramatic for Alaska than for any
other state. Most states typically adopt federal standards in a
manner similar to how Alaska does as that is the easiest approach:
it "takes an effort to come forth and change it".
Mr. Dickenson observed that West Virginia, Montana, and North
Dakota, which are also considered resource states, have decoupling
legislation pending.
10:26:53 AM
Co-Chair Green recognized Arkansas, which has already decoupled
from the Federal QPAI Deduction, as a resource state.
Mr. Dickenson voiced that the Department would be available to work
with the Committee to address further concerns.
Co-Chair Green ordered the bill HELD in Committee.
AT EASE 10:27:37 AM / 10:30:35 AM
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