Legislature(2003 - 2004)
04/14/2004 09:05 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 366
"An Act relating to the levy and collection of sales and use
taxes, to the levy and collection of municipal sales and use
taxes, and to municipal sales and use taxes on alcoholic
beverages; and providing for an effective date."
This was the fourth hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that this bill, which is sponsored by the
Senate Finance Committee, would implement a four-percent Statewide
sales tax on the sale, lease, rental and use of tangible personal
property and services. He noted that the Version 23-LS1051\W
committee substitute is before the Committee.
Co-Chair Wilken noted that the purpose of today's meeting is to
hear public testimony regarding the bill.
Senator B. Stevens moved to adopt the Version 23-LS 1051\X
committee substitute and objected for explanation.
Senator B. Stevens explained that the Version "X" committee
substitute would exempt motor fuel taxes as well as the tax on the
sale and rental of real property, as identified in Section 17, Sec.
43.44.020 Exemptions subsection (14) and (15) on page seven, lines
seven through nine. This language reads as follows.
(14) the sale, transfer, or use of motor fuel taxed under AS
43.40.010;
(15) the sale, lease, and rental of real property and the
construction of improvements on real property.
Senator B. Stevens also pointed out that the committee substitute
would add a new subsection through which, at the request of the
Department of Revenue, internet commerce could be addressed, as
specified on page 16, lines three through five that reads as
follows.
(b) The Department of Revenue shall adopt regulations relating
to sourcing, or the determination of where a sale occurred for
sales and use tax purposed, that are, to the extent possible,
consistent with the Streamlined Sales and Use Tax Agreement.
Senator Hoffman asked whether Version "X" defines what constitutes
real property.
Senator B. Stevens communicated that while this definition is not
specifically included in the bill, pertinent definitions are
located in Section 17, subsection Sec. 43.44.199. Definitions.
beginning on page twelve.
Senator Hoffman acknowledged.
Senator B. Stevens removed his objection to adopting the committee
substitute.
There being no further objection, the Version "X" committee
substitute was adopted as the working document.
[NOTE: The following testimony from Deborah Mach, City Clerk, City
of Unalaska, which was inadvertently presented during the public
testimony on HB 375 and HB 377, has been incorporated into the
testimony on SB 366.]
DEBORAH MACH, City Clerk, City of Unalaska, testified via
teleconference from an offnet site in Unalaska to explain that as
part of her job as City Clerk, she is responsible for the
enforcement and collection of the local three-percent sales tax.
She is opposed to this legislation for numerous reasons.
Approximately ten to 15 percent of the 400 licensed businesses in
the city are on the city's sales tax delinquency list. Monthly, if
not weekly, communication is required with each of the 40 to 50
delinquent businesses. Some ultimately are sent to a collection
agency. The implementation of a Statewide tax would only serve to
increase the number of delinquencies that currently occur, and as
proposed, the implementation of a Statewide tax would eliminate the
City's ability to be involved. A previous version of the bill would
have provided an opportunity for the State to contract with a local
entity for enforcement efforts. However, this City/State
coordination of efforts option is not included in the current
version of the bill. This coordination of efforts "would make it
work."
Ms. Mach opined that it would be "impossible" for the State "to
collect taxes better," than those communities that have been
conducting this process for years, particularly in regards to those
businesses which are delinquent. She voiced concern that local
entities "would be forgotten" in the process were the State to
assume this responsibility. Therefore, she questioned how the State
would collect on delinquent sales taxes, as the State is so vast
and does not have a road system. She feared that the majority of
the enforcement effort would be focused on large communities such
as Anchorage, which has never had a sales tax. She declared that,
"small roadless communities would be the losers." To that point,
she stated that, to many small communities, the sales tax is the
primary source of local revenue.
Ms. Mach also voiced concern that the exemptions specified in the
bill are vague, and that the City of Unalaska is concerned that the
State would exempt the sale of marine fuel from taxation. She
stressed that Unalaska and many other coastal communities receive
the majority of their sales tax revenue from this source. She also
stressed that the proposed $60 tax limitation specified in this
bill regarding commercial and industrial rentals would also limit
revenue and result in serious negative consequences in communities
that do not currently limit taxes on this operation. She pointed
out that another area of concern is that sales tax collection
enforcement and remittance of sales tax is not thoroughly included
in the bill. Communities that currently collect a sales tax could
provide valuable assistance in this regard.
Ms. Mach voiced that there is also concern regarding the proposed
sales tax collection process and the subsequent redistribution of
that amount that would be remitted to local communities.
[NOTE: In addition to the testimony Ms. Mach presented during the
public testimony for HB 375 and 377, she also presented the
following testimony during the hearing on SB 366.]
Ms. Mach reiterated the concern that insufficient specifics
regarding enforcement and remittance of the sales tax have been
included in the bill. While voicing the understanding that
regulations would be developed in this regard, she urged that the
experience of municipalities be utilized in the development of
regulations that would affect them. One area of concern not
included in the bill, is the frequency regarding when the State
would remit local tax revenue to a municipality. She asked whether
this payment would be on a yearly basis or a monthly basis. This
type of information is critical in insuring that a municipality
could make payroll. She foresaw that municipalities would be lined
up to get the Legislature to change portions of this law, which
would not work for them. This legislation, like the versions before
it, is lacking in that dialogue with people such as herself who
have experience in sales tax matters has not been established. She
concluded that, in her experience, "a State sales tax together with
a local sales tax is not in the best interest of the State of
Alaska and its municipalities as a whole." She urged the Committee
to not support the bill.
JOHN MCNAMARA, Regional Tax Director, AT&T, testified via
teleconference from an offnet site in Denver Colorado and noted
that rather than presenting a position on this legislation, the
purpose of his testimony is to alert the Committee that, from the
telecommunications industry perspective, there are some technical
concerns that might compromise the industry's ability to comply
with certain aspects of this bill as written. The resale of
telecommunication services is one of the issues not addressed in
the bill. The telecommunications systems used today are multi-
faceted and involve a variety of provider and carrier "carrier
access" agreements that equate to wholesale and resale type
situations. The resale carrier access component of
telecommunications should be exempt from the proposed tax as taxing
it would create an unnecessary layering of the tax that would be
difficult to comply with. It must also be noted that the industry
is authorized by the Federal Communications Commission (FCC) to
"surcharge any … discriminatory taxes against our carrier access
expenses." Therefore, were the carrier access component taxed, the
industry would pass that expense on to Alaskan consumers via an
additional surcharge on their phone bills.
Mr. McNamara also noted that the majority of states that tax the
telecommunication industry itemize which services would be subject
to the tax, such as intrastate calls, interstate calls, or
international calls. Upon review, it appears that this bill would
tax all of these services; however, he suggested that the bill be
amended to clarify this point, as the intent "is not perfectly
clear."
Mr. McNamara stated that the third technical issue concerns
"bundling," which is the sale of "taxable and non-taxable items at
one fixed price." Bundling of services has become a popular
industry and consumer tool. Numerous states have addressed this
situation by allowing the industry to "disaggregate on our records"
the taxable from the non-taxable components. The tax could then
only be applied to those services that were taxable. The bill as
written "takes the exact opposite approach saying that if you
bundle those things, you have to apply the tax to everything." This
approach would place the State is a position contrary to the
national norm. In addition, were this tax applicable to wireless
carriers, they would, under the provisions of federal the Mobile-
Sourcing Act, also be able to pass the expense onto the consumer.
Mr. McNamara appreciated the fact that sourcing, or Internet,
taxation language was incorporated into the committee substitute.
He also voiced support of the State's participation in the
Streamlined Sales Tax project process, as it would be beneficial to
businesses that have multi-state operations, such as the
telecommunication industry. AT&T is currently required to file in
excess of 39,000 tax returns pertaining to its operations in over
11,000 taxing jurisdictions in the United States. This would equate
to one return every three minutes. Streamlining "would provide
uniform definitions, uniform tax basis, uniform bad debt
deductions, uniform rounding procedures, … where to source sales …
uniform grid space requirements for exemption processes," uniform
boundary change notifications, and other issues of importance to
businesses that are required to develop tax returns in multiple
taxing jurisdictions.
Mr. McNamara noted that local State of Alaska AT&T personnel could
work with the bill's sponsor to further its development, so that
the telecommunications industry could comply with its requirements.
Co-Chair Wilken voiced appreciation for Mr. McNamara's comments.
Senator B. Stevens asked the number of tax returns AT&T files
annually in the State.
Mr. McNamara recalled that AT&T submits approximately 50
jurisdictional tax returns in the State.
Senator B. Stevens understood that the implementation of this bill
would allow AT&T to file one tax return.
Mr. McNamara affirmed. The State's participation in the streamlined
Sales Tax provision program would go "hand-in-hand" with this
process.
Co-Chair Wilken voiced that AT&T's participation in further
developing the bill would be welcome. Gathering this type of
information is one reason that public testimony is important to the
bill process.
Co-Chair Wilken noted that participating via teleconference are the
communities of Kotzebue, Kenai, Ketchikan, Nome, Cordova and Mat-
Su.
DIANE KELLER, Mayor, City of Wasilla, testified via teleconference
from Mat-Su, and reminded the Committee that the City has a broad-
based two-point-five (2.5) percent sales tax with limited
exemptions and a current point-five (0.5) mill property tax rate
with a two-mill limitation. The City Council passed a resolution in
support of the State's pursuit of alternative revenue sources
including the development of a State sales tax. However, for the
next twenty years, the City is responsible for a total of
$18,635,000 in general obligation (GO) bond debt repayment for such
things as a local road and sports complex as approved by Wasilla
voters. She detailed the annual expenses the City is responsible
for and shared that there is concern that, with the current
property tax limitation and the City's current obligations, the
proposed State exemption for such things as the motor fuel tax,
combined with the State's proposal to collect the tax "would be
catastrophic" to the City. The City would be required to increase
the local sales tax level or the local mill tax. In addition, the
City is worried that it might lose business to surrounding non-
local-taxing communities. One full-time employee currently staffs
the City's sales tax program and approximately $100,000 was
recently expended to further the efficiency of the operation.
Another area of concern is the timeliness of the State's sales tax
remittance to the City as payroll and bills are required on a
monthly basis. No disruption of this process could be tolerated.
The City currently has a $500 tax limitation on purchases, as it is
concerned that the community would lose business to surrounding
communities such as Anchorage or Eagle River that have no sales
tax. Therefore, were the sales tax "differentials" too large, the
effect on Wasilla businesses could be devastating. Another area of
concern is that the proposed one-year transition period that would
be provided to cities that currently have local sales taxes is
insufficient. She suggested that either this transition period be
increased to five years or that the language in Sec. 17, subsection
Sec. 43.44.060(b), as detailed on page nine, that applies to those
cities having a three-percent or less sales tax, be altered as
those cities "do not have the means to quickly adjust to the
consequences of the bill." Were the State to adopt a streamlined
sales tax, she urged that local community participation be sought
in order "to better educate the State" about the impact the bill
would have on local communities.
Senator Bunde, reiterating that the State has a projected budget
deficit, asked whether Ms. Keller could suggest an alternate
revenue source.
Ms. Keller suggested that the State sell some of its massive land-
holdings. This would benefit the State and its residents by
infusing land into the property tax base. In addition, the revenues
generated from the sales would remove the State's need to withdraw
funds from State accounts. This avenue would have less impact than
a State sales tax.
Senator Bunde commented that this is an interesting concept;
however, he noted that this would provide future rather than
immediate revenue.
Ms. Keller responded that the implementation of this legislation
would also take a minimum of one to two years. She urged the
Committee to consider the impact that this legislation would have
on local communities.
Co-Chair Wilken asked Ms. Keller to submit her testimony in
writing.
Ms. Keller stated that she would provide a written copy of her
testimony after revising it to comply with language in the
"unexpected" Version "X" committee substitute.
Senator B. Stevens assured that multiple versions of the bill would
be forthcoming, as, in response to citizen, community, and business
concerns, the legislation is a work in progress.
Ms. Keller acknowledged the process and asked that the City of
Wasilla be provided further opportunities to comment regarding how
the bill would affect the community.
LOUIE COMMACK, JR, testified via teleconference from an offnet site
in Ambler in regards to HB 375 and HB 377 and urged that the Senate
reinstate the requested Alaska Legal Services (ALS) funding level
in the FY 05 Operating Budget as it is important to Bush area
residents. He noted that the closing of the Kotzebue ALS field
office incurred a hardship on area residents.
JOHN WHEATLEY, Legislative Chair, Associated General Contractors
(AGC), testified via teleconference from an offnet site in support
of broad based taxes to assist in balancing the State's budget.
While AGC supports the use of a broad based tax, specifically a
sales tax, it continues to support continuing efficiencies
including government cost savings, and other revenue sources,
including the use of the Alaska Permanent Fund. He urged Members to
further this bill.
GARY GRAHAM, Business Owner, Commercial Fisherman, Former
Commercial Pilot, and Member of the Cordova City Council and
District Representative, Alaska Municipal League (AML) Board of
Directors, testified via teleconference from Cordova and stated
that, as a result of its financial situation, the City of Cordova
has eliminated all travel funds. He presented an impassioned plea
on behalf of the residents of Cordova for the Legislature to
consider alternate options, including a State income tax, in lieu
of a State sales tax, as it would serve "to cripple and perhaps
bankrupt" several communities in Alaska including Cordova. This
version of the bill would devastate the City, especially in light
of the fact that the City is considering implementing a one-percent
sales tax to fund "the City's financially strapped medical center."
The imposition of this tax would serve to increase the City's sales
tax to seven percent. Were this legislation adopted, the total
State/City sales tax would amount to eleven percent. He urged the
Committee "to scrap" this bill as a Statewide income tax rather
than a sales tax would be the more appropriate and accepted manner
through which to address the State's fiscal gap. The City currently
has a 14-mill property tax and that each one-percent sales tax
equates to $400,000 in revenue to the City.
Senator Bunde expressed that an income tax would not be "a silver
bullet," as only 52-percent of the people in the State work. Of
that number, 48-percent, or less than 25-percent of the State's
total population, earn more than $30,000 and would likely be
subject to an income tax. Twenty percent of that 25-percent "would
end up paying 80-percent of the tax." He stated therefore, that
there would also be problems associated with developing an income
tax program to address the State's fiscal gap.
Mr. Graham acknowledged Senator Bunde's remarks and voiced
appreciation for the efforts exerted by the Legislature in
attempting to address the State's financial situation.
LARRY SEMMENS, Certified Public Accountant, Finance Director, City
of Kenai, and Former Controller and Finance Director, Kenai
Peninsula Borough testified via teleconference from Kenai. One
component of his job at the Kenai Peninsula Borough was being
responsible for the collection and administration of the Borough's
sales tax program. The City of Kenai is concerned about the impact
of a State sales tax on the City's ability to finance city services
due to the exemptions proposed in the bill. He spoke to his concern
about "the State's ability to administer a sales tax statewide" in
that the process, rather than the ability of the staff, is
cumbersome. He likened the Borough to being "a microcosm of the
State" and shared the difficulties it experienced such as that
oftentimes "businesses in very remote areas of the Borough simply
ignored the tax as there was no way the Borough was going to send
an auditor out to some remote area across Cook Inlet to collect a
couple of thousand dollars in sales tax as it was not cost
effective." He stated that the State would experience these same
types of problems. "The administration of the Sales tax would be
very costly." The computer system that would be required must be
tailored to the State's needs and would therefore be very
expensive.
SFC 04 # 79, Side B 09:54 AM
Mr. Semmens spoke of the difficulty and time-consuming efforts
exerted regarding the two different computer sales tax system
rewrites in which he had participated. One attraction of the sales
tax is that the level of the tax could be controlled by taxpayers;
however, the tax would place a heavier burden on low and middle
income individuals and would become "increasing regressive" on
these individuals as higher taxation limits were implemented and
large purchases were not taxed at the same level as smaller less
expensive purchases.
Mr. Semmens responded to Senator Bunde's comments regarding who
would pay a State income tax by commenting that approximately 50-
percent of the State's residents who do not work "would not be
paying a whole lot of sales tax either" as they might be utilizing
such things as assistance programs that are exempt from the sales
tax. Therefore, a sales tax would not serve "to spread that cost
either." He cited an Alaska Municipal League [unspecified] report
that was conducted by the University of Alaska and the Department
of Revenue that projected that tourism would generate approximately
ten-percent of the State sales tax revenue whereas non-resident
workers might pay up to 25-percent of a State income tax revenue.
That comparison, he stated, should encourage further consideration
of a State income tax. A State income tax would qualify as a
deduction on the federal income tax whereas a sales tax would not.
He calculated that, to generate the same amount of revenue for the
State, residents would pay more were a sales tax imposed than were
a deductible State income tax imposed. While the idea that the
State sales tax revenue would be shared with the local communities
is attractive, other revenue sharing programs such as veteran and
senior citizen property tax exemptions, road maintenance funding,
and municipality assistance programs that had been implemented by
the State are now defunct. Therefore, the sharing component of this
bill could be eliminated in the future were the State to experience
financial difficulties. He spoke against the implementation of a
State sales tax and echoed the Mayor of Wasilla's concern about the
impact on municipalities' ability to finance local service
projects. He commended Legislative action on reviewing revenue-
generating options but noted that other alternatives would be
preferred to a sales tax.
Senator Bunde responded that while a State income tax is deductible
on federal income tax, the argument "is illusionary", as an
individual must prepare an itemized income tax return in order for
the State income tax to qualify. The majority of Alaskans do not
itemize. In addition, the belief that non-resident income tax would
generate sufficient revenue for the State is also illusionary as
only approximately ten-percent of the wages earned in Alaska are
attributable to non-Alaska residents. Non-resident Alaskan workers
earn approximately $14,000 to $15,000 a year and as a result would
not pay much were an income tax imposed.
Senator Bunde asked Mr. Semmens what revenue-generating
alternatives he would recommend.
Mr. Semmens suggested that either a limit be placed on the
Permanent Fund Dividend or, as he understood the original intent of
establishing the Permanent Fund to be, some mechanism be developed
that would allow the earnings of the Permanent Fund to be utilized
when "the oil revenues ran out." Secondly, he would also implement
an income tax, and thirdly, were additional revenue required he
would support a State sales tax.
Senator Bunde clarified that numerous Legislators support using the
earnings of the Permanent Fund, as was originally intended.
Senator B. Stevens asked why the Kenai Peninsula Borough does not
implement an income tax if it is so effective.
Mr. Semmens was unsure as to whether the Borough had the authority.
Senator B. Stevens suggested that the Borough's Legislative
representatives further the idea that a local income tax be allowed
to support local government. He argued that while it is acceptable
for a local entity to impose a local sales tax to support local
government, local governments oppose the State's desire to impose a
State sales tax to support State services.
Mr. Semmens responded that there are better alternatives to a
Statewide sales tax at this time, as the implementation of such a
tax would have significant impact on municipalities. He commented
that he is "not ignorant of the fact that there are economies of
scale" in the proposal and that the State's administration of a
sales tax program might provide additional opportunities. However,
due to a variety of local taxing structures and codes, and the fact
that some municipalities have local sales taxes and other do not,
"the ability to craft sales tax language that would be revenue
neutral for municipalities" while at the same time generating
required revenue for the State to make it worthwhile would be very
difficult.
LINDA FREED, City Manager, City of Kodiak, testified in Juneau that
the City "is philosophically opposed to the implementation of a
Statewide sales tax. The City Council believes that there are other
better revenue options available to the State that do not
negatively affect" municipalities across the State "specifically
the earnings of the Permanent Fund and an income tax." She stated
that 70-percent of the City's operations have been supported for
more than 30 years by the revenue generated from its local sales
tax, which is its largest revenue source. She noted that as other
revenue sources, including State funding, have declined, the money
generated from the local sales tax becomes very significant. The
City utilizes these funds to support its harbors, street
construction and maintenance, parks and recreation services, the
police department, fire and ambulance service, public works
operation, and museum and library. She stated that the local "sales
tax program has been crafted to be sensitive to local needs." There
is concern that a Statewide sales tax could not be sensitive to the
multitude of local municipal issues.
Ms. Freed echoed other's concerns regarding the State's ability and
commitment to collection, enforcement, and auditing of each
community were a statewide tax imposed. The City of Kodiak has
absorbed the financial burden induced by reduced State and federal
funding because of its ability to develop a local sales tax
program. In addition, the City was able to completely fund a new
ice rink via a local sales tax. A City of Kodiak Resolution Number
04-5 [copy on file], dated January 22, 2004, in opposition to a
State sales tax was distributed to the Committee.
JACK SHAY, Assembly Member and Former Mayor and School Board
Member, Ketchikan Gateway Borough, and Board Member, Alaska
Municipal League testified in Juneau and noted "the irony" in the
fact that, were a State sales tax implemented, the Municipality of
Anchorage and other Railbelt communities would be "volunteering to
pay most of this tax burden that would be represented by the four-
percent sales tax." He stated that the Alaska Municipal League has
reviewed the idea of a State sales tax for many years and has
weighted in opposition to the sales tax proposal in its present
form as research indicates that in excess of 3,000 indirect jobs
would be lost were this tax imposed due to decreased purchasing
power of State residents. Small business operations would be
negatively affected, as, were local municipality taxes factored in,
the State would have some of the highest sales taxes in the nation.
This would result in "retail leakage" as consumers increase out-of-
state purchasing, including internet sales.
Mr. Shay, noting Senator B. Stevens question regarding a local
government implementing a local income tax, stated that local
citizens are already paying local property taxes combined with
other things such as local sales, tobacco, fuel, and alcohol taxes.
Mr. Shay shared that, as an alternative to the State sales tax, the
Alaska Municipal League (AML) supports using the earnings of the
Permanent Fund under such methodology as the Percent of Market
Value Plan (POMV) while protecting the citizens' Permanent Fund
Dividends. Other options could include increasing the motor fuel
tax, implementing a visitor tax, and increasing user fees. He
appreciated Legislator's efforts to address the State's fiscal
challenge. The aforementioned study indicates that the
establishment of an income tax would result in the loss of 1,875
jobs, which would be less of an impact than a sales tax, and that
use of the Permanent Fund earnings would incur zero job losses. He
informed the Committee that AML represents approximately 96-percent
of the State's municipalities and about 98-percent of the people.
In response to a question from Co-Chair Wilken, Mr. Shay noted that
he was speaking on behalf of both the Ketchikan Gateway Borough
Assembly and AML.
Senator Bunde pointed out that regardless of what taxation
methodology is utilized to generate revenue, the ultimate source of
all taxes is the people. There is no magic solution.
Co-Chair Wilken spoke regarding the concept of retail leakage, and
voiced that it should be recognized that were the decisions to buy
outside of the State solely a financial decision, people would only
make such out-of-area purchases were the cost of purchasing and
shipping the item less than the cost of buying it locally including
sales tax.
DENISE MICHELS, Mayor, City of Nome, testified via teleconference
from Nome, in opposition to the bill. The City's local five-percent
sales tax generates revenue that is used to pay for local services
and improvements. She voiced concern that were a Statewide Sales
tax implemented, local voters might choose to lower the local tax
rate and thereby undermine the City's ability to pay off its debt
services and fund City operations. The City has developed a
taxation system that works well for the community, and the City
does not currently exempt many of the items exempted from taxation
in this bill. She voiced support of POMV as an alternative source
of funding for the State.
MITCH ERICKSON, Representative, Nome Chamber of Commerce, testified
via teleconference from Nome and voiced appreciation for the
efforts being exerted to develop methods through which to address
the State's fiscal gap. Nonetheless, the proposed State Sales Tax
"is not the avenue to take." He noted that the City of Nome's
current five percent sales tax places the City at a disadvantage
with the City of Anchorage and the Internet that impose no sales
tax. He stated that while many people do not factor in the added
cost of shipping, the by-pass mail status that the City has reduces
the true costs of shipping substantially. He urged that other
revenue sources be considered.
Co-Chair Wilken asked whether bypass mail would include UPS, FED EX
shipping, and priority mail.
Mr. Erickson understood that it does not.
ROY ECHERT, Borough Manager, Ketchikan Gateway Borough, testified
via teleconference from Ketchikan and informed the Committee that
he has 27-years of municipal management experience, the majority of
which has occurred in other states in the country. He is personally
opposed to a State income tax and he reminded that it could only be
deducted from the federal income tax were a person to itemize their
tax return. He would support a State sales tax, "but only if" input
from those experienced in its administration is incorporated into
its development. He voiced appreciation for Senator B. Stevens's
comments that this bill is a work in progress and opined that the
process is being professionally and thoughtfully addressed.
However, he stressed that cooperative efforts with local
municipalities must occur in order to make it truly successful.
Mr. Echert identified two components of the bill that should be
altered: the State collection of the taxes and the Streamlined
Sales Tax Act (SSTA). The SSTA was initiated by large corporations
that have "a vast amount of bookkeeping" such as AT&T, and in
particular, WalMart that has a uniform pricing code policy.
Currently, every business is required to program its operations to
meet the local government tax requirements whereas SSTA would
provide a uniform tax basis. The incorporation of the SSTA should
be closely reviewed, as its adoption would allow for "the same
sales tax" in every city in every State that adopts it. This tax
would be remitted to a central collection agency in Massachusetts
and then divvied out to the Member states and municipalities "after
a huge administrative fee" is subtracted. In addition, neither the
frequency of this distribution nor any auditing procedure is
specified. The loss to the States would amount to millions of
dollars; the municipality would loose hundreds of thousands or
millions of dollars by joining SSTA.
Mr. Echert shared that during his experience as a City Manager in
Alabama, which is a state that administers a state sales tax, the
city lobbied for the local collection of the local sales tax, as a
leakage in the full amount of sales tax being collected was
identified, as the amount was lower than it should have been. When
the City began to do its own collection, the amount of sales tax
revenue collected by the two-person sales tax department increased
by 70-percent. This equated to approximately "three-quarters of the
local sales tax" being uncollected by the State. Numerous other
cities followed suit in the local sales tax collection process and
not one of them experienced less than a 30-percent increase in
their collection. In order to devote the same level of effort to
the collection of the tax as local governments provided, the State
would have been required to add an additional 1,500 State
employees. This was not fiscally possible.
Mr. Echert continued that the State of Alabama currently has a
three-tiered collection process wherein the State, the local
entity, or a private heavily regulated contractor could collect the
tax. The process is working well.
Mr. Echert stated that Alabama has voted against participating in
the SSTA for the past four years, as it would be "a disaster for
the State." Testimony supporting this position from the Alabama
Legislature could be provided.
Mr. Echert commended the Legislature for addressing the State's
financial concerns and offered his further assistance in developing
the bill. He reiterated his opposition to participation in the SSTA
as it ultimately benefits large corporations and would have a
negative affect on the State.
CATHLYNN GREENE, Sales Tax Clerk, City of Kotzebue, testified via
teleconference from Kotzebue and, on behalf of the City Council,
stated that the City opposes the adoption of a Statewide Sales Tax.
She noted that local concerns include the collection and
enforcement of the tax as well as the standard exemptions that
conflict with existing local sales tax exemptions and would result
in huge local revenue losses. The local sales tax has been elevated
as high as tolerable, and were a State tax implemented, the only
solution would be to lower the local sales tax level. At the
present time, the local tax raises approximately fifty percent of
the City's general fund revenue. The local tax supports such things
as police, fire and emergency services.
DOCTOR DOUG STARK, Member, Homer City Council, testified in Juneau
and reviewed his extensive local government work history, including
his Doctorate in Public Administration. He stated that, while the
Council has not enacted a Resolution specific to the proposed sales
tax, there is no support for a Statewide sales tax as there are too
many variables from community to community to develop a one bill
fits all position. From an administrative, political, and financial
standpoint, this proposal could not be a viable alternative through
which the State could raise the revenue required. Another major
revenue generator would be a State income tax; however the belief
that this could be a federal tax deduction is unfounded, as most
residents in the State do not prepare itemized tax returns and
would not qualify. He stated that there is "great inequality" in a
State income tax as most would not pay any and others would pay a
substantial amount.
Doctor Stark stated that a variety of smaller taxes would be
preferred as this would be the best manner to capture the widest
scope of State individuals without a significant impact on anyone.
While he supports the POMV, there is concern about the probability
of its being enacted, as the State's citizens generally do not
support using the earnings of the Permanent Fund to support State
government, even though the original intent of the Permanent Fund
was to provide a revenue source to the State during "rainy days."
He stressed that after dividends and inflation proofing were
provided, only the earnings and not the corpus, would be utilized
to support the State and possibly provide "municipal dividend
funding to substitute for the elimination of revenue sharing and
municipality assistance in the last couple of years." He avowed
that "the earnings of the Fund would be increasing substantially"
over the next few years and that this would be a good and
politically viable solution to the State's needs, as it does not
require a State Constitutional Amendment. He urged the Committee to
consider this action.
TIM BORSEY, Small Business Owner, Mayor, City of Skagway, and
Member, Board of Directors, Alaska Municipal League, testified in
Juneau as a small business owner, in opposition to a Statewide
sales tax. He stressed that retail leakage, especially when an
expensive item is being purchased is a serious and real issue.
While businesses often follow manufacturer's suggested retail
prices in order to remain competitive, wages and other business
overhead expenses are high in the State. This equates to a lower
profit margin. It is hard to compete with large corporations and
the purchasing of goods in Canada. People do make buying decisions
based on price and the addition of a State four-percent tax in
addition to the four-percent City of Skagway local sales tax would
result in consumers purchasing products elsewhere. He noted that
"savvy" Internet companies reach out to Alaskans and often provide
reasonable shipping rates. He concluded that the implementation of
a State sales tax would not be in the best interest of small
business.
CRAIG DUNCAN, Finance Director, City & Borough of Juneau (CBJ)
noted that he supports many of the comments opposing this
legislation. The CBJ has developed a budget that is an approximate
50/50 split balanced by property taxes and a five-percent local
sales tax component that includes a permanent one-percent tax and
two separate and temporary one-percent taxes. The implementation of
a four-percent State Sales Tax would "suddenly change" this
balance. The resulting nine-percent tax would jeopardize the
ability of the CBJ to get voter approval to extend the temporary
sales taxes to fund local projects. It has been determined that a
tax amount exceeding five percent is unpalatable. A nine-percent
tax "would be regressive," would harm local business, and would
"drive sales to the internet" and to Seattle. Sales taxes are
regressive, people do not like taxation, and would attempt to avoid
taxation even where it to cost more to avoid it. To further
complicate the issue, the nine-percent sales tax could result in an
approximate 20-percent budget deficit as this sales tax revenues
lost could not be recouped by an increase in property taxes, as the
City is limited to a maximum mill rate of 12-percent. The City does
not support this sales tax proposal as it would be financially
regressive for the City and would "have a devastating affect on our
economy and would drive business south…" rather than promoting
buying locally.
Co-Chair Wilken calculated that were this legislation implemented,
the City's current five-percent tax would increase to nine-percent.
One percent of the State's four-percent would be rebated to the
City and the City would not be required to staff a sales tax
department. He asked whether the City has determined how this would
affect the City's financial situation.
Mr. Duncan responded that the City conducted an analysis based on
an earlier version of the bill; it has been difficult to quantify
as numerous and on-going changes are occurring. He noted that over
the years a tax structure has been developed, through trial and
error, that specifies 40 local sales tax exemptions. The current
structure has been crafted based on twenty years of analysis and
what would be acceptable to residents.
Mr. Duncan stated therefore that the differing components of this
bill include such things as the sales tax limitation and the
exemptions, specifically the motor and heating fuel tax exemption
and the variance between the proposed senior citizen exemptions and
what is currently in place at the City level. In summary, while the
one percent rebate is an incentive, an exact projection is
difficult to accomplish. The big concern for the City is whether
local voters would extend the local temporary sales taxes, as he
reiterated, a sales tax exceeding five-percent would be
unacceptable to citizens.
Co-Chair Wilken asked whether the savings generated by not being
required to staff a sales tax division combined with the one-
percent rebate would allow the 12-percent mill rate to be lowered.
Mr. Duncan clarified that the City currently charges a 10.5 mill
rate. The two temporary one-percent local taxes generate
approximately $12 to $15 million dollars, which equates to
approximately five mills above the cap, and accounts for
approximately 15-percent of the City's annual budget. Were this tax
not re-approved, it would negatively impact education, which
equates to one-third of the City's budget, and police and fire
services, which equate to 15-percent and five-percent of the
budget, respectfully.
SFC 04 # 80, Side A 10:41 AM
Co-Chair Wilken asked whether the CBJ provides a senior citizen tax
exemption, and if so, how does one qualify for that exemption.
Mr. Duncan expressed that in order to qualify for the City's sales
tax exemption, the senior citizen is required to provide
documentation that they are age 65 or older. Once the documentation
is provided, a card is issued that must be displayed when making a
purchase in order to avoid paying the local tax.
Senator Bunde, understanding that Fairbanks does not have a local
sales tax, asked the property mill rate in the Fairbanks North Star
Borough.
Co-Chair Wilken responded that the 14-mill rate level includes a
City of Fairbanks mill rate.
Senator Bunde recalled that a compilation of local mill rate levels
and sales taxes had been developed in previous years. Such a chart
would allow for a comparison of local tax burdens.
Co-Chair Wilken agreed. He noted that the CBJ is one of several
communities in the State that is "really taxed."
Mr. Duncan stated that the City's temporary taxes are used to
support such things as roads, streets, sidewalks, and recently, a
hospital expansion. Where these capital project elements removed
and the operating component "provided to our mill levy" then the
CBJ per capita tax burden level would compare to the Municipality
of Anchorage property tax mill rate level. He reminded; however,
that the CBJ property tax mill rate level is limited to twelve
mills.
Senator Bunde, referencing the fact that education is the CBJ's
largest expense, commented that education is the State's second
largest expense.
DORIS BAILEY, Deputy Mayor, City & Borough of Sitka, testified in
Juneau and declared that when she voted on establishing the
Permanent Fund in 1976, it was understood that the Fund would be
used to support both Permanent Fund Dividends (PFDs) and State
government when oil revenues declined. She "strongly supports" the
POMV concept that would guarantee PFDs to citizens and would allow
the Legislature to use some of the earnings to support State
operations. She attested that multiple rather than a single
solution would be required to address the State fiscal crisis.
Ms. Bailey stated that, like Juneau, Sitka has a very carefully
crafted list of sales tax exemptions, including one that exempts
senior citizens from the tax. Some of the incentives provided by
the State and local communities are necessary to offset the State's
high cost of living that might otherwise force seniors to move
elsewhere. She is concerned that were this legislation enacted
without some senior citizen consideration, seniors living in Sitka
would be exposed to a ten percent sales tax comprised of a six-
percent local tax combined with the four-percent State tax. Many of
Sitka's senior citizens are low income and would be burdened by
this tax. Multiple options including the sales tax, the POMV, an
income tax, and other increased fees should be explored to address
the State's fiscal gap; the State sales tax should be the last
recourse. She urged that the affect of this bill on low income and
elderly people be a consideration.
There being no other testifiers, Co-Chair Wilken announced that
public testimony has concluded.
Senator B. Stevens communicated that of the 16 testifiers, one
special interest testifier was neutral, one private industry
representative was supportive, one Chamber of Commerce
representative spoke against the bill, and thirteen testifiers
representing local governments spoke against the bill. He stated on
the record, that rather than being a tax on local governments,
"this is a bill that affects the consumers of the State." He stated
that "a government verses government debate" occurred today
regarding who has access to the State's citizens' money. Additional
public testimony opportunities would occur as the bill continues to
be developed.
Senator Hoffman declared that the local government concerns are
valid, as local taxation has traditionally and historically been
utilized as a revenue source to support local government. He stated
that the proposal to implement a streamlined State sales tax could
be viewed as eliminating a local community's ability to fairly and
equitably collect revenue to support local governmental operations.
In addition, some of the exemptions might not properly align with a
local situation or produce the level of funding that a local
community might require, especially in light of the fact that there
is concern that the State might not be able to pursue collections
as well as the local government could.
Senator B. Stevens voiced appreciation for the concerns and the
debate; however, he pointed out that this is not a new concept and
that of the 45 states that have a statewide sales tax, 34 have
multiple taxing jurisdictions such as county, city, and borough
taxes in addition to the State tax. He declared that an appropriate
plan could be developed as exampled by the testifier who had
experienced this endeavor in Alabama. The State has a long way to
go to address its projected fiscal gap, and entities such as AML
have "adamantly" requested that the fiscal gap be addressed. This
is a mechanism that could generate revenue "to meet the demands
that are put on us as a government to provide the public services
that people demand."
Senator Bunde pointed out that "there was a small but well thought
out support" for utilizing the earnings from the Permanent Fund to
address the State's fiscal crisis. He declared, "that it would be
so logical that those funds" be utilized prior "to reaching into
citizens pockets for any type of taxes." Further consideration
should be provided to balance the needs of citizens, local
governments, and the State.
Co-Chair Wilken reminded that there is currently a $1.6 billion
balance in the Constitutional Budget Reserve.
Co-Chair Wilken ordered the bill HELD in Committee.
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