Legislature(2017 - 2018)SENATE FINANCE 532
11/09/2017 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB4001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB4001 | TELECONFERENCED | |
SENATE BILL NO. 4001
"An Act imposing a tax on wages and net earnings from
self-employment; relating to the administration and
enforcement of the wages and net earnings from self-
employment tax; and providing for an effective date."
1:35:53 PM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
introduced himself.
Co-Chair MacKinnon queried opening comments. Commissioner
Fisher replied that he was grateful for the time allowed to
discuss the bill. He announced that there was "too much
uncertainty" in Alaska. He noted the budget deficit, and
stressed that the deficit had an impact on the economy in
the state. He stressed that there was an opportunity to
unify the branches of government. He urged the committee to
observe the presentation within the context of the current
budget deficit. He stressed that he did not want to repeat
the challenges of the most recent legislative sessions.
Co-Chair MacKinnon acknowledged that Co-Chair Hoffman,
Senator Micciche, and herself had asked for an advancement
of the new Department of Revenue (DOR) Sources Book. She
wanted a common agreement that would reflect the revenue
shortfall.
Mr. Alper acknowledged his staff who had worked to compose
the preliminary fall forecast.
Co-Chair MacKinnon remarked that some of the items in the
forecast may change, because of the pressure to provide the
information early. She remarked that the changes would not
be held against DOR, but stressed that she needed to know
the reason for the change.
Mr. Alper remarked that chapter 3 of the Revenue Sources
Book would be about oil price forecasting, and some of the
nuance and uncertainty within that forecast.
Co-Chair MacKinnon noted the various models that predicted
price at significantly higher than the DOR forecast.
Mr. Alper remarked that the presentation was like the
presentation in the House Finance Committee, with some
slight differences.
1:41:43 PM
Mr. Alper discussed the PowerPoint, "Capped Payroll Tax-
Bill Introduction: SB 4001 by Governor Walker" (copy on
file).
Mr. Alper looked at slide 2, "Bill Title":
"An Act imposing a tax on wages and net earnings
from self-employment; relating to the administration
and enforcement of the wages and net earnings from
self-employment tax; and providing for an effective
date."
Mr. Alper addressed slide 4, "From OMB Director Pitney." He
remarked that expenditures had declined from the peak in
2013, but did not decrease as quickly as the revenues.
Mr. Alper highlighted slide 5, "The main issue is a
reduction in oil revenue." He remarked that the slide
reflected the decline in oil revenue. He also noted the
decline in oil.
Mr. Alper addressed slide 6, "Budget has been reduced to
1990s levels when adjusted for inflation and population."
He explained the colors of the chart.
1:46:13 PM
Mr. Alper discussed slide 7, "Why a Broad-Based Tax?"
? Even a small tax as proposed in SB4001 covers
roughly half the forecasted ongoing deficits
? This buys the state time in case of various
contingencies
? A tax combined with PF restructuring and continued
budget discipline makes a complete fiscal plan
? If we get to where the CBRF is gone in a couple of
years and don't have a revenue measure in place, it
takes over a year to collect a new tax
? At that point, the remaining alternative of
additional unstructured Earnings Reserve draw could
establish a potentially catastrophic long-term
precedent
1:48:29 PM
Senator von Imhof looked at the third bullet point, and
queried the description of "continued budget discipline.
Mr. Alper responded that he was only responsible for the
Tax Division budget. He remarked that his division was
consistently looking for consistencies. He hoped that every
department and division was looking for efficiencies within
their budgets.
Commissioner Fisher furthered that the budget proposals
still left hundreds of millions of dollars of unfunded
spending. He stressed that the tax would not fully fund the
budget need, so it was incumbent to continue the focus on
reducing costs. He stressed that a large driver was health
care, and he hoped that there would be a conversation
related to the handling of health care costs. He remarked
that the Department of Administration (DOA) published a
relevant article to that conversation. He understood that
there was an expectation that there was a desire to see
future budget discipline in the management and operation of
government.
Co-Chair MacKinnon wondered whether Senator von Imhof
wanted to elaborate on previous comments related to average
inflation in the Anchorage area.
Senator von Imhof shared that David Teal [Director,
Legislative Finance Division] had previously indicated that
inflation at five-year trailing CPI [consumer price index]
at approximately 1.3 percent yielded for a more balanced
overall budget in the future years, than the assumptions of
a higher growth rate. She stressed that the discipline was
both in a starting point and future growth.
Commissioner Fisher remarked that felt that there was some
wisdom in that assertion. He felt that there was a recent
nationwide period of low inflation. He remarked that there
was an expectation that future years would experience
higher rates of inflation.
1:53:42 PM
Senator Micciche wondered whether the deficit was a likely
temporary situation.
Commissioner Fisher stated that the modeling showed that in
the out years the budget would go back into balance, and
there would be a replenishment of the reserves.
Mr. Alper furthered that the balanced budget presumed the
passage of a permanent fund restructuring bill, comparable
to SB 26.
Mr. Alper addressed slide 8, "Impact of Unstructured
Draws":
Maintaining the CBR balance at $2 billion minimum
level is crucial but leaves little flexibility.
An additional $500 million annually taken from the ERA
above the structured draw reduces the Permanent Fund
balance by $5 billion compared to a structured draw
with additional revenues
That $5 billion left in the PF generates $250 million
annually - reducing future tax.
1:57:22 PM
Co-Chair MacKinnon remarked that a $2 billion draw would
impact the long-term viability to the fund, and felt that a
conversation of an additional $500 million was a huge
policy discussion. Mr. Alper agreed. He stated that the
permanent fund tended to grow faster than the rate of
inflation, because there was only a withdrawal of a portion
of its earnings. He stressed that using the earnings to run
government must allow for inflation within the structure to
keep the real value whole.
Co-Chair MacKinnon felt that highlighting one variable in
the discussion was not appropriate. She wanted to ensure
that it was known that there were many variables that
affected regions differently. The formula provided a
different conclusion depending on "where we turn those
knobs." She remarked that there had been a discussion about
how one half of one percent equaled $300 million. Mr. Alper
replied that it equaled between $200 million and $300
million.
Co-Chair MacKinnon remarked that they were discussing rates
that had historically been over 2 percent above the
discussion. She pointed out that the three-year average was
closer to 6.18 percent actual rate of return. She noted
that there was a downward trend, in only the previous three
years. Mr. Alper stated that the bill that had passed from
committee addressed the revisiting of the sustainable
rates.
Senator Micciche wondered whether there was the right "mix
in the liquidity management" statutes for the CBR. Mr.
Alper replied that he did not fully understand the
question. He stressed that the CBR was invested more
aggressively when there was not the expectation to
withdraw.
Senator Micciche felt that the time horizon of the five-
year expected spend should be shortened, to have a higher
rate of return on the CBR. Mr. Alper replied that the
administration was directed by the legislature was that the
portion that would not be needed in five years could be
invested more aggressively at a higher rate of return. He
expected that, should there be a broader fiscal solution
passed, that there would be a transition into a better
investment portfolio at a higher rate of return.
Commissioner Fisher furthered that five years was a long
horizon, and shared that the statute that governed the
management of the CBR required that money expected to be
spent in five years be invested cautiously in highly liquid
instruments. He felt that there should a reexamination of
that management.
2:02:38 PM
Mr. Alper looked at slide 10, "Tax Proposal Summary":
? 1.5 percent tax on wages and self-employment income
? Tax paid by individuals earning income in Alaska;
two income families would pay for each person
? Does not tax investments, retirement income, etc.
? Employers withhold and file for wage employees
? Tax is capped at $2,200 or twice the previous year's
PFD, whichever is greater
o Cap applies to incomes over $147,000 / year
o Cap only impacts top 5 percent of earners
o Foregone revenue from the cap is $10 to $20
million
Mr. Alper discussed slide 11, "Tax Proposal Summary":
? Revenue about $320 million at full implementation
? About 15 percent of revenue will come from
nonresidents
? For most Alaskans the tax is less than the PFD
? Out-of-state residents will pay the highest
effective rate because they do not receive PFDs
Senator Stevens queried the rational for not letting those
who earn more money pay more tax. Mr. Alper responded that
there would be a slide related to the tax cap.
2:06:59 PM
Mr. Alper addressed slide 13, "Alaska History of Taxes
based on Income and Wages":
? Began in 1949 at 10 percent of federal tax liability
? By 1961, the tax was 16 percent of federal tax
liability
? In 1975, Alaska switched from federal tax liability
to its own tax brackets
? Ranged from 3 percent to 14.5 percent on taxable
income
? Alaska repealed personal income tax in 1980 after
oil revenue boom
? "Alaska Fair Tax" (HB303) passed House in 2002.
This was an income tax designed to match the effective
tax rates of a Sales Tax
? Various bills 2015-17 leading to HB115
2:09:20 PM
Co-Chair MacKinnon queried the total amount of money that
Alaskans pay in federal income taxes. Mr. Alper replied
that it was more than $300 million.
Co-Chair MacKinnon remarked that there was a notion that
use of the earnings to benefit all Alaskans. She stated
that 50 percent federal and general funds were the budget,
which is why there was a concentration on the undesignated
general funds (UGF). She stated that 50 percent of the UGF
went to the communities, and were not part of the state
government. She stressed that some people felt that it was
unfair to take from low income families a dividend that
meant something different than a higher income family. She
stressed that Alaskans were contributing to federal taxes.
Mr. Alper replied that the permanent fund was essential to
Alaska's culture, both symbolically and monetarily.
2:13:14 PM
Co-Chair MacKinnon noted that a previous administration
approved a "double dividend." Mr. Alper agreed. He remarked
that there some slides that showed the per capita tax.
Mr. Alper discussed slide 14, "SB 4001 is different from a
true income tax":
? Does not tax several key types of income:
o Capital gains
o Retirement earnings
o S-corp distributions
? The administrative structure, as well as the flat
rate with a cap, is modeled after the "school head
tax" bills such as Sen. Bishop's SB12 (without the
marginal tax issues that come with the stair step
structure)
? Much less complex administration and staffing need
? Does not require individual filing for typical wage
earners
? Nevada is one of seven states without any income
tax, but has a Modified Business Tax (MBT) of 1.43
percent remitted by employers on wages above $50,000
(Tax Foundation)
Mr. Alper highlighted slide 15, "Thought behind the 'cap'":
? Substantial number of Alaskans ask, in essence, "why
are we collecting a tax with one agency while paying a
dividend with another?"
o Certain people, while opposing a tax, are
prepared to give up their PFD to help operate
government
? Actually eliminating the dividend would be very bad
policy for many Alaskans throughout the state, and it
is highly unlikely to imagine a majority approving a
full elimination
? The structure of the SB 4001 "cap" acknowledges the
concerns of those people- basically taxing the
dividend back from higher income Alaskans
? The hope is, a tax with this structure will be more
broadly acceptable than a full income tax
2:18:40 PM
Mr. Alper discussed slide 16, "Technical Language in SB
4001":
Bill is about 1/3 the length of HB 115.
Language is adequate to establish, or authorizes
regulations to define, many key issues:
? Defining "self-employment" and "from a source
in the state" plus other key terms
? Interpretations must be consistent with
Multistate Tax Compact
? Incorporates IRS code to a limited degree where
needed, state can require a copy of federal
return
? Process for withholding and remitting tax by
employers
? Filing of reports for payments to self-employed
individuals and contract employees
Vice-Chair Bishop wondered if there had been analysis of
the 1980 school head tax, and its implementation
procedures. Mr. Alper replied that the proposal was
withholding and employer-based, so there was some
"piggybacking" that could be done with Department of Labor
and Workforce Development (DLWD). He stated that the
federal government funded some unemployment insurance, so
the DLWD was federally funded with tightly prescribed
workloads.
2:21:35 PM
Mr. Alper continued to discuss slide 16:
? Individual returns by those required to do so,
mainly the self-employed
? Refunds for overpayment
Vice-Chair Bishop felt that the protocol already existed
within DLWD, and there was a repayment method. Mr. Alper
agreed. He stated that there was a cap that the state
annually adjusted, which was currently $39,000. He
explained that unemployment insurance was only paid on the
first number of dollars earned.
Mr. Alper looked at slide 18, "Revenue Impact":
? DOR estimates $160 million in FY2019 due to the tax
taking effect in January 2019
? This amount is from withholding / employer
payments
? No tax returns filed until April 2020
? DOR estimates $320 million in FY2020 based on
modeling using aggregated federal income data for
Alaska residents
Mr. Alper highlighted slide 19, "Revenue Details":
Revenue estimates are based on 2015 IRS Data
? About 440,000 total resident taxpayers, revenue
$280-$290 million
68,000 below $10,000 income
62,000 between $10 and $20,000
161,000 between $20 and $50,000
107,000 between $50 and $100,000
38,000 between $100 and $250,000
4,000 above $250,000
? Net nonresident (after subtracting Alaskans who
earn all their income outside) revenue $40
million
? Without the cap, total revenue would be $10 to
$20 million higher (foregone from high income
individuals)
2:25:50 PM
Mr. Alper addressed slide 20, "Fiscal Note Implementation
Cost":
? Implementing an individual income tax in 14 months
will be a significant logistical challenge
o Need to draft regulations
o Need to design, develop, and test technology to
administer tax system for over 400,000 taxpayers
? Estimated $300,000 supplemental appropriation
request for a contractor to work with DOR on an
implementation plan
? Estimated $10,000,000 one-time capital appropriation
to build income tax into our current tax revenue
system
o Includes withholding, filing, and refunds
? Gradual ramp-up of staffing; eventual annual
management cost estimate is $5.2 million with up to 40
employees
? Total cost over six-year fiscal note period is about
2.5 percent of projected revenue.
Co-Chair MacKinnon queried a comparison to the income tax
that was proposed, and the employees needed for income tax;
versus the payroll tax with most of the collections housed
in other areas outside of state government. Mr. Alper
replied that the income tax fiscal note spoke of 60
employees, but he felt that was too few a number. He
remarked that the type of auditing activity with an income
tax was "a big deal." He stated that there could probably
be one-half of the numbers of additional employees. He
stated that the cap would save money, because there was
less need to audit the high-income tax payer to be sure
that they were filing accurately.
2:29:55 PM
Senator von Imhof wondered whether the component could be
added to the personal business. Mr. Alper replied that
there would be efficiencies, and felt that the main
comingling element with the Permanent Fund Division would
be dealing with the physical paper application.
Senator von Imhof noted that there was already a quarterly
report of employees by the employer. She felt that there
would be a redundancy of work. Mr. Alper replied that
there was a hope to use the DLWD data.
Mr. Alper discussed slide 21, "Fiscal Note Implementation
Cost":
? The Department of Revenue's Fiscal Note is somewhat
conservative (meaning too high, we hope)
? Assumes stand-alone system built within the Tax
Division
? Items that need to be pinned down (partial list):
o How much can we limit individual reporting
needs vs. relying on employer filing?
o Process for self-employment filing system
o Degree of electronic vs. paper filing
o Potential coordination with Department of Labor
(Employment Security Tax). This would have
substantial challenges due to federal funding
2:36:26 PM
Co-Chair MacKinnon announced that the presentation was
currently on slide 21.
Mr. Alper highlighted slide 23, "Impact of Recession on
Alaska's Economy":
Per the Alaska Department of Labor, since the peak:
? Overall economic activity in the state down 17
percent (much of this due to the reduction in the
value of every barrel of oil)
? Total job losses 11,600 positions (3.2 percent)
? State government job losses 2,600 positions (11
percent)
? State facility closures throughout the state
Vice-Chair Bishop wondered whether the 2600 state job
losses were "real people affected by a layoff."
Commissioner Fisher explained the difference between
layoffs, reductions, and vacant PCNs [position control
numbers]. He explained that there were several PCNs that
were not funded. He stated that the slide represented
people that were receiving a paycheck, and were currently
not receiving a paycheck. He explained that the majority
were association with attrition that were not backfilled.
Mr. Alper furthered that eliminating a state position would
cause that person in that position to look for another job.
2:41:51 PM
Co-Chair MacKinnon wondered whether the private sector used
attrition as the best business practice when facing a large
deficit. Commissioner Fisher responded in the affirmative.
Co-Chair MacKinnon stated that the 2600 employees might
need state services. Commissioner Fisher agreed.
Vice-Chair Bishop stressed that he would like to see full
employment.
Co-Chair MacKinnon noted that Alaska had the highest
unemployment rate at 9 percent.
Mr. Alper addressed slide 24, "ISER-Job Impact of Different
Options." He noted that taking the money out of the economy
would be reflected in job losses.
2:47:27 PM
Co-Chair MacKinnon queried the label on the lighter area of
the slide. Mr. Alper replied that there was enough
uncertainty and variables in the analysis, based on certain
assumptions.
Co-Chair MacKinnon handed the gavel to Co-Chair Hoffman.
Mr. Alper looked at slide 25, "ITEP analyzed multiple tax
options that each would raise $500 million." He stated that
the slide was a screenshot from the Institute for Taxation
and Economic Policy.
Mr. Alper highlighted slide 26, "Comparable Tax Burden
(state to state)." The chart showed the per capita taxation
of every state.
2:52:08 PM
Senator von Imhof queried the other states with regional
sales tax layered with their state sales tax. Mr. Alper
shared that the next slide might address that issue. He
stated that Alaska was unusual in that it had predominantly
local sales taxes. He remarked that the actual average
sales tax rate paid by Alaskans was 1.7 percent, but no one
actual paid that rate, but it was the average of all the
107 sales taxes in the state. He shared that other states
had local taxes, but "piggy-banked" on top of the state
sales tax.
Co-Chair Hoffman handed the gavel to Co-Chair MacKinnon.
Senator von Imhof stressed that Alaska had a tax related to
health care. She felt that the cost of living in Alaska was
extremely high. Mr. Alper agreed.
Mr. Alper discussed slide 27, "Comparable Tax Burden (state
and local)."
2:58:40 PM
Senator Micciche wondered why the oil and gas property tax
was included, because he felt that it was a confusing
addition to the slide. Mr. Alper replied that the property
tax data included all local property taxes.
Co-Chair MacKinnon noted that the contribution to school
districts was based from a calculation on property tax. She
remarked that a reduction in property tax would be a loss
to the local schools. Mr. Alper replied that it was
included in the property tax data set.
Mr. Alper highlighted slide 28, "Comparable Tax Burden
(largest cities."
Co-Chair MacKinnon wondered whether there could be a walk-
through of the structure of the bill. Mr. Alper replied in
the affirmative.
3:04:25 PM
AT EASE
3:12:43 PM
RECONVENED
Mr. Alper deferred to Mr. Spanos.
3:13:38 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, discussed the Sectional Analysis
(copy on file):
Section 1:
Conforming language to exempt individuals required to
file under this bill from electronic filing
requirement. Actual exemption language is in Section 2
at 43.45.051(f).
Section 2:
Adds a new chapter 45 in AS 43 for a payroll tax on
both wages and self-employment income earned in
Alaska.
43.45.011 Imposes a tax of 1.5 percent on wages
and net earnings from self-employment from
sources in the state. Net operating losses are
not allowed when calculating earnings from self-
employment. Creates a maximum tax "cap" equal to
two times the permanent fund dividend distributed
in the previous calendar year. If the dividend is
less than $1,100 as adjusted for inflation, the
maximum tax is $2,200 adjusted for inflation
instead.
43.45.021 Defines sources of income in Alaska
that are subject to the tax.
Senator Stevens asked that there be a reference to a page
and a line.
Mr. Spanos continued to discuss the Sectional Analysis:
43.45.031 Authorizes the DOR to adopt
regulations for determining self-employment and
partnership net income of multistate businesses
consistent with apportionment statutes currently
allowed for multistate corporations.
Co-Chair MacKinnon announced that she would point out the
pages.
Mr. Alper stated that the bulk of the bill was in Section
2, which added new statute that created the new tax.
3:17:20 PM
Mr. Spanos continued to discuss the Sectional Analysis:
43.45.041 Provides for withholding from wages
and salaries by employers, with those withheld
taxes periodically remitted to the state.
43.45.051 Provides for annual returns from
self-employed individuals to the DOR with taxes
due on the date the federal tax return is due.
Self-employed individuals are exempt from the
requirement to file a return electronically, but
paid preparers are not exempt from the
requirement. Authorizes the DOR to adopt
regulations for partnerships to elect to pay tax
on the partner's behalf and file composite tax
returns.
43.45.061 Provides that a taxpayer's tax year
and method of accounting are the same as they are
for federal tax purposes.
43.45.071 The department is authorized to pay
refunds of overpaid taxes. Refunds may be
coordinated with refunds of employment security
contributions.
43.45.081 Anyone required federally to report a
payment to a self-employed individual is required
to report the same payment to the DOR.
43.45.091 Authorizes the DOR to adopt
regulations and forms. Tax collected under this
bill to be deposited into the general fund. The
DOR will coordinate collection and reporting of
this tax with the employment security
contributions by the DLWD if it will result in
cost savings for the state.
43.45.101 Adopts certain administrative and
penalty sections of the internal revenue code.
3:21:09 PM
Co-Chair MacKinnon wondered whether the references did not
commit Alaskans to any other form of taxation outside of
the control, based on the legislation that tied into the
federal code. She wondered whether it was for refunds only
or descriptive language that was consistent with employment
issues. She asked whether the legislation "hooked into" a
rate increase or something else. Mr. Spanos replied that
there were no rate increases in the sections. He stated
that there may be some understatement penalties.
Co-Chair MacKinnon remarked that there may be some changes
that had increased compliance requirements. Mr. Spanos
stated that the sections were all administrative sections.
3:23:12 PM
Mr. Spanos continued to discuss the Sectional Analysis:
43.45.111 Authorizes the DOR to send certain
confidential information to a banking institution
to verify the direct deposit or correct an error
of a refund.
43.45.151 Adds definitions for specific terms
used in this section.
Section 3:
The DOR may adopt regulations to implement
Section 2. The regulations will take effect on or
after the effective date of Section 2.
Section 4:
Immediate effective date of Section 3, so that
regulations can be drafted immediately.
Section 5:
Effective date of 1/1/2019 for the rest of the
bill.
Mr. Alper thanked the committee for their consideration of
the bill.
Co-Chair MacKinnon thanked the presenters. She remarked
that many Alaskans had opinions about the subjects
discussed related to the bill and the budget. She wished
Senator Giessel a "Happy Birthday." She felt that Senator
Giessel was one of the most hardworking legislators. She
discussed the following day's agenda.
SB 4001 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 4001 DOR TAX present payroll tax 11-9-17.pdf |
SFIN 11/9/2017 1:30:00 PM |
SB4001 |
| SB 4001 Sectional.pdf |
SFIN 11/9/2017 1:30:00 PM |
SB4001 |