Legislature(2015 - 2016)

04/07/2016 06:41 PM House FIN

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 365                                                                                                            
     "An  Act  relating  to   the  permanent  fund  dividend                                                                    
     disbursement;  relating to  the taxation  of income  of                                                                    
     individuals;  relating   to  tax  credit   against  the                                                                    
     individual  income tax  in the  amount  of a  permanent                                                                    
     fund  disbursement;   repealing  tax   credits  applied                                                                    
     against  the tax  on individuals  under the  Alaska Net                                                                    
     Income Tax Act; and providing for an effective date."                                                                      
6:53:54 PM                                                                                                                    
Co-Chair  Neuman  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute  for  HB  365 (FIN),  Work  Draft  (29-LS1422\P).                                                                    
There being NO OBJECTION, it was so ordered.                                                                                    
REPRESENTATIVE   PAUL   SEATON,  SPONSOR,   introduced   the                                                                    
PowerPoint  Presentation: "HB365  Individual Income  Tax and                                                                    
Permanent Fund Refundable Tax Payment."  He began by reading                                                                    
a quote by Gunnar Knapp on slide 2:                                                                                             
     "Not paying for what we  spend this year means that our                                                                    
     children will pay for what we spend this year."                                                                            
Representative  Seaton turned  to  slide 3:  "The Plan."  He                                                                    
explained  that  the plan  had  3  parts: Sensible  spending                                                                    
cuts, new revenue, and the Permanent Fund Dividend (PFD).                                                                       
Representative  Seaton  scrolled  to  slide  4:  "The  Plan:                                                                    
Sensible  Spending Cuts."  He  reported  that spending  cuts                                                                    
were controlled by  the legislature. There were  a number of                                                                    
bills before the legislature.                                                                                                   
Representative Seaton advanced to  slide 5: "The Plan: PFD."                                                                    
He explained that most of the  other plans that had been put                                                                    
forward dealt with restructuring the  PF. The money used for                                                                    
state spending  would be derived solely  from draining money                                                                    
from the fund or decreasing or eliminating the PFD.                                                                             
Representative Seaton turned to slide  6: "The plan: PFD and                                                                    
New Revenue."  He elaborated that  his plan contained  in HB
365  combined new  revenues  and  the PFD.  If  the PFD  was                                                                    
reduced  it would  have the  most impact  on large  families                                                                    
with  several kids  and low  income families.  His plan  was                                                                    
balanced with  new revenues  from an  income tax.  An income                                                                    
tax would impact higher income  families more. No particular                                                                    
segment  of  the  population  would  be  paying  more  on  a                                                                    
percentage basis than another.                                                                                                  
Representative  Seaton reviewed  slide 7:  "Income Tax."  He                                                                    
detailed the income tax portion of  his plan. It would be at                                                                    
15 percent  of the federal  tax liability which  would raise                                                                    
about $500  million. He reported  that in 1961  through 1975                                                                    
when  Alaska  had  a  very  similar income  tax  it  was  16                                                                    
percent.  His income  tax plan  also included  a 10  percent                                                                    
long-term  capital   gains  which  would  raise   about  $85                                                                    
million. Many  states had a  similar capital gains  tax. For                                                                    
example California had a 13.3  percent capital gains tax. He                                                                    
provided  additional  examples  of capital  gains  in  other                                                                    
states.  The tax  also raised  about $70  million from  non-                                                                    
residents who made  up a little more than 20  percent of the                                                                    
6:58:21 PM                                                                                                                    
Representative Seaton  discussed slide 8: "Changes  with the                                                                    
PFD."  He  spoke  to  the  benefits of  the  plan.  It  left                                                                    
everyone doing the  job that they knew how  to do. Currently                                                                    
the state  had a  PFD Division and  the PF  Corporation. The                                                                    
Permanent Fund  Corporation managed a  pot of money  and the                                                                    
division handled  PFDs. In the  plan he was  presenting they                                                                    
stayed exactly the same.                                                                                                        
Representative Seaton read from slide 8:                                                                                        
   · Distributable Income: currently 50 percent of the                                                                          
     income available  for distribution goes to  PFDs and 50                                                                    
     percent  stays  in  the  Earnings  Reserve.  HB365:  25                                                                    
     percent goes  to PFDs, 25  percent goes to  the general                                                                    
     fund,  and  50  percent  still stays  in  the  Earnings                                                                    
   · A PFD will not exceed $1,200. If the amount calculated                                                                     
     for the PFD is over $1,200, the amount in excess of                                                                        
     $1,200 shall be appropriated to the general fund.                                                                          
   · Residents may apply their PFD to their upcoming state                                                                      
     income tax due as a Refundable Tax Payment. Any amount                                                                     
     left over after paying taxes will be refunded by the                                                                       
     Tax Division.                                                                                                              
   · 2.3 percent Permanent Fund POMV directed to the                                                                            
     General Fund and delete inflation proofing.                                                                                
Representative Seaton referred to  the bubble chart on slide                                                                    
9: "Current  Permanent Fund  System." He  noted that  on the                                                                    
top it  showed that oil  and gas and mineral  royalties were                                                                    
the  real supplies  of money.  Currently, 25  percent to  30                                                                    
percent  were going  into  the PF  royalties.  The other  70                                                                    
percent to  75 percent went  into the general fund  (GF). In                                                                    
the past  it had been as  high as 50 percent  by statute. He                                                                    
pointed out that the PF and  all of the money it made flowed                                                                    
into  the  earnings reserve.  From  the  earnings reserve  a                                                                    
couple of things happened. First,  to the left, there was an                                                                    
automatic inflation proofing. To the  right of the scale the                                                                    
legislature  had 2  options: It  could,  by simple  majority                                                                    
vote, appropriate earnings and put  them into the GF or into                                                                    
the principle  of the  PF. He indicated  that 21  percent of                                                                    
the 5  year average of  the earnings reserve itself  went to                                                                    
the distributable  income account. He noted  that 50 percent                                                                    
of the  distributable income went  to calculate the  PFD and                                                                    
the PFD was  distributed with the option to  donate to Pick-                                                                    
Click-Give and college funds.                                                                                                   
7:02:08 PM                                                                                                                    
Representative  Seaton pointed  to  slide 10:  "HB365-Income                                                                    
Tax  &  Permanent Fund  Refundable  Tax  Payment Changes  to                                                                    
current."  He drew  attention  to the  center  of the  chart                                                                    
where it  showed an income  tax of $655 million  which, with                                                                    
the passage  of HB 365,  would go directly into  the general                                                                    
fund.  Next  he  pointed  to the  distributable  income,  25                                                                    
percent  of  which  would  be used  to  calculate  the  PFD.                                                                    
Another 25  percent would be  deposited into the GF.  If the                                                                    
calculation of  the PFD  was over  $1200, the  excess amount                                                                    
would go into  the GF essentially capping the  PFD. Like the                                                                    
current system  donations could be given  to Pick-Click-Give                                                                    
and  college funds.  House Bill  365  also provided  another                                                                    
option  which would  allow individuals  to  apply their  PFD                                                                    
against their state income tax.  The remainder would be sent                                                                    
out. The  new option was  totally up to the  individual. The                                                                    
advantage to his  legislation was that the PFD  did not have                                                                    
to  be   restructured.  The  thing  that   changed  was  the                                                                    
percentage that  came out of the  distributable earnings. He                                                                    
reported that  the percentage of  market value  (POMV) would                                                                    
be an  entirely separate  calculation made  on the  basis of                                                                    
the   entire  fund   and  the   earnings  reserve   combined                                                                    
(averaging about  $1.1 billion). There was  no direct impact                                                                    
on the calculation  of the PFD. He relayed that  in his plan                                                                    
the  POMV  was not  created  to  calculate a  dividend,  but                                                                    
rather to figure out how much  of a draw was possible for GF                                                                    
spending without damaging the earnings reserve or the PFD.                                                                      
Representative  Seaton reviewed  the  figures  on slide  11:                                                                    
"HB365: Total Estimated Revenue to General Fund":                                                                               
  · Income Tax Revenue                      $655,000,000                                                                        
  · 25 Percent PF Distributable Income      $686,542,500                                                                        
   · 2.3 Percent POMV Draw and Delete     $1,100,000,000                                                                        
     Inflation Proofing                                                                                                         
   · Total Revenue to General Fund        $2,441,542,500                                                                        
Representative Seaton  noted that $2.44 million  was not the                                                                    
state's  total debt.  The legislature  was doing  other work                                                                    
towards controlling the budget.                                                                                                 
Representative  Seaton discussed  the  models  on slide  12:                                                                    
"Alaska Futures - CS HB 365  ver. P." He first looked at the                                                                    
status  quo. Currently,  the  Constitutional Budget  Reserve                                                                    
(CBR) would  be exhausted  in 2018. He  relayed that  the PF                                                                    
earnings reserve, represented  by the red line  on the chart                                                                    
in the lower  left-hand corner, would be  exhausted by 2021.                                                                    
In the upper  right-hand corner the PF  value would continue                                                                    
to grow a  little before declining. In  the lower right-hand                                                                    
corner it  showed that there  would be three large  years of                                                                    
PFDs  over   $2000  [represented  by  the   red  bars].  The                                                                    
following year the dividend calculation  would be over $2000                                                                    
but there  would be  no money  to pay  for it  because money                                                                    
would have  been lost  in the CBR  and the  earnings reserve                                                                    
would  have declined.  Under the  status quo  there would  3                                                                    
years of  large dividends and  then no dividends.  Under the                                                                    
plan proposed  in HB  365 the blue  bars reflected  the PFD.                                                                    
Next he pointed to the  upper left-hand chart reflecting the                                                                    
funds in the  CBR. In the proposed plan,  without any budget                                                                    
cuts, the Constitutional Budget  Reserve would extend out to                                                                    
about 2024,  represented by  the blue  line. The  plan would                                                                    
keep  the   earnings  reserve  growing  a   little  and  the                                                                    
Permanent Fund (PF) would grow  by about $5 billion over the                                                                    
following 5 years (2 percent per year).                                                                                         
7:07:23 PM                                                                                                                    
Representative Seaton discussed slide  13: "Alaska Futures -                                                                    
CS  HB 365  ver. P  -  with additional  Budget Reductions  &                                                                    
Revenues."  He  explained that  the  slide  showed what  the                                                                    
fiscal  circumstances   might  look   like  if   there  were                                                                    
additional  cuts  to  the budget.  The  slide  assumed  $450                                                                    
million in  reductions, a motor  fuel tax increase  of about                                                                    
$49 million,  a fish  tax increase of  about $18  million, a                                                                    
tax credit reduction  for Cook Inlet of  about $300 million,                                                                    
and a credit  reduction of about $100 million  for the North                                                                    
Slope.  He   reported  that  the  earnings   reserve  stayed                                                                    
healthy, the PF stayed healthy,  and the CBR would extend to                                                                    
2034.  He  thought  his  proposal,  with  a  combination  of                                                                    
solutions, gave fairness and balance  to the citizens of the                                                                    
state. He  suggested that  the purpose  of putting  the plan                                                                    
together was  to have  one package  that solved  the state's                                                                    
fiscal woes in  a fair and balanced way. He  was open to any                                                                    
questions and referred  to a hand-out in  member packets. He                                                                    
reviewed the list of available testifiers.                                                                                      
Representative Guttenberg asked  if part of the  plan was to                                                                    
turn the PF into a  POMV. Representative Seaton stated there                                                                    
was a  POMV element at  2.3 percent which he  believed would                                                                    
not be damaging to the fund.                                                                                                    
Representative  Guttenberg asked  for Representative  Seaton                                                                    
to repeat himself. Representative  Seaton indicated it would                                                                    
not diminish the fund.                                                                                                          
Representative  Guttenberg  commented  that  the  state  had                                                                    
dealt with  POMV's in the  past. He understood that  the 2.5                                                                    
percent padding  was more moderate than  the other proposals                                                                    
the   committee  had   considered.   He   asked  about   the                                                                    
consequences of low  earnings and getting locked  out of the                                                                    
Representative  Seaton  replied  that  earnings  over  time,                                                                    
based  on a  5 year  average, would  not approach  the rate.                                                                    
There was nothing  that could be done in  statute that could                                                                    
affect the  principle. The calculation would  always be made                                                                    
by  the  Permanent  Fund  Corporation  because  legally  the                                                                    
legislature could  not tap into  the principle of  the fund.                                                                    
He  thought the  plan  helped  to bring  in  new revenue  to                                                                    
offset the  deficit rather  than closing  the gap  using the                                                                    
earnings of the  PF. He commented that he  was also counting                                                                    
on the  legislature to make  further cuts to the  budget. He                                                                    
furthered that  his plan extended  the CBR out to  2024 even                                                                    
without  budget cuts.  The legislature  was  aware that  the                                                                    
fiscal problem needed  to be addressed in  3 areas: sensible                                                                    
spending cuts, the PFD, and new revenues.                                                                                       
7:12:21 PM                                                                                                                    
Representative Guttenberg suggested that  the PFD portion of                                                                    
the plan  had a cap  without a floor.  Representative Seaton                                                                    
indicated  that Representative  Guttenberg was  correct. The                                                                    
reason there was no floor was  because if the return was low                                                                    
for a series of years, money  would not be generated. He did                                                                    
not  want  to  put  the  state in  the  position  of  taking                                                                    
additional  money above  the formula  to  make payouts.  The                                                                    
Permanent Fund  was essentially green  oil; oil  turned into                                                                    
money.  The  state was  using  the  investment stream  as  a                                                                    
source of  the money rather  than the pool. However,  if the                                                                    
investment  stream  was  not   keeping  up  there  would  be                                                                    
significant problems that would have to be addressed again.                                                                     
Representative   Edgmon  asked   Representative  Seaton   to                                                                    
discuss  the  difference between  his  plan  and the  others                                                                    
including the  governor's plan [Legislation offered  in 2016                                                                    
-  HB  245:  Short  Title: Perm  Fund:  Deposits;  Dividend;                                                                    
Earnings]  and the  plan  offered  by Representative  Hawker                                                                    
[Legislation offered  in 2016  - HB  224: Short  Title: Perm                                                                    
Fund: Income; Distribution; PFD] in  terms of the impact for                                                                    
those earning a higher income versus a lower income.                                                                            
Representative Seaton  responded that  the other  plans used                                                                    
volatile royalties,  values based on  price, to pay or  be a                                                                    
contributor to  the dividend itself.  He indicated  that the                                                                    
problem with  attaching the dividend  to royalties  was that                                                                    
when  prices  were  low  the   dividend  would  be  low.  He                                                                    
suggested that  it was  better to  have it  out of  cycle so                                                                    
that a  dividend was paid  out based on  investment earnings                                                                    
over  time.  He specified  that  when  prices were  low  the                                                                    
economy  would be  aided by  having a  healthy dividend.  In                                                                    
cycling the  2 together  when prices  were low  the dividend                                                                    
would  be  low   and  problems  in  the   economy  would  be                                                                    
accelerated. In terms of the  PF, the difference between his                                                                    
plan  and  the  others  was that  the  other  plans  totally                                                                    
restructured  the   make-up  of  the  fund   and  were  more                                                                    
complicated. His  plan left everyone continuing  to do their                                                                    
same job.  The Permanent Fund Corporation  would continue to                                                                    
manage the fund, the Permanent  Fund Division would continue                                                                    
to generate  and process PFD applications,  and distributing                                                                    
the PFD. The only difference  was that the division would be                                                                    
distributing  25  percent  instead  of  50  percent  of  the                                                                    
distributable   earnings.  His   plan   attempted  to   keep                                                                    
everything clean and easy. He did  not have the graph on how                                                                    
the  legislation influenced  each  section  of the  economy.                                                                    
However,  he  had  seen  graphs   that  showed  that  a  PFD                                                                    
reduction hit  low income families  and large  families much                                                                    
harder  affecting  a  larger  percentage  of  their  income.                                                                    
Hence, that  was why  the plan was  balanced with  an income                                                                    
tax which hit the wealthier population harder.                                                                                  
Representative  Edgmon   asked  about  the   refundable  tax                                                                    
provision on slide  10. He drew attention to the  box at the                                                                    
bottom of  the page labeled "Refundable  Tax Payment applied                                                                    
to  state  income  tax."  He   thought  the  refundable  tax                                                                    
provision  lent itself  to being  less regressive  for those                                                                    
that made less money and  depended more on their annual PFD.                                                                    
He commented  that it was  a distinguishing  feature between                                                                    
Representative Seaton's plan  and all of the  other plans in                                                                    
circulation at  present. He  wanted to  hear more  about the                                                                    
progressivity  feature  of  the  plan. He  opined  that  the                                                                    
feature was a highly attractive part of the overall plan.                                                                       
Co-Chair   Thompson   thanked  Representative   Seaton   for                                                                    
presenting his  bill. He indicated  he would be  setting the                                                                    
bill aside.                                                                                                                     
HB  365  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair Thompson reviewed the  agenda for the following day                                                                    
and stated that the committee would meet at 10:00 AM.                                                                           

Document Name Date/Time Subjects