Legislature(2015 - 2016)
04/07/2016 06:41 PM House FIN
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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 workforce. 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 Reserve. · 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 principle. 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 consideration. Co-Chair Thompson reviewed the agenda for the following day and stated that the committee would meet at 10:00 AM.