Legislature(2015 - 2016)BILL RAY CENTER 208

05/24/2016 08:30 AM House FINANCE

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08:39:04 AM Start
08:39:04 AM HB4001
09:42:43 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
Heard & Held
HOUSE BILL NO. 4001                                                                                                           
     "An  Act relating  to taxation,  including establishing                                                                    
     an  individual income  tax; relating  to the  marijuana                                                                    
     tax and bonding  requirements for marijuana cultivation                                                                    
     facilities;  relating  to   the  exploration  incentive                                                                    
     credit; increasing  the motor fuel tax;  increasing the                                                                    
     taxes  on  cigarettes   and  tobacco  products;  taxing                                                                    
     electronic  smoking products;  adding  a definition  of                                                                    
     'electronic smoking product'  and requiring labeling of                                                                    
     an  electronic smoking  product; increasing  the excise                                                                    
     tax  on  alcoholic  beverages; relating  to  exemptions                                                                    
     from the  mining license tax; removing  the minimum and                                                                    
     maximum  restrictions on  the annual  base fee  for the                                                                    
     reissuance  or  renewal  of  an   entry  permit  or  an                                                                    
     interim-use permit;  increasing the mining  license tax                                                                    
     rate; relating to  mining license application, renewal,                                                                    
     and  fees; increasing  the fisheries  business tax  and                                                                    
     fishery resource  landing tax;  relating to  refunds to                                                                    
     local  governments;  and  providing  for  an  effective                                                                    
8:39:04 AM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
provided  opening  statements   about  the  legislation.  He                                                                    
discussed  the governor's  introduction  of a  comprehensive                                                                    
package   to   reform   the  government's   current   fiscal                                                                    
situation,    which    included   new    revenue,    reduced                                                                    
expenditures,  and use  of financial  assets to  balance the                                                                    
budget and close  the $4 billion gap. He  believed that over                                                                    
the course of  the session it become clear $4  billion was a                                                                    
very large number  and closing the gap was  a very difficult                                                                    
task. He  detailed the House  Finance Committee  had already                                                                    
dealt with  two of  the large  components including  the oil                                                                    
and  gas tax  credit reform  [HB  247] and  the budget.  Two                                                                    
major components  were remaining that would  come before the                                                                    
committee during  the current special session  including the                                                                    
Permanent Fund Protection  Act [HB 245] and  the omnibus tax                                                                    
bill currently before the committee [HB 4001].                                                                                  
Commissioner  Hoffbeck  relayed  the committee  had  already                                                                    
seen some of the bill  components including those related to                                                                    
mining, fishing,  motor fuel, and income  taxes; the alcohol                                                                    
and  tobacco  taxes  had  not yet  been  considered  by  the                                                                    
committee. Additionally,  a marijuana  enforcement component                                                                    
had  been  added  to  the  bill,  which  was  a  portion  of                                                                    
Representative  Gabrielle  LeDoux's   HB  337.  The  revenue                                                                    
package included  in HB 4001 would  raise approximately $350                                                                    
million  per  year by  FY  19  and  would be  a  substantial                                                                    
portion  of the  effort to  close the  fiscal gap.  The bill                                                                    
combined previous  tax bills before the  legislature [during                                                                    
regular session] including  income tax (HB 250  and SB 134),                                                                    
motor fuel tax (HB 249 and  SB 132), tobacco tax (HB 304 and                                                                    
SB 133),  alcohol tax (HB  248 and  SB 131), mining  tax (HB
253  and  SB  137),  fish  tax (HB  251  and  SB  135),  and                                                                    
marijuana tax  enforcement (HB  333). For  the most  part HB
4001  incorporated work  that had  already been  done during                                                                    
session;  most   of  the  committee  adjustments   had  been                                                                    
included within the bill.                                                                                                       
Commissioner  Hoffbeck   addressed  the  structure   of  the                                                                    
presentation  titled "New  Sustainable Alaska  Plan: Pulling                                                                    
Together  to Build  Our Future;  Governor's Special  Session                                                                    
Omnibus  Tax Bill  HB  4001"  dated May  24,  2016 (copy  on                                                                    
file); there were two pages  for each of the bill components                                                                    
including  what  the  bill  did and  how  it  differed  from                                                                    
legislation heard during regular  session and how much money                                                                    
it  raised  and how  it  impacted  individual Alaskans.  The                                                                    
original  bills  had  included a  component  for  electronic                                                                    
filing, which had been taken care  of with the passage of HB
375 [related  to the  filing of  electronic tax  returns and                                                                    
reports];  therefore,  it  had  been  stripped  out  of  the                                                                    
various components of HB 4001.                                                                                                  
8:42:36 AM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
addressed  slide 5  related  to income  tax.  He relayed  he                                                                    
would discuss  the items  in the  sequence they  appeared in                                                                    
the bill.  The income tax  statute would  be a new  AS 43.22                                                                    
for individual income  tax tied to 6 percent  of the federal                                                                    
tax  liability.  He  explained  it was  very  similar  to  a                                                                    
previous income  tax in Alaska  that had lasted  for several                                                                    
decades and had  been repealed in 1980. The  former rate had                                                                    
peaked as  high as  16 percent of  the federal  liability (6                                                                    
percent  was  slightly more  than  one-third  of the  former                                                                    
tax).  The   bill  language  provided  for   withholding  by                                                                    
employers that  would send money  to the  state (effectively                                                                    
equivalent to  a W2 form).  The bill would enable  the state                                                                    
to tax income  out of state residents,  partnerships, and S-                                                                    
Mr. Alper  highlighted how the  income tax  section differed                                                                    
from  the regular  session bill.  He relayed  it cleaned  up                                                                    
language related  to the taxation  of trusts.  He elaborated                                                                    
that  Alaska  was  something  of   a  trust  haven  and  the                                                                    
administration  did  not  want  to harm  money  residing  in                                                                    
Alaska for trust purposes. He  noted the department had just                                                                    
heard the bill  did not remove fishery crew  shares from the                                                                    
withholding  tax requirements;  however, the  intent was  to                                                                    
remove the language in the  withholding section of the bill.                                                                    
He explained that  fishery crew tended to  be contractors as                                                                    
opposed to wage employees and  it would be burdensome on the                                                                    
captain  to  have  to  do  withholding  taxes  for  non-wage                                                                    
employees. Individuals  with no taxes withheld  would have a                                                                    
higher tax  liability at  the end of  the year,  which would                                                                    
have  to be  dealt with  on the  enforcement side.  The most                                                                    
important  change was  the delay  of the  effective date  to                                                                    
January  2018  from  the  initial   January  2017  date.  He                                                                    
detailed  the   change  made  a   big  difference   for  the                                                                    
Department  of Revenue  (DOR) because  it would  provide the                                                                    
department with  time to gain some  outside expertise, learn                                                                    
about building an income tax  from scratch, and removed much                                                                    
of  the implementation  cost  out of  the  fiscal note.  The                                                                    
department did  not currently have  a complete sense  on the                                                                    
cost it would take to  implement the income tax; it intended                                                                    
on reporting back  to the legislature in  the coming January                                                                    
on the  actual cost including  a staffing plan  and software                                                                    
needs.  The project  was large  and the  department did  not                                                                    
want to  base the implementation on  a partially constructed                                                                    
idea on cost.                                                                                                                   
Mr. Alper moved to slide  6 and addressed the fiscal aspects                                                                    
of the  income tax. The  bill had originally  been projected                                                                    
as  $200  million and  was  a  $205  million bill  based  on                                                                    
inflation by the time the full  value would be reached in FY                                                                    
19. The revenue  was only $100 million in FY  18 because the                                                                    
state would  begin collecting  withholding taxes  in January                                                                    
2018;  therefore,  by June  30,  effectively  half a  year's                                                                    
worth  of taxes  would have  been withheld.  The first  full                                                                    
year the  tax would  be in  effect was FY  19. After  FY 19,                                                                    
revenue numbers would increase slightly  every year based on                                                                    
inflation and the expectation of income growth.                                                                                 
Mr. Alper relayed  the tax would only be paid  by people who                                                                    
owe the  federal government money. The  department estimated                                                                    
that between 20  to 30 percent of Alaskans  had zero federal                                                                    
liability  and would  therefore have  zero state  liability.                                                                    
The percentage was  a bit lower than the  national average -                                                                    
typically  about 40  percent of  households paid  no federal                                                                    
income tax. He  detailed part of the reason the  state had a                                                                    
lower number was  due to the Permanent  Fund Dividend, which                                                                    
provided  a  base  income  for   Alaskans  and  pushed  some                                                                    
individuals up  into a  tax bracket  they may  not otherwise                                                                    
fall  into. The  tax was  somewhat progressive,  meaning the                                                                    
effective rate  increased the  higher a  person fell  on the                                                                    
income  scale. There  was a  very low  or no  tax burden  on                                                                    
households making less than $50,000  per year. He elaborated                                                                    
most households would pay substantially  less than 1 percent                                                                    
of  their income  and no  one would  be over  the 1  percent                                                                    
threshold  until  they  earned over  $100,000  in  household                                                                    
income.  He specified  state  income  taxes were  deductible                                                                    
from federal income tax;  therefore, individuals who itemize                                                                    
(generally  homeowners  with  a  mortgage)  would  have  the                                                                    
ability  to deduct  their  state income  tax  and save  from                                                                    
their  federal   income  tax  at   the  marginal   tax  rate                                                                    
(typically 25  percent); some of  the money would  be coming                                                                    
out the  federal government's pocket.  There were  43 states                                                                    
that currently had an income tax.                                                                                               
8:47:59 AM                                                                                                                    
Mr. Alper  turned to slide 7  related to the motor  fuel tax                                                                    
(AS  43.40).  He relayed  the  subject  had previously  been                                                                    
heard  by the  House Finance  Committee after  going through                                                                    
the House  Transportation Committee during  regular session.                                                                    
He highlighted the various tax changes:                                                                                         
     What it Does                                                                                                               
     • Increases current tax rates                                                                                              
     • Highway Fuel: 8 cents to 16 cents                                                                                        
     • Marine Fuel: 5 cents to 10 cents                                                                                         
     • Aviation Gas: 4.7 cents to 7 cents                                                                                       
     • Jet Fuel: 3.2 cents to 6.5 cents                                                                                         
    • Doubles the credit for highway fuel used off-road                                                                         
Mr. Alper  relayed there was  a current credit of  $0.06 for                                                                    
highway  fuel used  off-road,  generally  claimed by  mining                                                                    
operators  or people  purchasing large  amounts of  fuel for                                                                    
use  off the  road system.  The  credit was  applied to  the                                                                    
$0.08  cent tax,  bringing it  down to  $0.02. He  explained                                                                    
that  because  highway  fuel  tax  would  double  under  the                                                                    
legislation  to  $0.16, the  credit  was  doubled to  $0.12,                                                                    
which would mean an increase to $0.04.                                                                                          
Mr. Alper  addressed how  the motor  fuel tax  differed from                                                                    
the  regular  session bill  on  slide  7. He  explained  the                                                                    
administration  had  used  language  from  a  House  Finance                                                                    
Committee  substitute for  HB  249,  which reduced  proposed                                                                    
increases on  aviation and jet fuel.  Additionally, the bill                                                                    
did  not  incorporate  a  two-year   sunset  that  had  been                                                                    
included  in the  House  Transportation  Committee bill  [HB
249].  The  sunset  had  been  built into  FY  18  with  the                                                                    
expectation the issue would be  revisited based on the price                                                                    
of  oil at  the time.  The  current bill  would implement  a                                                                    
permanent tax increase.                                                                                                         
8:49:40 AM                                                                                                                    
Mr. Alper addressed slide 8  and relayed that the motor fuel                                                                    
tax  would generate  about  $43 million  per  year. The  tax                                                                    
would roughly double the current  motor fuel collections. He                                                                    
detailed that about $200,000 would  be shared with municipal                                                                    
airports.  He elaborated  it related  to standard  statutory                                                                    
formulas  on   aviation  fuel  collected  from   areas  with                                                                    
municipal   airports   and   included  a   revenue   sharing                                                                    
component.  He  relayed  the  last  time  the  highway  fuel                                                                    
increased  had been  in 1970.  He  referred to  a remark  by                                                                    
Deputy  Commissioner Jerry  Burnett that  he could  fill his                                                                    
car for  $3.00 in 1970.  He specified the state  would still                                                                    
have one of  the lowest tax rates in the  country if it were                                                                    
doubled  to  $0.16.  He  explained  that  a  typical  person                                                                    
driving 12,000 miles per year  in a vehicle getting 20 miles                                                                    
per gallon, would pay an additional $48 in tax.                                                                                 
8:51:00 AM                                                                                                                    
Mr. Alper addressed  tobacco tax (AS 43.50) on  slide 9. The                                                                    
cigarette  tax  was  measured in  mills  (one-tenth  of  one                                                                    
cent); the current  tax was 100 mills  between two different                                                                    
taxes  with  two  slightly different  funding  destinations,                                                                    
which for all  intents and purposes was a single  tax of 100                                                                    
mills per cigarette. The bill  would increase the tax to 150                                                                    
mills  or $0.15  per cigarette  or from  $2.00 to  $3.00 per                                                                    
pack. He  referred to  the tax  stamp sold  by the  State of                                                                    
Alaska, which was  placed on every pack  of cigarettes sold.                                                                    
He detailed  a new series  of stamps would be  generated and                                                                    
would be sold for $3.00  instead of $2.00; it was considered                                                                    
a pre-paid  tax in  some ways.  Other tobacco  products were                                                                    
taxed  at a  percentage  of the  wholesale  value; the  bill                                                                    
would increase the  tax rate from 75 percent  to 100 percent                                                                    
of total sale value.  Electronic smoking products fell under                                                                    
a  new  industry  also  known as  the  "vape"  industry.  He                                                                    
elaborated  the industry  was  becoming quite  sophisticated                                                                    
and  there   were  several  full-time  vape   shops  in  the                                                                    
Anchorage  area;  the  product was  currently  untaxed.  The                                                                    
product  was  made  of  generally  tobacco  derivatives  and                                                                    
typically  contained  nicotine.  The bill  expanded  tobacco                                                                    
definitions  in  order to  tax  the  new products;  however,                                                                    
because   the  products   were  currently   not  taxed   the                                                                    
administration felt it was appropriate  to establish a lower                                                                    
tax rate of 75 percent.                                                                                                         
Mr. Alper elaborated  the tobacco sections of  the bill were                                                                    
the longest  because there were numerous  definition changes                                                                    
involved with electronic smoking  products. There was also a                                                                    
definition cleanup  for wholesale price in  order to clarify                                                                    
some issues which  had arisen in some tax  audits within the                                                                    
excise tax group related to  tobacco taxes. He addressed how                                                                    
the  sections differed  from the  regular  session bill.  He                                                                    
explained it was  the only one of the  governor's bills with                                                                    
distinctly different  language introduced  to the  House and                                                                    
Senate at the beginning of  session. He explained the Senate                                                                    
bill had  been introduced  at the  beginning of  session and                                                                    
some corrections  had been  made before  the House  bill had                                                                    
been  introduced  a   week  or  so  later   related  to  the                                                                    
definition of  electronic smoking  products. The  House bill                                                                    
had  been  used  as  the  starting  point  for  the  current                                                                    
sections  in HB  4001 and  definitions had  been cleaned  up                                                                    
based  on work  done in  the  Senate. He  detailed the  bill                                                                    
would only  tax electronic  smoking products  that contained                                                                    
nicotine. He furthered that people  used vape technology for                                                                    
non-nicotine  purposes,  which  the   bill  would  not  tax;                                                                    
however, it added  a labeling requirement -  products had to                                                                    
show whether or not they contained nicotine.                                                                                    
Mr. Alper  discussed how  much the  tobacco tax  would raise                                                                    
about  $29  million  per  year (slide  10).  The  tax  would                                                                    
decline a little bit every  year due the forecast projecting                                                                    
a  decreasing number  of  smokers in  Alaska  over the  next                                                                    
several years. He  added the decline was  not anticipated to                                                                    
be  tremendous, but  the projected  revenue for  later years                                                                    
was closer to  $27 million. The revenue  represented about a                                                                    
50 percent  increase above current tobacco  tax collections.                                                                    
The  fiscal  note  was indeterminate  because  revenue  from                                                                    
electronic cigarettes  was currently  unknown, which  was in                                                                    
part  why  the  department  felt the  need  to  include  the                                                                    
product  under the  tobacco umbrella.  The department  could                                                                    
only guess at the actual  revenue that could come in because                                                                    
it did  not know how much  the product was out  there. About                                                                    
$2 million  of the new revenue  would go to the  Tobacco Use                                                                    
Education and Cessation Fund,  which represented a statutory                                                                    
percentage of the mill rate tax on cigarettes.                                                                                  
8:54:45 AM                                                                                                                    
Mr. Alper  continued to address  slide 10 and  addressed how                                                                    
the tobacco tax would impact  Alaskans. The bill did make it                                                                    
more expensive  to smoke; $1.00 per  pack at a pack  per day                                                                    
would be an  increase of $365 per year.  The state currently                                                                    
had the  11th highest  cigarette tax and  would move  to 5th                                                                    
place with  the increase.  He noted the  numbers were  a bit                                                                    
misleading  because  there  were  numerous  local  cigarette                                                                    
taxes  all over  the  country including  some cities  within                                                                    
Alaska. For example, Juneau had  an additional cigarette tax                                                                    
of  at least  $2.00.  The state  had substantial  healthcare                                                                    
costs through  the Department of Health  and Social Services                                                                    
(DHSS) related to tobacco illness,  which the increase would                                                                    
help offset.  He detailed the state's  chief medical officer                                                                    
had testified  in the previous  committee about  the issues.                                                                    
The bill would add a tax for  the first time to the new vape                                                                    
Mr.  Alper moved  on to  discuss alcohol  tax (AS  43.60) on                                                                    
slide  11. He  detailed  the alcohol  tax  had not  received                                                                    
significant  hearings  apart from  in  the  House Labor  and                                                                    
Commerce  Committee.  The  bill  would  double  current  tax                                                                    
     • Distilled Spirits: $12.80/gallon to $25.60                                                                               
     • Wine: $2.50/gallon to $5.00                                                                                              
     • Beer and Cider: $1.07/gallon to $2.14                                                                                    
Mr.  Alper  explained  the  numbers   were  not  random.  He                                                                    
explained  that  the last  time  the  alcohol tax  had  been                                                                    
increased in 2002 the decision had  been made to tie the tax                                                                    
to  $0.10 per  drink. He  elaborated that  1 gallon  was 128                                                                    
ounces,  1  ounce  was  about a  standard  shot  of  liquor;                                                                    
therefore, a  tax of  $12.80/gallon or  $0.10 per  drink was                                                                    
established. Likewise, 1  gallon of wine based on  a 5 ounce                                                                    
pour would  be $2.50 and $1.07  per gallon for beer  was the                                                                    
equivalent of $0.10  for a 12 ounce beer.  The craft brewery                                                                    
rate was  tied to  the federal definition  of a  small craft                                                                    
brewery  -  not  just  breweries in-state,  which  would  be                                                                    
unconstitutional  - it  also included  small breweries  from                                                                    
outside Alaska.  The first  60,000 barrels  per year  from a                                                                    
craft  brewery would  have a  tax of  one-third of  the full                                                                    
rate:  $0.35/gallon increasing  to $0.70.  The bill  created                                                                    
something  of  an advantage  for  the  industry; the  spread                                                                    
between larger  and small breweries  became larger  when the                                                                    
taxes were  doubled. The tax  would increases the cost  of a                                                                    
drink  from $0.10  to  $0.20. He  explained  the bill  would                                                                    
change  the  requirement  tax  payers  had to  pay  a  as  a                                                                    
security  bonding payment  to DOR  from $25,000  to variable                                                                    
based on the  department's decision about what  would be the                                                                    
best number for the individual  taxpayer. He noted that many                                                                    
taxpayers  were quite  small and  the  $25,000 was  somewhat                                                                    
onerous;  whereas,  some  taxpayers  were  quite  large  and                                                                    
$25,000  may  not  be  an adequate  incentive  for  them  to                                                                    
continue  paying   their  taxes.   The  bill   contained  no                                                                    
differences  between  the   one  introduced  during  regular                                                                    
session. He reiterated the prior  bill had not received many                                                                    
Mr. Alper  addressed the increased  alcohol tax  would raise                                                                    
approximately  $40  million per  year  (slide  12). He  drew                                                                    
attention to  a table on  the back  page of the  fiscal note                                                                    
showing the 2017  revenue from alcohol would  be $4 million.                                                                    
He  corrected the  amount was  actually  $40 million,  which                                                                    
would add  $36 million to  the bottom  line total in  FY 17.                                                                    
The tax increase roughly  doubled current collections. About                                                                    
$20 million  would go  to the Alcohol  and Other  Drug Abuse                                                                    
Treatment and  Prevention Fund. He  elaborated the  fund was                                                                    
included in  the mental health  budget and funded  many DHSS                                                                    
programs. He  added that  the funds  were supplemented  by a                                                                    
large  number of  GF. He  noted it  did not  mean the  state                                                                    
needed to  be putting  $20 million  more into  the programs;                                                                    
the GF could be backed out in the budget making process.                                                                        
Mr. Alper addressed  how the bill would  impact Alaskans. He                                                                    
relayed it  would make it  more expensive to drink.  The tax                                                                    
could  equal $0.10  per drink  or  could be  built into  the                                                                    
wholesale price  and could  lead to  a larger  increase than                                                                    
the  typical price  of  a  drink. The  state  had among  the                                                                    
highest  alcohol taxes  in the  country at  present and  the                                                                    
increase  would  make Alaska  number  one  by a  substantial                                                                    
margin, which he  was certain the alcohol  industry would be                                                                    
quick to point out.                                                                                                             
Mr. Alper  moved to  slide 13 related  to marijuana  tax (AS                                                                    
43.61) and relayed the bill  would not increase the specific                                                                    
tax.  The   bill  included  some  provisions   from  a  bill                                                                    
Representative  LeDoux  had  submitted  during  the  regular                                                                    
session, which had come out  of the House Labor and Commerce                                                                    
Committee. He  did not  believe the bill  had been  heard by                                                                    
the House  Finance Committee. The 2014  marijuana initiative                                                                    
had  established   a  $50  per   ounce  rate;   through  the                                                                    
regulatory  process a  lower rate  had been  established for                                                                    
the non-smokable portions  (i.e. the concentrates industry).                                                                    
The  bill  would  requires  a  surety  bond  of  $5,000  for                                                                    
taxpayers (i.e.  the growers). The requirement  was slightly                                                                    
atypical  among the  department's  surety  bonds because  it                                                                    
gave  the option  for the  growers to  provide the  money in                                                                    
cash rather  than an insurance  plan because there  was some                                                                    
concern the marijuana taxpayers would  not be able to access                                                                    
traditional banking services and  would therefore be working                                                                    
in  a cash  economy. The  primary goal  was to  give certain                                                                    
enforcement powers to DOR that it had for some other taxes.                                                                     
Mr. Alper  explained the bill  would empower DOR  to enforce                                                                    
the tax against a marijuana  retailer who is selling product                                                                    
that  did not  come  from  a licensed/taxpaying  cultivator.                                                                    
Additionally, the  bill would empower  DOR to enforce  a tax                                                                    
penalty  on  illegal  grow  operations   in  excess  of  the                                                                    
personal use limit. He noted the  limit had been six, but HB
75 had  increased the limit to  12. He referred to  a recent                                                                    
arrest of  a grower in  Homer with 1,000 plants  and relayed                                                                    
that  988 of  the  plants  were illegal,  which  could be  a                                                                    
felony. However,  an alternative enforcement  mechanism that                                                                    
would be  much easier to collect  would be to include  a tax                                                                    
penalty  on that  marijuana. For  example,  the state  could                                                                    
charge $50  an ounce for the  illegal plants; it would  be a                                                                    
civil fine  and in the  case of the Homer  growing operation                                                                    
it  would   have  equated  to  approximately   $250,000.  He                                                                    
furthered it would  hopefully act as a  deterrent from large                                                                    
illegal grow operations.                                                                                                        
9:02:11 AM                                                                                                                    
Representative Wilson  clarified that  the number  of plants                                                                    
had not been  increased. She stated that the  limit had been                                                                    
6  plants per  person and  HB 75  had changed  it to  12 per                                                                    
household regardless of the number  of individuals living in                                                                    
the  home.  She reasoned  effectively  the  number had  been                                                                    
lowered  because  previously  if  there  were  three  adults                                                                    
residing in  a home they could  have had 18 plants,  but now                                                                    
they could only have 12.                                                                                                        
Mr. Alper  replied in the  affirmative. He relayed  the bill                                                                    
contained no  difference in the marijuana  sections from the                                                                    
bill  that  came  out  of   the  House  Labor  and  Commerce                                                                    
Committee several weeks back.                                                                                                   
Mr. Alper  moved to  slide 14 and  relayed the  revenue from                                                                    
the marijuana  tax was indeterminate.  He detailed  that any                                                                    
money  raised by  the changes  would be  through enforcement                                                                    
actions, which  were impossible  to predict.  Ultimately the                                                                    
administration's  goal was  to make  it  as advantageous  as                                                                    
possible   to  be   a  legal   and  licensed   business  and                                                                    
disadvantageous to  remain in the  black market.  He equated                                                                    
the current  situation to 1934 when  alcohol prohibition had                                                                    
just  been  repealed.  The bill  would  indirectly  increase                                                                    
revenue to the state from legal marijuana.                                                                                      
Mr. Alper turned  to slide 15 related to  mining license tax                                                                    
(AS 43.65), which  had been included in a  bill with several                                                                    
small  taxes  previously  considered by  the  House  Finance                                                                    
Committee.  The bill  would increases  the  current top  tax                                                                    
rate on  net profits greater  than $100,000 per year  from 7                                                                    
percent to 9  percent. The bill would  reduce the production                                                                    
tax holiday  for new mines  from 3.5  years to 2  years. The                                                                    
bill would prevent the  mining exploration incentive credits                                                                    
from being  used to reduce  royalties, limiting to  just the                                                                    
tax  (the change  had originally  been  incorporated in  the                                                                    
House Resources  Committee). He  explained the  credits were                                                                    
not cashable and were rolled  forward for use against taxes.                                                                    
He  elaborated the  state  was  only the  land  owner for  a                                                                    
couple of  the large mines in  Alaska. The bill would  add a                                                                    
$50  annual license  fee for  miners. He  noted that  miners                                                                    
were  exempted from  needing a  business license,  which was                                                                    
also  $50.  He furthered  that  because  miners already  had                                                                    
mining licenses  there was  no reason to  make people  get a                                                                    
second license.                                                                                                                 
Mr. Alper addressed  how the bill differed  from the regular                                                                    
session bill.  The original bill  sought elimination  of the                                                                    
tax  holiday;  the  2-year  tax  holiday  was  a  compromise                                                                    
proposal.  Additionally  the exploration  incentive  credits                                                                    
and  royalty change  made in  House Resources  Committee had                                                                    
been  incorporated.  The  2   percent  increase  at  current                                                                    
commodity  prices  (the industry  was  closely  tied to  the                                                                    
global  price of  gold and  zinc)  would bring  in about  $7                                                                    
million per  year (about $25,000  of the total  would result                                                                    
from the  $50 license  fee). He  addressed how  the increase                                                                    
would impact Alaskans. He relayed  the typical "mom and pop"                                                                    
miner would  not feel an impact  apart from the $50  fee. He                                                                    
shared that  in 2014  there were  only 14  taxpayers earning                                                                    
over $100,000 in taxable profits  and were the only ones who                                                                    
would be impacted by the tax  increase. Out of the 14, there                                                                    
were only  about 5  large mines in  the state.  He specified                                                                    
there were  smaller miners who  had a particularly  good and                                                                    
earned over  $100,000; only the amount  above $100,000 would                                                                    
be  subject to  the tax.  He relayed  that if  someone owned                                                                    
land leased  by a  mine and  the mine  paid the  landowner a                                                                    
private  royalty, the  royalties were  current subject  to a                                                                    
mining  license  tax;  therefore, several  of  the  $100,000                                                                    
taxpayers were not actually miners,  but were landowners who                                                                    
were paid royalties by a miner.                                                                                                 
9:06:42 AM                                                                                                                    
Mr. Alper  turned to  slide 17  and addressed  the fisheries                                                                    
business tax  (AS 43.75) and  the fisheries landing  tax (AS                                                                    
43.77).  He  highlighted  that   the  business  tax  applied                                                                    
primarily to  processors and the landing  tax applied mostly                                                                    
to federal  fisheries. The bill  would increase  the current                                                                    
tax rates by one percentage  point. The rates were currently                                                                    
between 3  percent and 5  percent depending on  status (i.e.                                                                    
onshore,   offshore,   canneries,  shore-based,   etcetera).                                                                    
Currently  the   fisheries  taxes   were  shared   with  the                                                                    
municipal  government 50/50.  Under  the bill,  the first  1                                                                    
percent of  the increased  tax would go  100 percent  to the                                                                    
state  and  the  rest  would be  shared  50/50,  effectively                                                                    
holding the  municipalities harmless. He noted  that the tax                                                                    
increase would not be shared with the municipalities.                                                                           
Mr. Alper explained the bill  would remove the $3,000 cap on                                                                    
annual  Commercial Fisheries  Entry Commission  (CFEC) entry                                                                    
permit fees. The  elimination of the cap  would increase the                                                                    
permit fee for  certain large boat owners  (a couple hundred                                                                    
large boat  owners who  were almost  entirely non-resident).                                                                    
The   developing  fisheries   designated  annually   by  the                                                                    
Department  of   Fish  and  Game  were   exempted  from  the                                                                    
increase. He  discussed how the  sections differed  from the                                                                    
regular session  bill. The original  bill had  increased the                                                                    
rate for  one of  the developing  fisheries, which  had been                                                                    
removed in the current  bill. Additionally, the entry permit                                                                    
fee  had not  been included  in the  original bill,  but had                                                                    
been added  in committee.  He believed it  may have  been in                                                                    
other  legislation,   but  he  had  not   found  the  source                                                                    
Mr.  Alper highlighted  the increases  would bring  in about                                                                    
$18 million  from the tax  change and about $2  million from                                                                    
the CFEC  fee change.  He addressed  how the  sections would                                                                    
impact Alaskans. He relayed the  price of fish was generally                                                                    
set  by   the  commodity   market;  the  market   would  not                                                                    
necessarily  absorb the  tax  increase.  He elaborated  that                                                                    
although  the  tax  would  be paid  by  processors,  it  was                                                                    
typically backed out  of payments made to  harvesters. So in                                                                    
effect, the fisherman would pay the tax.                                                                                        
9:09:33 AM                                                                                                                    
Representative  Gara addressed  the state's  $4 billion-plus                                                                    
deficit. He  noted that the governor's  revenue proposal did                                                                    
not  reach   $4  billion.  He  discussed   that  there  were                                                                    
opponents  of  each  of  the  various  taxes;  therefore  he                                                                    
thought it seemed  to be a recipe for failure  to put all of                                                                    
the taxes  in one  bill. He  asked why  it was  the strategy                                                                    
that the administration had chosen.                                                                                             
Commissioner  Hoffbeck answered  that  there  had been  much                                                                    
discussion about  whether to offer  the bills  separately or                                                                    
combined  during  regular  session. The  administration  had                                                                    
weighed  whether  combining them  or  leaving  the taxes  in                                                                    
separate bills would give people  to give people the ability                                                                    
to vote for something they  did not necessarily like because                                                                    
they   were  potentially   alright  with   the  other   five                                                                    
components  of  the bill  versus  a  situation where  people                                                                    
would not vote for the  bill. The administration had offered                                                                    
the taxes in separate bills  during regular session, but the                                                                    
bills had  not moved forward. Therefore,  the administration                                                                    
had elected to introduce the  taxes in an omnibus bill where                                                                    
it was easier  to see all of the components  in one place at                                                                    
one time. One of the  major pushbacks the administration had                                                                    
received was  there had not been  a large desire to  work on                                                                    
an individual tax bill separate from other tax bills.                                                                           
9:12:47 AM                                                                                                                    
Representative  Gara expounded  on  his  prior question.  He                                                                    
remarked that  when numerous popular bills  were combined it                                                                    
was  a  method  for  increasing  votes;  however,  combining                                                                    
numerous bills that  people did not love,  resulted in fewer                                                                    
votes. Based on conversations  he had with other legislators                                                                    
he surmised the  bill was almost guaranteed  to fail because                                                                    
people  disliked various  components of  the bill.  He asked                                                                    
the administration to rethink the  strategy. He spoke to the                                                                    
income  tax   component.  He  believed   the  administration                                                                    
testified it  had chosen an  income tax that was  the lowest                                                                    
in the  country. He  elaborated the  income tax  would raise                                                                    
close to  $200 million  or one-twentieth  of the  state's $4                                                                    
billion deficit. He  reasoned that the public  would say the                                                                    
administration  was imposing  the tax  at present  and would                                                                    
increase it in the future.  He believed there was some logic                                                                    
behind  that   line  of  thinking.   He  wondered   why  the                                                                    
administration chose  not to propose something  more similar                                                                    
to the  state's former income  tax or a proposal  offered by                                                                    
Representative Paul  Seaton earlier in the  regular session,                                                                    
which  would  raise more  money.  He  continued the  current                                                                    
proposal  only  applied  to   people  making  capital  gains                                                                    
income. He equated the individuals  who would be impacted by                                                                    
the tax to  the Warren Buffets of the state;  he added there                                                                    
were  few  individuals  in  that   category  in  Alaska.  He                                                                    
concluded the income  tax would be less than 1  or 2 percent                                                                    
on a person's 15 percent capital gains tax.                                                                                     
Mr. Alper answered  that no one wanted to add  an income tax                                                                    
just to  add an income  tax; there  was no strong  desire to                                                                    
tax the  Alaskan people.  The income tax  had been  the last                                                                    
component added to the governor's  revenue plan the previous                                                                    
fall. The size  had been chosen based on what  was needed to                                                                    
balance the  state's budget.  The administration  had looked                                                                    
at the  other components  including what  the change  to the                                                                    
Permanent Fund would  do, all of the smaller  taxes, the oil                                                                    
and gas tax  credit reform, and the  expected and additional                                                                    
budget cuts  and without  the income tax  the plan  had been                                                                    
$200 million short  by FY 19. Therefore,  the last component                                                                    
chosen was the  income tax, which was as small  as it needed                                                                    
to be in order to balance  the budget. Until it became clear                                                                    
which  bills  passed   or  did  not  pass   by  the  current                                                                    
legislature,  it  was not  possible  to  calculate what  the                                                                    
income tax rate  may need to be. At present,  the number had                                                                    
been selected  in order to  balance the budget  assuming the                                                                    
passage of the other components.                                                                                                
Representative Gara  countered that the  administration knew                                                                    
its Permanent  Fund Protection Plan  had been replaced  by a                                                                    
plan  that raised  less money.  He  stated that  if HB  4001                                                                    
passed  he would  have to  be  honest with  the public  that                                                                    
people  would  pressure a  second  income  tax increase.  He                                                                    
reasoned  the  last thing  people  wanted  was to  be  taxed                                                                    
twice. He  referred to  the current  $4 billion  deficit and                                                                    
discussed that any version of  the passed oil and gas credit                                                                    
bills brought in zero revenue in FY 17 or FY 18.                                                                                
Co-Chair Thompson  asked to  the committee  to stick  to the                                                                    
current bill.                                                                                                                   
Representative  Gara  continued that  the  oil  and gas  tax                                                                    
credit bill  brought in no  revenue and the  proposed income                                                                    
tax brought in no revenue for  two years. He wondered why it                                                                    
was a good idea.                                                                                                                
Mr.  Alper  answered  that  the  income  tax  was  new.  The                                                                    
administration  could  quadruple  the  other  taxes  if  the                                                                    
legislature desired  and absorb it into  the existing staff.                                                                    
The dollar  part was  not the  difficult part.  However, the                                                                    
state did not have  the infrastructure, people, or equipment                                                                    
to handle  the income tax;  it was necessary to  procure the                                                                    
items and  the state  needed to learn  how to  implement the                                                                    
income  tax  from  people  who  know  about  the  issue.  He                                                                    
furthered developing the infrastructure  would take time; it                                                                    
was not  that the administration  did not want the  money at                                                                    
present to  balance the  current budget,  but the  state was                                                                    
physically incapable  of beginning to collect  an income tax                                                                    
at present. The decision had been  made to delay for a year.                                                                    
He continued  that it was  currently May and the  thought of                                                                    
having  the  infrastructure in  place  by  January 2017  was                                                                    
challenging. He  reasoned the work  would be done  better if                                                                    
implemented  in  FY  18.  Additionally,  the  administration                                                                    
would do  a better job asking  for the resources if  it came                                                                    
back in January with expertise  about what it would take. He                                                                    
remarked  the  legislature had  seen  a  fiscal note  a  few                                                                    
months ago specifying $14 million  and 60 new employees were                                                                    
needed. He  believed the estimate was  probably about right,                                                                    
but the administration honestly did  not know; it would take                                                                    
real money  to implement an  income tax. He would  rather be                                                                    
accurate than need to ask for funding twice.                                                                                    
Representative Gara asked for  verification that it would be                                                                    
the lowest income tax in  the nation. Additionally, he asked                                                                    
how  much revenue  the  income  tax would  raise  if it  was                                                                    
imposed at the level of the state's former income tax.                                                                          
9:18:41 AM                                                                                                                    
Mr. Alper answered in the  affirmative. He elaborated that 2                                                                    
states had a  tax on capital gains (not a  true income tax).                                                                    
Out of the 41 other states  with an income tax, Alaska would                                                                    
have the  lowest if  the 6 percent  tax was  implemented. He                                                                    
relayed  Representative  Seaton's  HB 182  during  the  2015                                                                    
session,  had  included Alaska's  former  income  tax of  16                                                                    
percent combined  with a capital  gains component  and would                                                                    
have generated $650 million in revenue per year.                                                                                
Vice-Chair  Saddler  asked  if the  administration  believed                                                                    
combining seven taxes  together would make the  bill more or                                                                    
less likely to pass.                                                                                                            
Commissioner   Hoffbeck   answered   that   based   on   the                                                                    
administration's   lack  of   success   passing  the   bills                                                                    
individually, he  surmised combining  the taxes  together in                                                                    
one bill  it was  probably not less  likely the  bills would                                                                    
pass. He detailed  some people had been willing  to vote for                                                                    
a  package if  they liked  six out  of the  seven taxes.  He                                                                    
continued that  others would have preferred  to vote against                                                                    
an individual tax and hope  that the rest of the legislators                                                                    
would pass  it. He believed it  was "six to one,  half dozen                                                                    
to  another"  as far  as  the  best  way  to get  the  taxes                                                                    
through.  He believed  the option  to take  the bills  apart                                                                    
again was still  within the legislature's purview  even in a                                                                    
special session. However, the  administration thought it was                                                                    
important for  all of the  bills to be  in one place  at one                                                                    
time.  He elaborated  that addressing  the taxes  separately                                                                    
had been  one of  the biggest criticisms  the administration                                                                    
had received  during regular session -  people had vocalized                                                                    
they were not  willing to move a bill until  the other bills                                                                    
were also available  to move. He added  that legislators had                                                                    
vocalized they  did not  want to  move a  bill they  did not                                                                    
support only to see other bills they supported not make it.                                                                     
Vice-Chair  Saddler surmised  that based  on advice  by some                                                                    
legislators, the administration believed  it was more likely                                                                    
to see the taxes passed in a combined package.                                                                                  
Commissioner Hoffbeck  that the decision had  not been based                                                                    
on   advice  by   legislators.  He   elaborated  that   some                                                                    
legislators  believed  individual   bills  were  better  and                                                                    
others thought an omnibus bill was better.                                                                                      
Vice-Chair Saddler  asked if the administration  believed it                                                                    
was more or less likely for  the taxes to pass as a combined                                                                    
package. He  recognized different legislators  had different                                                                    
views on the issue.                                                                                                             
Commissioner Hoffbeck believed it  was more likely some form                                                                    
of a  bill would pass  as a  package because the  taxes were                                                                    
now all  in play in the  same location for everyone  to deal                                                                    
Vice-Chair Saddler  surmised the administration  believed it                                                                    
was more  likely some elements  would pass, but  not others.                                                                    
He asked  which elements  the administration  believed would                                                                    
Commissioner  Hoffbeck   answered  that  the   governor  had                                                                    
included all of the taxes  because they were each important.                                                                    
He chose  to avoid  placing odds on  which taxes  would pass                                                                    
versus not.                                                                                                                     
Vice-Chair  Saddler  remarked   on  Commissioner  Hoffbeck's                                                                    
statement that some legislators  thought the taxes would all                                                                    
pass and  others did  not. He referred  to the  grounds that                                                                    
some of  the taxes may pass.  He was trying to  determine if                                                                    
the administration  believed it was  more likely to  get the                                                                    
taxes passed in the current combined form.                                                                                      
Commissioner Hoffbeck  answered that the governor  wanted to                                                                    
see all of  the proposed taxes passed; the idea  was for all                                                                    
of the taxes to pass.                                                                                                           
Vice-Chair Saddler asked if the  governor told anyone in the                                                                    
legislature that  he planned  to call  a special  session on                                                                    
bills such  as the  one before  the committee  regardless of                                                                    
what   legislators  had   passed  during   regular  session.                                                                    
Commissioner  Hoffbeck asked  Vice-Chair  Saddler to  repeat                                                                    
the question.  Vice-Chair Saddler complied and  restated his                                                                    
Commissioner  Hoffbeck  answered not  that  he  knew of.  He                                                                    
believed  the governor's  statement  all along  was that  he                                                                    
would  look at  what  passed  and if  the  numbers had  been                                                                    
sufficient to  bring the budget  in line he was  willing for                                                                    
some things  to not be  part of the  package as long  as the                                                                    
numbers worked.                                                                                                                 
Vice-Chair  Saddler   asked  if  the  answer   was  a  "no."                                                                    
Commissioner Hoffbeck  replied that  as far  as he  knew the                                                                    
governor had not told anyone that.                                                                                              
Vice-Chair Saddler  asked if Commissioner Hoffbeck  would be                                                                    
in  a position  to  know. Commissioner  Hoffbeck replied  he                                                                    
believed he would know.                                                                                                         
Co-Chair  Thompson asked  about  the tobacco  tax stamp.  He                                                                    
noted  the  tax had  been  included  in  HB 155  related  to                                                                    
indirect  expenditures  and  had required  the  industry  to                                                                    
place the stamp  on packages. Currently the  state paid over                                                                    
$300,000 to  have the  stamp put  on cigarette  packages. He                                                                    
reasoned the work  should be done by the  industry. He noted                                                                    
it was  not addressed in  the current bill, but  he believed                                                                    
the issue needed to be addressed in the future.                                                                                 
Mr. Alper answered  that he did not know whether  HB 155 had                                                                    
passed during regular session.                                                                                                  
Co-Chair Thompson  replied that  the bill  did not  pass; it                                                                    
had been hung up in Senate Rules.                                                                                               
Mr.  Alper explained  how  tax was  paid  on cigarettes.  He                                                                    
relayed the  wholesaler purchased  stamps from the  State of                                                                    
Alaska,  which the  state bought  in bulk.  The stamps  were                                                                    
valued  at   $2.00  apiece   and  were   kept  in   a  safe.                                                                    
Subsequently, it was the  wholesalers' responsibility to get                                                                    
their money  back by  sticking the  stamps to  the cigarette                                                                    
pack and  selling the pack. In  years back a tax  credit had                                                                    
been proposed for the physical  act of applying the stickers                                                                    
to help defray  the costs of some  advanced sticker applying                                                                    
equipment  that had  been purchased  a few  decades ago.  He                                                                    
explained that HB  155 would have eliminated  the credit. He                                                                    
furthered it was the wholesalers'  responsibility to put the                                                                    
stamps on  the cigarettes  and they continued  to do  so. He                                                                    
explained  with HB  155,  they had  tried  to eliminate  any                                                                    
advantage or payback for the  act of placing the stickers on                                                                    
the packages.  He explained that  the equipment  should have                                                                    
all  been paid  for  at  present; it  was  an  old piece  of                                                                    
9:25:26 AM                                                                                                                    
Representative Gattis  referred to  about the  craft brewery                                                                    
component  of the  alcohol  tax. She  was  uncertain what  a                                                                    
craft  brewery  was.  She  wondered  if  the  craft  brewery                                                                    
component pertained to craft distilleries and wineries.                                                                         
Mr.  Alper answered  that the  federal  definition of  craft                                                                    
brewery  was  broader than  one  may  think and  related  to                                                                    
facilities  producing "something  like less  than 2  million                                                                    
barrels  per  year." Almost  all  companies  other than  the                                                                    
largest  10  or   fewer  in  the  country   fit  within  the                                                                    
definition.  The state's  statute  specified  that from  the                                                                    
qualifying breweries, 60,000 barrels  per year were taxed at                                                                    
the lower rate. He did  not know whether there were distinct                                                                    
federal definitions  for craft wineries or  distilleries. He                                                                    
relayed  something  could  certainly   be  worked  into  the                                                                    
statute for  a lower tax  rate on craft  distilleries, which                                                                    
was a growing  industry; the topic had not  been included in                                                                    
the  conversation  in 2002  when  the  legislature had  last                                                                    
addressed the  alcoholic beverage tax. He  was certain craft                                                                    
distilleries  would appreciate  it.  He  clarified that  the                                                                    
state would not  have the ability to only  carve out Alaskan                                                                    
distilleries; it  would open the  door for a lower  tax rate                                                                    
for  craft distilleries  for products  made out-of-state  as                                                                    
Co-Chair  Thompson asked  how many  breweries qualified  for                                                                    
the credit. Mr. Alper deferred to his colleague.                                                                                
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT  OF REVENUE  (via teleconference),  answered that                                                                    
there  were only  three of  the major  brewers that  did not                                                                    
qualify  under the  federal definition  of  a craft  brewer.                                                                    
Therefore,  many  of  the   applicants  (not  all  breweries                                                                    
submitted an application) received the credit.                                                                                  
Representative Gattis  asked how  many in-state  and out-of-                                                                    
state breweries applied  for the credit. She  was asking the                                                                    
question  from the  standpoint of  looking  out for  Alaskan                                                                    
distilleries  and breweries.  She  referred  to Mr.  Alper's                                                                    
testimony that the  state could not offer the  credit to in-                                                                    
state businesses only.                                                                                                          
Mr.  Alper replied  that there  were  20 in-state  breweries                                                                    
that qualified for the credit.  He noted Mr. Spanos may have                                                                    
detail  on   the  number  of  out-of-state   applicants.  He                                                                    
provided an example  of an out-of-state brewery  such as Red                                                                    
Hook,  which  sold  through  a  distributor  in  Alaska.  He                                                                    
clarified the  distributor was the  taxpayer. The  state was                                                                    
not able to parse out  the individual products going through                                                                    
the distributors;  therefore, it  was hard  to say  how many                                                                    
products were  receiving the credit. He  explained there was                                                                    
beer  sold  directly,  which  was  easy  to  parse  out  and                                                                    
included mostly local businesses;  and the beer sold through                                                                    
a warehouse distributor,  which was a much  larger volume of                                                                    
beer receiving the craft brewery exemption.                                                                                     
Representative Gattis  noted that  there were a  few Alaskan                                                                    
distilleries  and   she  wanted  to  explore   the  idea  of                                                                    
including a credit for craft distilleries.                                                                                      
Representative  Wilson   asked  for  clarification   on  the                                                                    
state's  actual  deficit.  She   noted  the  committee  kept                                                                    
hearing the state's deficit was  over $4 billion, but it was                                                                    
her  understanding that  figure was  actually the  amount of                                                                    
the  state's  budget.  She  reasoned  the  state  still  had                                                                    
revenue.  She detailed  the  budget  was approximately  $4.3                                                                    
billion  and the  state had  approximately  $1.3 billion  in                                                                    
revenue at  present, which left approximately  $3 billion to                                                                    
fill. She asked for the accuracy of her estimates.                                                                              
Mr.  Alper answered  that the  original $4.3  billion budget                                                                    
did not  include the oil  and gas  tax credits that  were in                                                                    
the governor's  original budget; therefore, the  revenue was                                                                    
about  $700   million  short  pertaining  to   the  specific                                                                    
component.  He  understood   the  conference  committee  was                                                                    
funding a portion of the  amount with another funding source                                                                    
through a Constitutional  Budget Reserve (CBR) appropriation                                                                    
from the  previous year. Presuming that  nothing changed and                                                                    
the operating budget  passed as is, the GF  portion would be                                                                    
$4.3 billion  and the deficit  would realistically  be about                                                                    
$3 billion.  He agreed her assessment  was correct; however,                                                                    
there were still a few missing  pieces before "we get to the                                                                    
finish line."                                                                                                                   
9:31:17 AM                                                                                                                    
Representative  Wilson countered  that the  pieces were  not                                                                    
missing and everyone knew they  were there. She believed the                                                                    
real question  was how  the legislature may  or may  not pay                                                                    
them.  She  wanted to  be  clear  about the  state's  actual                                                                    
deficit. She  stressed that the  deficit was  definitely not                                                                    
the entire budget. She had  heard statements repeatedly made                                                                    
that the  state's deficit was  over $4 billion;  however, it                                                                    
was  really  $3  billion  at present  that  the  legislature                                                                    
needed to  fund with  a combination  of its  savings account                                                                    
and incentives/enhancements.                                                                                                    
Mr. Alper responded  that the prior year budget  (FY 16) was                                                                    
closer to  $5 billion.  There had  been cuts  and components                                                                    
that had yet to be  funded. Based on Representative Wilson's                                                                    
reasoning,  the anticipated  deficit  was down  to about  $3                                                                    
billion for FY 17.                                                                                                              
Vice-Chair Saddler noted that  some of the bill's components                                                                    
had been heard  earlier in the regular  session. He recalled                                                                    
the  administration  had  relayed   the  only  analysis  the                                                                    
administration had done  on the impacts of the  taxes on the                                                                    
economy was consultation with its  own departments. He asked                                                                    
if  the  administration  had  contracted  for  any  analysis                                                                    
outside its own departments in the past several months.                                                                         
Commissioner Hoffbeck  answered that  the only new  piece of                                                                    
information  introduced, which  dealt  with  the income  tax                                                                    
more  than anything  else was  the Institute  of Social  and                                                                    
Economic Research (ISER) study. The  study had looked at the                                                                    
impacts of  various income and  sales taxes and  the various                                                                    
cuts that needed to be made.                                                                                                    
Vice-Chair Saddler  asked if Commissioner  Hoffbeck believed                                                                    
it was important to understand  what the impact of the taxes                                                                    
would be on the state's  economy. Alternatively, he asked if                                                                    
the only criteria was how much money the taxes would raise.                                                                     
Commissioner  Hoffbeck  answered that  the  administration's                                                                    
concern was  the state's large  deficit. He  elaborated that                                                                    
everything  they did  to  close the  deficit  would have  an                                                                    
impact. He  reasoned the  same statement  could be  made for                                                                    
every  cut that  had  been made  in terms  of  how it  would                                                                    
impact  the state's  economy. The  administration recognized                                                                    
that  difficult decisions  needed to  be made  and that  the                                                                    
changes  would have  impacts. The  department had  worked to                                                                    
highlight the relative  size of the state's  tax compared to                                                                    
other taxing  jurisdictions. He furthered that  other places                                                                    
had taxes  to fund  governments and their  economies thrive.                                                                    
He  believed  the assumption  that  any  tax increase  would                                                                    
devastate  the economy  was  probably  an overstatement.  He                                                                    
agreed there  would be impacts and  the administration could                                                                    
not  specify  at  present  what the  impacts  would  be.  He                                                                    
believed a  fairly major  study could  be conducted  and the                                                                    
precise impacts  would still be  unknown and how  they would                                                                    
compare  to  doing nothing  to  address  the deficit,  which                                                                    
would  have  to  be  dealt  with one  way  or  another.  The                                                                    
question was whether  to do it at present or  later when the                                                                    
impacts would be even greater.                                                                                                  
9:35:13 AM                                                                                                                    
Vice-Chair Saddler remarked  the administration acknowledged                                                                    
there  would  be  impacts,  but   he  saw  no  evidence  the                                                                    
administration tried  to assess  what the impacts  would be.                                                                    
He   addressed  the   legislative   process  for   compiling                                                                    
information  including speaking  to  the administration  and                                                                    
talking  to the  public about  what  the impact  may be.  He                                                                    
reiterated the department testified  that it had not studied                                                                    
the  impacts  other than  how  much  money the  taxes  would                                                                    
Commissioner  Hoffbeck replied  with an  example related  to                                                                    
the motor fuel  tax of $0.08 per gallon. He  noted the price                                                                    
for gas in Anchorage had increased  by $0.35 in the past few                                                                    
months. He questioned whether the  $0.08 per gallon increase                                                                    
would  have  a greater  impact  than  the $0.35  per  gallon                                                                    
increase going  to refineries.  Some of  the taxes  would be                                                                    
absorbed  within  the  normal  volatility  of  the  markets.                                                                    
General  statements could  be made,  but the  administration                                                                    
did not  have information showing the  exact economic impact                                                                    
of the various components.                                                                                                      
Vice-Chair Saddler countered "or even generally."                                                                               
Representative Gara wanted a  balanced fiscal plan. However,                                                                    
he believed individuals with the  least amount of money were                                                                    
being  hit   hard,  while   wealthy  individuals   were  not                                                                    
impacted. He looked  at the income tax,  which was basically                                                                    
1 or  2 percent.  He added the  Permanent Fund  Dividend was                                                                    
about 20 percent  of the income for people in  the lowest 50                                                                    
percent   of   wage   brackets.    He   wondered   why   the                                                                    
administration  had  not  considered  a  corporate  tax  for                                                                    
companies making  over $250,000  per year. He  remarked that                                                                    
over  6,000  Alaska  corporations   paid  no  corporate  tax                                                                    
because they  were not   C  corporations. He  continued that                                                                    
the companies  would pay  a tax  of about  2 percent  if the                                                                    
income tax  passed; however, the  state's corporate  tax was                                                                    
about 9.5 percent.                                                                                                              
Commissioner Hoffbeck answered  that the governor's decision                                                                    
on the income  tax was to spread the burden  of the economic                                                                    
issues across  the broader  economy. The  administration had                                                                    
looked  at a  specific  corporate income  tax  to include  S                                                                    
corporations and  limited liability companies (LLC),  but it                                                                    
was  more complicated.  He detailed  the  revenues in  those                                                                    
cases flowed  to the  individual; therefore,  it was  not an                                                                    
easy piece of legislation. He  furthered that many LLCs were                                                                    
not  big  lucrative  businesses;   many  were  mom  and  pop                                                                    
businesses that were just getting  by. He explained that the                                                                    
income really  equated to personal  income than  a corporate                                                                    
income in  many cases. He  added there were some  very large                                                                    
companies as well.                                                                                                              
9:39:05 AM                                                                                                                    
Representative  Gara   replied  that   he  had   proposed  a                                                                    
corporate tax  bill for companies  making over  $250,000 per                                                                    
year. He reasoned  it was not overly challenging  to apply a                                                                    
corporate tax to profitable businesses.  He asked a separate                                                                    
question related to craft breweries.  He surmised the lowest                                                                    
income  tax had  been proposed,  but the  administration was                                                                    
also proposing  the highest  alcohol tax  in the  nation. He                                                                    
supported the growing  craft brewery industry and  he had no                                                                    
problem with taxing  the group at a lower  rate. He reasoned                                                                    
that locally  owned restaurants were locally  owned as well.                                                                    
He  wondered  why the  decision  had  been  made to  make  a                                                                    
distinction between  locally owned  craft breweries  but not                                                                    
restaurants  selling  alcohol.  He declared  a  conflict  of                                                                    
interest  related to  his restaurant  in Anchorage.  He made                                                                    
remarks  about the  specific restaurant.  He reasoned  there                                                                    
were families  who owned local  restaurants and  he wondered                                                                    
why the state would treat the businesses differently.                                                                           
Mr.  Alper  answered  that the  restaurant  owner  would  be                                                                    
paying individual income  tax under the plan.  To the extent                                                                    
the alcohol  tax would impact restaurants  it would increase                                                                    
the cost  restaurants paid to a  supplier, which restaurants                                                                    
would  have  the  ability  to  pass  on  to  customers.  The                                                                    
business owner was impacted by  the income tax. He addressed                                                                    
the  idea of  an s-corporation  specific tax  or partnership                                                                    
specific  tax  and  conceded  it  could  be  done,  but  the                                                                    
decision had  been made that  the broadest way to  reach the                                                                    
entire  population  was  to  implement  an  income  tax.  He                                                                    
detailed an  income tax was inherently  progressive, meaning                                                                    
it had a  higher percentage of income for  the higher income                                                                    
earners.  He   continued  it   would  offset   the  inherent                                                                    
regressiveness  of  anything  changing  the  nature  of  the                                                                    
Permanent  Fund Dividend,  which disproportionately  hit the                                                                    
lowest income households. To get  to a true balance it would                                                                    
probably  take  a  higher  income   tax  to  have  an  equal                                                                    
percentage  of  income  participation across  the  different                                                                    
income levels.                                                                                                                  
HB  4001  was  HEARD  and  HELD  in  committee  for  further                                                                    
Co-Chair Thompson relayed that the afternoon meeting was                                                                        
canceled. He recessed the meeting to a call of the chair                                                                        
[Note: the meeting never reconvened].                                                                                           

Document Name Date/Time Subjects
DOR presentation omnibus tax bill 5-24-16.pdf HFIN 5/24/2016 8:30:00 AM