Legislature(2017 - 2018)HOUSE FINANCE 519

02/13/2017 01:30 PM House FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
01:33:52 PM Start
01:35:11 PM HB115
02:57:10 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 115                                                                                                            
     "An  Act  relating  to  the  permanent  fund  dividend;                                                                    
     relating  to the  appropriation of  certain amounts  of                                                                    
     the earnings reserve account;  relating to the taxation                                                                    
     of  income  of  individuals;   relating  to  a  payment                                                                    
     against the  individual income  tax from  the permanent                                                                    
     fund  dividend  disbursement;   repealing  tax  credits                                                                    
     applied  against  the  tax  on  individuals  under  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
1:35:11 PM                                                                                                                    
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, read                                                                         
from a prepared statement:                                                                                                      
     The  goal of  HB 115,  the State  Revenue Restructuring                                                                    
     Act, is  to create a balanced,  stable, and sustainable                                                                    
     approach to resolving our state's  deficit, for now and                                                                    
     for  future Alaskans.   A  stable fiscal  plan requires                                                                    
     multiple approaches  and should be addressed  this year                                                                    
     because our reserve account is running low.                                                                                
     For  over   30  years  the  state   has  relied  almost                                                                    
     exclusively on  volatile resource  revenues.   This has                                                                    
     led  to years  where the  state budget  has been  high,                                                                    
     with  large  capital  budgets  creating  infrastructure                                                                    
     throughout the  state.   But it has  also led  to years                                                                    
     where  the  budget has  contracted  quickly  to try  to                                                                    
     match reduced revenue streams,  leaving little money to                                                                    
     maintain our  existing infrastructure or for  our state                                                                    
     State  government  does  not  function  efficiently  or                                                                    
     effectively  with so  much volatility.   Volatility  in                                                                    
     state  government is  also unhealthy  for the  economy.                                                                    
     As we heard from Mr.  King on Friday, businesses do not                                                                    
     feel comfortable  investing in  the state when  they do                                                                    
     not know  what the state  will look like next  year, or                                                                    
     the  year after  that.   We  have  heard from  business                                                                    
     leaders  throughout  the   state  that  uncertainty  is                                                                    
     freezing their investment decisions.                                                                                       
     We also  see the  effect of  volatility on  the state's                                                                    
     credit rating.   Even  though the  State of  Alaska has                                                                    
     more assets  then most other  states, all  three credit                                                                    
     rating  agencies downgraded  the state's  credit rating                                                                    
     last year.   Without a  fiscal plan they are  likely to                                                                    
     downgrade us again this year,  because without a stable                                                                    
     and sustainable  plan there  is no  way for  the rating                                                                    
     agencies  to predict  what  the  state's finances  will                                                                    
     look like in future years.                                                                                                 
     To provide  business leaders  and rating  agencies with                                                                    
     the confidence they  need to invest in  Alaska, we need                                                                    
     a fiscal  plan that  will stabilize state  revenues and                                                                    
     will be sustainable into the  future.  The plan must be                                                                    
     a  comprehensive solution,  not a  partial one,  or the                                                                    
     economy  will continue  to struggle  with questions  of                                                                    
     uncertainty  and the  legislature will  be back  in the                                                                    
     same situation next year.                                                                                                  
     How does HB 115 create a stable plan?                                                                                      
     The State Revenue  Restructuring Act reduces volatility                                                                    
     in  the  state  budget   by  diversifying  our  revenue                                                                    
     sources from one  single source, oil, to many.   HB 115                                                                    
     will utilize earnings from the  Permanent Fund based on                                                                    
     4.75% of the  market value.  The fund is  invested in a                                                                    
     diverse portfolio,  protecting it from  fluctuations in                                                                    
     value  of  one investment  type  or  another.   As  was                                                                    
     demonstrated last week  by David Teal, a  draw based on                                                                    
     a  percent of  market value  of  the fund  is the  most                                                                    
     stable option.                                                                                                             
     In  addition,  the   State  Revenue  Restructuring  Act                                                                    
     implements  a  modest  income tax  which  will  further                                                                    
     diversify   state   revenues    and   protect   against                                                                    
     fluctuations in any one source.                                                                                            
     How does HB 115 create a sustainable approach?                                                                             
     The intent  is to  craft a  fiscal framework  that will                                                                    
     not  drain  value from  our  savings  but will  instead                                                                    
     preserve those assets, so they  continue to provide for                                                                    
     future Alaskans.  A sustainable  draw on  the Permanent                                                                    
     Fund  earnings  will allow  the  fund  to grow  and  to                                                                    
     continue to maintain the same  value for future Alaskan                                                                    
     as it  has for us today.  Draw rates that are  too high                                                                    
     could risk  the future  value of the  fund if  they are                                                                    
     drawing above the rate of inflation.                                                                                       
     How does HB 115 create a balanced approach?                                                                                
     This bill  asks every  Alaskan and  non-resident worker                                                                    
     to contribute  to the core  state services that  we all                                                                    
     utilize, while  recognizing that some are  more capable                                                                    
     of    contributing   than    others.   The    necessary                                                                    
     restructuring  of the  permanent fund  earnings and  of                                                                    
     the dividend,  which is paid from  those same earnings,                                                                    
     will impact every  Alaskan but does not  touch the non-                                                                    
     resident  workers.  However,  rural Alaskans  and  low-                                                                    
     income Alaskans,  especially those with  families, will                                                                    
     feel  this impact  the  deepest.  A progressive  income                                                                    
     tax, based on  15% of the federal tax  liability or the                                                                    
     amount you  pay to the federal  government, will offset                                                                    
     this impact  by collecting revenues  from non-residents                                                                    
     and  those with  higher incomes.  It will  also collect                                                                    
     income  from those  non-resident  workers  who use  our                                                                    
     state  services  while they  are  here  but take  their                                                                    
     money  earner  here  out  of state.    The  income  tax                                                                    
     includes a  $25 minimum  tax that will  be paid  by all                                                                    
     filers,   ensuring   that   most   Alaskans   will   be                                                                    
     contributing to this revenue source.                                                                                       
     The State  Revenue Restructuring Act is  the foundation                                                                    
     for  a  fiscal  plan  that  is  balanced,  sustainable,                                                                    
     stable,   and   comprehensive   to  help   remove   the                                                                    
     uncertainty  that is  freezing business  investment and                                                                    
     credit ratings in the state currently.                                                                                     
1:40:28 PM                                                                                                                    
JANE PIERSON, STAFF, REPRESENTATIVE NEAL FOSTER, read the                                                                       
sectional analysis for HB 115:                                                                                                  
     Section  1  (page  1,  line 7)  -  Clarifies  that  all                                                                    
     components  of this  bill are  part of  a comprehensive                                                                    
     revenue act.                                                                                                               
     ---Appropriations from the Earnings Reserve Account---                                                                     
     Section 2 (page 1, line  10) - Amends AS 37.13.140, net                                                                    
     income  of  the  Permanent   Fund,  to  remove  "income                                                                    
     available for distribution" and  adds "market value" to                                                                    
     section title.                                                                                                             
     Section 3 (page 2, line 9)  - Adds a new subsection (b)                                                                    
     to AS  37.13.140 determining  the amount  available for                                                                    
     distribution  each  year   from  the  earnings  reserve                                                                    
     account, equal to  4.75 percent of market  value of the                                                                    
     entire fund.  Defines how the  average market  value of                                                                    
     the fund is calculated.                                                                                                    
     Section 4  (page 2, line  19) - States that  33 percent                                                                    
     of  the  amount  available for  distribution  under  AS                                                                    
     37.13.140 may be  directed to the dividend  fund and 67                                                                    
     percent to the general fund.                                                                                               
     Section 5 (page  2, line 27) -  Amends AS 37.13.145(d),                                                                    
     relating  to the  Amerada Hess  settlement, to  clarify                                                                    
     that income  from that settlement  may not be  used for                                                                    
     distribution.   Additionally,  removes   references  to                                                                    
     subsection (c),  relating to inflation  proofing, which                                                                    
     is repealed by this act.                                                                                                   
     Section 6 (page  3, line 6) - Provides  that money from                                                                    
     the  earnings   reserve  may  be  transferred   to  the                                                                    
     principal  of  the  permanent   fund  for  purposes  of                                                                    
     inflation  proofing  the fund  when  the  value of  the                                                                    
     earnings  reserve  account  is four  times  the  annual                                                                    
     amount calculated under AS 37.13.140(b).                                                                                   
     Section 7 (page  3, line 11) -  Includes the unexpended                                                                    
     balance  of  the  Alaska Permanent  Fund  Corporation's                                                                    
     budget in  the calculation of the  fund's market value;                                                                    
     this budget balance is already  calculated as a part of                                                                    
     the net income of the fund under current law.                                                                              
     Section 8  (page 3,  line 18)  - Clarifies  that income                                                                    
     from mental health trust fund,  which is managed by the                                                                    
     Alaska Permanent  Fund Corporation, is not  included in                                                                    
     the market value of the Permanent fund.                                                                                    
     Section 9 (page  3, line 22) - Asserts  that the income                                                                    
     of the  mental health trust  fund shall continue  to be                                                                    
     calculated as  before, in  the same  manner as  the net                                                                    
     income of the entire fund.                                                                                                 
     ---Start of Income Tax section---                                                                                          
     Section 10 (page  3, line 29) -  AS 43.05.045(a) states                                                                    
     that there is  a penalty if a state income  form is not                                                                    
     filed  electronically but  that individuals  are exempt                                                                    
     under AS 43.22.020 (f).                                                                                                    
     Section 11  (page 4, line  8) - Creates  the Individual                                                                    
     Income Tax within AS 43.                                                                                                   
     Subsection: Sec. 43.22.010 (page  4, line 10) - Imposes                                                                    
     an  income tax  and a  long-term capital  gains tax  on                                                                    
     residents,  as well  as nonresidents  with income  from                                                                    
     within  the state.  The  tax  is equal  to  15% of  the                                                                    
     taxpayer's  total federal  income  tax  due or  $25.00,                                                                    
     whatever  is  greater.  Long  term  capital  gains  are                                                                    
     additionally taxed at the lesser  of 10% or the federal                                                                    
     tax rate  difference between earned income  and capital                                                                    
     gains.  Currently  capital  gains   are  taxed  by  the                                                                    
     federal government at a lower rate than earned income.                                                                     
     Subsection:  Sec.   43.22.020  (page  5,  line   14)  -                                                                    
     Establishes how  a taxpayer will submit  the tax return                                                                    
     for the  individual income tax. It  clarifies that this                                                                    
     tax is  due and payable  to the department at  the same                                                                    
     time and in  the same manner as the tax  payable to the                                                                    
     U.S. IRS for federal taxes.                                                                                                
     Subsection: Sec. 43.22.030 (page  6, line 17) - Defines                                                                    
     income from  sources in  the state  for the  purpose of                                                                    
     the   tax.  Note   -  the   Internal  Revenue   Service                                                                    
     definition for income is adopted in a later section.                                                                       
     Subsection:  Sec.   43.22.035  (page  7,  line   12)  -                                                                    
     Provides  a  credit  to residents  for  taxes  paid  to                                                                    
     another  state based  on income  earned  in that  other                                                                    
     state, ensuring  a resident is  not taxed twice  on the                                                                    
     same income.                                                                                                               
     Subsection: Sec.  43.22.040 (page 7, line  27) - States                                                                    
     a person may  choose to apply some or all  of their PFD                                                                    
     as  a refundable  tax payment  to their  upcoming state                                                                    
     income tax  due (see  Sec. 12). Any  remaining dividend                                                                    
     after  the payment  will be  refunded  to the  dividend                                                                    
     Subsection:  Sec.   43.22.050  (page   8,  line   6)  -                                                                    
     Establishes  how taxes  will be  withheld by  employers                                                                    
     making  payment  of  wages or  salaries,  or  a  person                                                                    
     paying  crew  shares,  similar  to  the  way  in  which                                                                    
     employers withhold federal income taxes.                                                                                   
     Subsection: Sec. 43.22.055 (page 9,  line 4) - Allows a                                                                    
     person's  income tax  information to  be shared  with a                                                                    
     banking  institution   to  verify  direct   deposit  of                                                                    
     Subsection:  Sec.   43.22.060  (page   9,  line   7)  -                                                                    
     Authorizes  the  department  to  create  all  necessary                                                                    
    forms and adopt regulations to implement this tax.                                                                          
     Subsection:  Sec.   43.22.190  (page  9,  line   17)  -                                                                    
     Provides  definitions of  terms used  in this  section,                                                                    
     including the  definition of  resident for  the purpose                                                                    
     of this tax.                                                                                                               
     ---End of Income Tax section ---                                                                                           
     Section 12  (page 10, line  9) - Directs  the Permanent                                                                    
     Fund Division to create a  place on the PFD application                                                                    
     where an applicant  may choose to apply some  or all of                                                                    
     their PFD to their upcoming state income tax due.                                                                          
     Section   13  (page   10,  line   15)   -  Repeals   AS                                                                    
     37.13.145(c) inflation proofing  of the permanent fund.                                                                    
     Also, repeals sections relating  to a former tax credit                                                                    
     for   political   contributions  that   existed   under                                                                    
     Alaska's   prior  individual   income  tax   which  was                                                                    
     repealed in 1980.                                                                                                          
     Section 14 (page 10, line  16) Clarifies that the state                                                                    
     income tax  created under section  11 of this  act only                                                                    
     goes into effect  starting on January 1,  2018 and will                                                                    
     not  be applied  to  any income  earned  prior to  that                                                                    
     Section  15  (page  10,  line   20)  -  Authorizes  the                                                                    
     Department   of  Revenue   to   adopt  regulations   to                                                                    
     implement the act.                                                                                                         
     Section 16 (page  10, line 25) - If  sections 2 through                                                                    
     9  take effect  after  June 30th  of  2017, sections  2                                                                    
     through  9  are retroactive  to  June  30th, 2017.  The                                                                    
     appropriation  from the  earnings reserve  described in                                                                    
     sections 2 through 4 will  be applicable in fiscal year                                                                    
     Section 17 (page  10, line 29) - Sections  1 through 9,                                                                    
     relating  to  the  earnings  reserve  account  and  the                                                                    
     permanent fund, and sections 15 and 16, take effect                                                                        
     Section 18 (page 10, line 31) - The effective date of                                                                      
     the act, except those noted in Section 17 above, is                                                                        
     January 1, 2018.                                                                                                           
1:48:45 PM                                                                                                                    
Vice-Chair Gara mentioned  that when he first  read the bill                                                                    
the capital  gains tax was  10 percent. Looking  through the                                                                    
sectional he  thought the tax appeared  more complicated. He                                                                    
asked if the issue could be addressed.                                                                                          
Co-Chair Foster acknowledged  that Representative Pruitt had                                                                    
joined the meeting.                                                                                                             
Ms. Pierson did not know the answer.                                                                                            
Ms. Hansen  responded that 10  percent would be  the maximum                                                                    
tax on  capital gains. The  tax could change if  the federal                                                                    
government  changed  the  differential between  the  capital                                                                    
gains  rate on  long term  capital gains  currently. If  the                                                                    
federal  government increased  the rate  in the  future, the                                                                    
state's rate would decrease.                                                                                                    
Vice-Chair Gara asked if the  rate was 10 percent for short-                                                                    
term and long-term capital gains based on existing law.                                                                         
Ms. Hansen answered, "long-term capital gains."                                                                                 
Vice-Chair  Gara asked  if there  was a  provision on  short                                                                    
term capital gains.                                                                                                             
Ms.  Hansen responded  in the  negative. She  indicated that                                                                    
short  term capital  gains under  federal law  are currently                                                                    
taxed at the same rate as other income.                                                                                         
Co-Chair Foster invited Ms. Hansen to begin her PowerPoint.                                                                     
Ms.  Hansen introduced  the PowerPoint  Presentation: "State                                                                    
Revenue  Restructuring  Act  HB  115" (copy  on  file).  She                                                                    
turned to  slide 2: "Fiscal  Foundation." She  reported that                                                                    
Alaska was currently  undergoing some economic contractions.                                                                    
She  suggested that  how big  the recession  ended up  being                                                                    
would  depend,  in part,  on  the  approach the  legislature                                                                    
decided to  take to address  the deficit. She argued  that a                                                                    
diversified approach  would help minimize the  impact on any                                                                    
one  group  of  Alaskans  and  should  help  provide  for  a                                                                    
smoother transition for the economy as a whole.                                                                                 
Ms.  Hansen advanced  to slide  3: "Four  Pillar Plan."  She                                                                    
indicated  that  the  legislation being  considered  in  the                                                                    
House contained four key pillars  to a diversified plan. The                                                                    
first  pillar was  a structured  use of  the Permanent  Fund                                                                    
(PF)  earnings reserve  account  (ERA),  the state's  single                                                                    
largest  asset. The  second pillar  was new  revenue from  a                                                                    
broad-based tax,  which would  allow everyone  to contribute                                                                    
to the services  Alaska was utilizing. The  third pillar was                                                                    
protecting and  maintaining a Permanent Fund  Dividend (PFD)                                                                    
for  Alaskans  within  the restructuring  of  the  ERA.  The                                                                    
fourth  pillar  was  smart  budget  cuts  while  maintaining                                                                    
functioning core  services. Smart budget cuts  could include                                                                    
reductions to  some of the  state's liabilities such  as the                                                                    
oil and gas liability that the state currently had.                                                                             
Ms. Hansen  continued to  slide 4:  "Four Pillar  Plan." She                                                                    
explained that not all the  components would be addressed in                                                                    
one  piece of  legislation.  However, in  the State  Revenue                                                                    
Restructuring  Act would  consider a  structured use  of the                                                                    
ERA, new  revenue from  a broad-based  tax, and  a protected                                                                    
structure for the dividend.                                                                                                     
Ms.  Hansen  turned to  slide  5:  "HB 115:  Permanent  Fund                                                                    
   · 4.75%   Permanent   Fund   POMV.   Inflation   proofing                                                                    
     contingent on surplus.                                                                                                     
   · 1/3 of POMV to pay dividends. $1100 and growing over                                                                       
     years, with payouts more stable than current                                                                               
   · 2/3 of POMV directed to the General Fund. $1.5 billion                                                                     
     in FY18 growing to $2 billion in FY25.                                                                                     
   · Residents may choose to apply their PFD to their                                                                           
     upcoming state income tax due as a Refundable Tax                                                                          
     Payment. Any amount left over after paying taxes will                                                                      
     be refunded by the Tax Division.                                                                                           
Ms. Hansen detailed  that the changes that were  made to the                                                                    
use of the  PF earnings came down to 4  points. First, there                                                                    
would  be  an annual  draw  based  on  4.75 percent  of  the                                                                    
Permanent  Fund's  full  value. Inflation  proofing  of  the                                                                    
principle of  the fund would  be contingent on  surpluses in                                                                    
the ERA.  The current  annual transfer from  the ERA  to the                                                                    
principle  for inflation  proofing  was  being replaced.  In                                                                    
years  when the  balance of  the  ERA exceeded  4 times  the                                                                    
Percent  of  Market Value  (POMV)  draw  calculated for  the                                                                    
general fund  in the dividend,  the excess in the  ERA would                                                                    
be transferred to  the principle. She continued  that of the                                                                    
4.75 percent that was  available for distribution, one-third                                                                    
or 33 percent would be  transferred directly to the dividend                                                                    
fund for the PFD. Two-thirds or  66 percent of the draw from                                                                    
the ERA would  be deposited into the general  fund (GF). The                                                                    
final component of the bill  relating to the PF earnings was                                                                    
that  Alaskan residents  could choose  to  apply their  PFDs                                                                    
against their  state income taxes  due. The option  would be                                                                    
entirely voluntary  and would appear  as a check box  on the                                                                    
dividend application.                                                                                                           
1:53:35 PM                                                                                                                    
Ms.  Hansen addressed  the  question of  how  an income  tax                                                                    
would be implemented on slide  6: "Income Tax." She reported                                                                    
that the numbers  on the slide were based  on 2015 estimates                                                                    
from the Department of Revenue  (DOR). She had just received                                                                    
updated fiscal  notes but had  not had the chance  to update                                                                    
the slide  in time. The  income tax  would be 15  percent of                                                                    
federal liability  due. The amount  would be listed  on line                                                                    
56 of the  federal 1040 form which would  equal the adjusted                                                                    
gross  income  minus  standard deductions  and  many  common                                                                    
exemptions  and  credits but  would  not  include the  self-                                                                    
employment tax  and some other  more specialized  taxes that                                                                    
were  generally considered  beyond the  traditional idea  of                                                                    
income.  It also  excluded things  like federal  bonds which                                                                    
states were not  supposed to tax. She suggested  that how it                                                                    
would translate exactly would  be created through regulation                                                                    
by  DOR. It  would also  not include  the earned  income tax                                                                    
credit which came after federal taxes were due.                                                                                 
Ms.  Hansen continued  that not  everyone would  have a  tax                                                                    
liability. However, everyone who  filed a federal income tax                                                                    
form  would at  least  pay a  minimum tax  of  $25. The  $25                                                                    
minimum  tax was  not included  in the  2015 estimates.  The                                                                    
fiscal note reflected  an amount of about $2  million in the                                                                    
first year  of implementation. Additionally, the  income tax                                                                    
would include a  10 percent tax on  long-term capital gains.                                                                    
As  discussed previously,  the federal  government currently                                                                    
taxed  long-term capital  gains  differently  than it  taxed                                                                    
short-term capital gains  or other forms of  income. For the                                                                    
lowest tax brackets, long-term capital  gains were not taxed                                                                    
at  all. For  tax brackets  where other  incomes were  taxed                                                                    
between 25 and 35  percent, the federal government currently                                                                    
taxed long-term  capital gains at  15 percent. By  adding an                                                                    
additional  10  percent  Alaska  tax  on  long-term  capital                                                                    
gains, the differential between  other incomes and long-term                                                                    
capital gains would  be equalized. She reported  that in the                                                                    
bill  there was  a  calculation such  that,  if the  federal                                                                    
government were to tax long-terms  capital gains close to an                                                                    
amount of what other income  was taxed at, Alaska's tax rate                                                                    
on long-term capital gains would adjust accordingly.                                                                            
Representative Pruitt asked if she  was saying the tax was a                                                                    
25 percent tax  (15 plus 10). Alternatively,  he wondered if                                                                    
she was suggesting  that the tax would be 10  percent of the                                                                    
Ms.  Hansen explained  that capital  gains were  reported on                                                                    
federal  taxes. The  capital gains  would be  15 percent  of                                                                    
federal tax  liability. However, the capital  gains that was                                                                    
reported  on the  federal tax  liability would  be taxed  at                                                                    
between zero and  15 percent compared to  other income which                                                                    
was  taxed at  a  higher  rate. There  would  also  be a  10                                                                    
percent tax specifically on the taxable income from long-                                                                       
term capital  gains. She relayed  that for somebody  who had                                                                    
long-term  capital gains  who was  paying  taxes in  Alaska,                                                                    
they would  be paying what  would be  equal to the  same tax                                                                    
rate they were paying on other income.                                                                                          
Representative Pruitt asked how it  would impact 401 K plans                                                                    
and  retirees.  That  was  a   long-term  capital  gain.  He                                                                    
wondered if a  10 percent tax would be required  or if there                                                                    
would  be   an  exemption.   Ms.  Hansen  deferred   to  the                                                                    
Department  of  Revenue  (DOR).  She  was  aware  that  some                                                                    
retirement income had different  taxing rules at the federal                                                                    
level, which  meant that the way  it was taxed at  the state                                                                    
level would also be different.                                                                                                  
Co-Chair Foster mentioned that someone  from DOR was online.                                                                    
Representative Pruitt  would leave it  up to the  chair. Co-                                                                    
Chair Foster would circle back to the issue later.                                                                              
1:58:48 PM                                                                                                                    
Representative  Wilson  asked if  the  state  would only  be                                                                    
imposing an  additional tax on  long-term capital  gains but                                                                    
not  on  short-term  capital  gains.  Ms.  Hansen  responded                                                                    
affirmatively.  Representative Wilson  wondered  if the  tax                                                                    
only  applied  to residents.  Ms.  Hansen  replied that  the                                                                    
calculation  would also  apply to  any income  earned within                                                                    
the state.                                                                                                                      
Representative Wilson asked  if it would only  apply to real                                                                    
estate  rather than  stocks and  bonds.  Ms. Hansen  relayed                                                                    
that stocks and  bonds fell in the  definition for potential                                                                    
income  earned   within  the  state.  She   referred  to  AS                                                                    
43.22.030  which defined  income from  sources in  the state                                                                    
for the  purposes of non-residents. It  included income from                                                                    
stocks, bonds,  notes, bank  deposits, and  other intangible                                                                    
personal property  having a taxable or  business interest in                                                                    
the state.                                                                                                                      
Representative  Wilson indicated  she had  done taxes  for a                                                                    
long time and she was under  the impression that if a person                                                                    
had long-term or short-term capital  gains it would apply in                                                                    
the state they  resided in as opposed to the  state a person                                                                    
worked in. She  asked if the concept was  taken from another                                                                    
state. She  provided an example  to her question.  She asked                                                                    
for clarity. Ms.  Hansen believed, because it  was on income                                                                    
from a  source in the state,  it would have to  be stocks or                                                                    
bonds  considered a  source in  the state.  She thought  Mr.                                                                    
Spanos might  be able to speak  more directly to how  it was                                                                    
differentiated.  The person  would not  be taxed  on all  of                                                                    
their long-term capital gains.                                                                                                  
Representative Wilson was unsure of  her next question.  She                                                                    
remarked that  she did not  know what, besides  real estate,                                                                    
would have  long-term capital  gains. Ms.  Hansen reiterated                                                                    
that  the definition  for the  different  incomes that  were                                                                    
considered  from  a source  in  the  state  was on  page  6,                                                                    
subsections 4 and 5.  She  deferred to Mr. Spanos to provide                                                                    
examples of stocks and bonds that might be from the state.                                                                      
2:01:47 PM                                                                                                                    
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT OF  REVENUE, thought the question  was about what                                                                    
long-term  capital gains  would be  applied to  Alaska other                                                                    
than real property.                                                                                                             
Representative Wilson  understood that  the tax  would apply                                                                    
to  a resident.  She wanted  an  example of  a capital  gain                                                                    
within Alaska that applied to an out-of-state resident.                                                                         
Mr. Spanos indicated that real  estate was a good example. A                                                                    
non-resident who  owned real  estate in  the state,  held it                                                                    
for investment  purposes for more  than a year, and  sold it                                                                    
at a gain would be liable  for a long-term capital gain tax.                                                                    
The person  would owe  long-term capital  gain rates  on the                                                                    
federal tax  return. If the  bill were to pass,  that person                                                                    
would also owe the long-term  capital gain rate to Alaska in                                                                    
addition  to the  15 percent  already taxed  at the  federal                                                                    
level.  Other  income sources  could  include  trusts. If  a                                                                    
person had income earned through  a trust in Alaska that was                                                                    
incorporated in  the state  and the funds  were held  in the                                                                    
state, it would be considered a long-term capital gain.                                                                         
Representative Wilson  asked if  the reverse applied.  As an                                                                    
Alaska resident  owning property  outside of the  state, she                                                                    
wondered  if she  would  have  to pay  state  taxes on  that                                                                    
property even if it was out of state.                                                                                           
Mr.  Spanos  replied that  a  resident  of the  state  whose                                                                    
assets were not  in Alaska - as long as  they were not taxed                                                                    
by another state - would be  taxed in Alaska. The bill had a                                                                    
credit for  taxes paid  in other states.  For example,  if a                                                                    
person had  income for  a rental in  another state  that was                                                                    
taxed by the other state, they  could get a credit for it in                                                                    
Alaska and  would not pay the  tax twice. If it  was a long-                                                                    
term  capital gain,  the circumstance  would be  similar. If                                                                    
the  other state  had a  higher  tax than  Alaska, a  person                                                                    
would receive a tax credit up  to the amount they would have                                                                    
paid  in Alaska.  If the  rate was  lower, then  that person                                                                    
would pay the difference to the state.                                                                                          
Representative Wilson thought what  was being proposed was a                                                                    
nightmare.  She  was unfamiliar  with  the  trust market  in                                                                    
Alaska  but  was aware  that  it  brought in  a  significant                                                                    
amount of revenue. She surmised  that the proposed tax could                                                                    
have a huge  negative affect in the form  of investors going                                                                    
elsewhere. She wanted to make  sure the committee heard from                                                                    
someone who  was knowledgeable about  the trust  market, the                                                                    
resulting revenue, and the  potential repercussions from the                                                                    
capital gains portion of the proposed legislation.                                                                              
Ms. Hansen responded that when  the sponsor was drafting the                                                                    
section  being  discussed  there had  originally  been  some                                                                    
references  to  trusts which  had  since  been removed.  She                                                                    
would follow-up with Mr. Spanos  to see if the Department of                                                                    
Revenue was interpreting it differently,  or if it was based                                                                    
on previous income tax versions  in previous years where the                                                                    
language had been included.                                                                                                     
2:06:19 PM                                                                                                                    
Representative   Guttenberg   indicated  that   a   previous                                                                    
presenter had suggested that the  state not tie taxes to the                                                                    
federal  taxes in  case of  unintended consequences  for the                                                                    
state.  He  mentioned  the  estimate   for  income  tax  and                                                                    
refundable PFD  tax payments. He  thought the  committee was                                                                    
broaching the  questions about the  mechanics of  how things                                                                    
worked  and what  the state  was  taxing or  not taxing.  He                                                                    
suggested having  a one-pager  on definitions  and something                                                                    
other than estimates for clarification.                                                                                         
Co-Chair Foster would get the information to members.                                                                           
Vice-Chair Gara agreed that the  state had to raise revenue.                                                                    
He  asked if  his thinking  was correct  that 15  percent of                                                                    
federal tax  liability was  equal to  15/100 of  the federal                                                                    
tax. Ms. Hansen  replied that he was correct  and added that                                                                    
in the back  of the documents there was  an estimated income                                                                    
tax. It  showed the differing income  levels, the associated                                                                    
taxes,  and  the  state  tax payment  of  15  percent  which                                                                    
equaled between .1 percent to 3 percent of gross income.                                                                        
Vice-Chair Gara relayed that  some people had misinterpreted                                                                    
the  legislation to  reflect  a 15  percent  tax on  income,                                                                    
which was  not accurate. He  elaborated that a  person would                                                                    
take their  federal tax  rate, for  example, 25  percent. He                                                                    
continued that  15 percent of  25 percent was  3.75 percent.                                                                    
If  a person  was  in a  25 percent  tax  bracket under  the                                                                    
federal  tax  rate,  under   the  proposed  legislation,  15                                                                    
percent of a  person's federal tax liability  would be about                                                                    
a 3.75  percent rate for  that bracket.  He asked if  he was                                                                    
correct.  Ms. Hansen  thought that  it sounded  correct. She                                                                    
would have  to have the numbers  in front of her  to confirm                                                                    
his math.                                                                                                                       
Co-Chair  Seaton  pointed  to  the tax  tables  provided  in                                                                    
members' packets [HB  115: Estimates for Income  Tax and PFD                                                                    
Refundable Tax  Payment: Estimated Federal and  State Income                                                                    
Tax for Year 2016] (copy on  file). He pointed to the bottom                                                                    
2  lines of  page  1 that  reflected the  federal  tax as  a                                                                    
percent of gross  income and the Alaska tax as  a percent of                                                                    
gross  income.  He  read  the  example  of  $800,000  income                                                                    
[listed on  page 9  under single with  2 children  filing as                                                                    
head  of household].  At  $800,000 a  person  would incur  a                                                                    
federal  tax of  32.38 percent  and an  Alaska state  tax of                                                                    
4.86 percent,  15 percent of  the federal tax rate.  He read                                                                    
another example from the tables.                                                                                                
2:10:29 PM                                                                                                                    
Vice-Chair Gara reemphasized that the  tax was 15 percent of                                                                    
the  federal tax  rate.  For  example, 15  percent  of a  25                                                                    
percent federal tax was a 3.75  percent tax. He did not want                                                                    
people walking  around saying that  the bill was  imposing a                                                                    
15 percent tax.                                                                                                                 
Vice-Chair Gara  relayed there was a  question about trusts.                                                                    
He suggested that  the treasury industry was  odd in Alaska.                                                                    
He  was unsure  of the  number of  attorneys and  bankers it                                                                    
benefitted.  He understood  that  the state  could only  tax                                                                    
Alaska income. He  provided an example of a  client from New                                                                    
York  City with  all  their investments  in publicly  traded                                                                    
stocks  on the  New  York Stock  Exchange  not being  taxed.                                                                    
However,  their attorney  and/or banker  in Alaska  would be                                                                    
making income in  Alaska off that trust and  would be taxed.                                                                    
He  thought the  state  would  only be  able  to tax  Alaska                                                                    
income and income made in Alaska.                                                                                               
Representative Wilson  disagreed that the tax  system was as                                                                    
simple as  the previous speaker stated.  She suggested there                                                                    
were several  steps to getting  to gross wages.  Someone who                                                                    
did not have as many  deductions would have a higher federal                                                                    
tax liability. Two  people earning the same  wages might pay                                                                    
a  very different  income tax  amount. Ms.  Hansen responded                                                                    
that it was based on federal  tax liability. If a person was                                                                    
paying  a  different  federal tax  liability  she  would  be                                                                    
Representative   Wilson   reiterated  the   differences   in                                                                    
deductions.  She asked  about a  side-by-side comparison  of                                                                    
two  different  families   with  differing  deductions.  She                                                                    
thought  the  comparison would  show  a  very differing  tax                                                                    
liability to the state.                                                                                                         
Co-Chair  Foster  added  that  tomorrow there  would  be  an                                                                    
opportunity to  ask additional  questions. There  would also                                                                    
be additional people from the  departments that could answer                                                                    
2:15:26 PM                                                                                                                    
Representative Pruitt  had heard  earlier that if  there was                                                                    
income  derived  from  another  state  it  would  be  taxed.                                                                    
However, from what Vice-Chair Gara  mentioned that the state                                                                    
would not  be able to tax  income made in another  state. He                                                                    
wanted clarification.  Ms. Hansen indicated that  for a non-                                                                    
resident,  the only  thing that  could be  taxed was  income                                                                    
from  the state.  For  an Alaskan  resident  all income  was                                                                    
taxable, but they had credit  against anything that had been                                                                    
taxed  in another  state.  She believed  there  were only  6                                                                    
other states  that did not  have income taxes but  had sales                                                                    
taxes instead.                                                                                                                  
Co-Chair Seaton tried to provide additional clarification.                                                                      
Representative Wilson asked if  a person received credit for                                                                    
the amount  paid to  the other state,  or was  a calculation                                                                    
needed. She provided an example  and asked if she understood                                                                    
correctly.  Co-Chair Seaton  responded that  if a  state did                                                                    
not have  an income tax  there would  not be any  credit. If                                                                    
the state  had an income  tax, there  could be a  credit for                                                                    
the amount up to the amount  that would have been charged on                                                                    
the income from Alaska. He  provided an example. If a person                                                                    
was from California, which had  a 13 percent gross tax, then                                                                    
that  person would  not be  able to  subtract more  tax from                                                                    
their Alaska earnings.  That person would still  have to pay                                                                    
15 percent of the federal  tax liability on the money earned                                                                    
in Alaska.                                                                                                                      
Representative  Wilson  provided  an example  pertaining  to                                                                    
Missouri.  Co-Chair  Seaton  would  get DOR  to  provide  an                                                                    
explanation.  Ms. Hansen  added  that  an explanation  could                                                                    
also be found on page 7.                                                                                                        
Vice-Chair  Gara  indicated  that  the  taxable  income  was                                                                    
discussed on pages  6 and 7 of the bill.  He relayed that if                                                                    
a  person was  an out-of-state  worker who  came to  Alaska,                                                                    
paid nothing  in Alaska,  and took money  out of  the state,                                                                    
they would pay taxes on the  money they earned in the state.                                                                    
They would not be able to  take everything out of the state.                                                                    
The credit portion was described  in .035 which only applied                                                                    
to residents of  the State of Alaska. A person  would be pay                                                                    
income tax on all their  income earned in the state. Out-of-                                                                    
state workers would have to  begin contributing to the state                                                                    
that they worked  in and then left. An  Alaska resident that                                                                    
paid income  taxes for  income earned  in that  other state,                                                                    
would receive a credit to avoid being double taxed.                                                                             
2:21:01 PM                                                                                                                    
Ms. Hansen  continued her review  of slide 6.  She indicated                                                                    
that the  slide was  based on estimates  from 2015.  She had                                                                    
just received  an updated  fiscal note  which did  not break                                                                    
out the income in the  same manner as the previous estimate.                                                                    
She could  not directly  update the  amount estimated  to be                                                                    
coming  from non-residents.  However,  in  2015 over  90,000                                                                    
non-residents  worked in  the state  taking  more than  $2.7                                                                    
billion  in wages  out of  state.  The income  tax would  be                                                                    
implemented  starting January  1, 2018.  For the  first year                                                                    
the state,  which functioned  on a  fiscal year,  would only                                                                    
see half  of the  revenue. The estimate  for that  period in                                                                    
the   new  fiscal   note  was   $321   million  versus   the                                                                    
approximated $300 million reflected on the slide.                                                                               
Ms. Hansen scrolled  to the flow chart on  slide 7: "Current                                                                    
Permanent Fund  System." The slide showed  the existing flow                                                                    
into  and out  of the  Permanent  Fund. Currently  25 to  30                                                                    
percent of  oil royalties went into  the PF and the  rest of                                                                    
the royalties  went into the  general fund. The  earnings on                                                                    
the investments came out of  the principle and went into the                                                                    
ERA which  could be spent by  any legislative appropriation.                                                                    
Historically the  legislature had not chosen  to appropriate                                                                    
from that  fund except  for the  dividend and  for inflation                                                                    
proofing.   The   option   existed.  She   highlighted   the                                                                    
distributable  income out  of the  ERA, which  was currently                                                                    
how the dividend  was paid. The calculation was  based on 21                                                                    
percent  of the  5-year average  of  the net  income of  the                                                                    
fund. The net income of  the fund did not include unrealized                                                                    
gains  or losses.  As was  demonstrated by  Mr. Teal  in the                                                                    
previous week,  it could be  highly variable.  For instance,                                                                    
there could be  a year of negative  realized earnings, which                                                                    
was why dividends had fluctuated between $700 and $2200.                                                                        
Ms. Hansen  reviewed the flow  chart on  slide 8: "HB  115 -                                                                    
State  Revenue  Restructuring  Act." Under  the  bill  there                                                                    
would be  an additional  cash flow from  an income  tax. The                                                                    
amount would be 15 percent of  federal income tax due and 10                                                                    
percent of  long-term capital gains which  would go directly                                                                    
into the general fund.                                                                                                          
Ms.  Hansen  reviewed  slide  9: "HB  115  -  State  Revenue                                                                    
Restructuring Act." She reported  that additionally the bill                                                                    
made changes  to how  the earnings  from the  Permanent Fund                                                                    
that  came out  of  the ERA  were  considered available  for                                                                    
distribution. Previously,  the calculation was based  on the                                                                    
5-year average  - 21  percent of  the statutory  net income.                                                                    
under the  bill the  amount would be  calculated based  on a                                                                    
Percent of  Market Value  (POMV) of  the entire  fund, which                                                                    
would also be  averaged over 5 or 6 years.  Instead of being                                                                    
based on only  the earnings (net income), it  would be based                                                                    
on the whole value of the fund - a more stable calculation.                                                                     
Ms. Hansen expounded that two-thirds  of the draw that would                                                                    
come out  of the  earnings reserve,  the structured  draw of                                                                    
4.75 percent,  would go  into the  general fund.  The amount                                                                    
would  be approximately  $1.5  billion in  FY  18 and  $1.59                                                                    
billion in FY 19 according  to LFD numbers. According to the                                                                    
Department  of Revenue's  estimate on  its fiscal  note, the                                                                    
amount was closer to $1.6  billion in FY 19. The Legislative                                                                    
Finance Division and DOR  had slightly different assumptions                                                                    
regarding the  earnings over the following  couple of years.                                                                    
On Wednesday they would be  available to answer questions on                                                                    
the subject.                                                                                                                    
Ms. Hansen stated  that the other third of  the 4.75 percent                                                                    
POMV  draw would  be  sent directly  to  the dividend  fund,                                                                    
which was where  the current draw from  the earnings reserve                                                                    
went.  The monies  would not  be going  through the  general                                                                    
fund but would be going  straight into the dividend fund for                                                                    
calculating the  current year's dividend.  The value  of the                                                                    
draw  would be  $762 million  for  FY 18  with an  estimated                                                                    
dividend of $1100.                                                                                                              
2:26:16 PM                                                                                                                    
Ms.  Hansen turned  to slide  10:  "HB 115  - State  Revenue                                                                    
Restructuring Act."  She reported  that the slide  looked at                                                                    
how  the   change  affected  the  dividend   distributed  to                                                                    
Alaskans.  Once  the  draw from  the  earnings  reserve  was                                                                    
placed into the  dividend fund, it would be  computed in the                                                                    
same way it was  presently calculated. Residents would still                                                                    
have  the option  of donating  to  Pick-Click-Give or  would                                                                    
have the added  option of using their dividend  as a payment                                                                    
against their  state income tax  due. If residents  chose to                                                                    
apply their  dividend to their  state taxes owed,  once they                                                                    
filed  their  taxes, they  would  receive  any remainder  of                                                                    
their  dividend as  a refund.  If they  did not  select that                                                                    
option, they  would receive the  dividend as they  had every                                                                    
Representative  Pruitt  wanted   to  better  understand  the                                                                    
logistics of  how the system  would work. He  wondered about                                                                    
the burden on the individual and  the burden on the state to                                                                    
manage the system. He thought it sounded complex.                                                                               
Ms.  Hansen  responded that  DOR  would  be better  able  to                                                                    
explain the  technical details.  Her understanding  was that                                                                    
it would  not be  complicated or  burdensome for  the state.                                                                    
There  was  already  an  option  for  withholding  quarterly                                                                    
payments  and   prepayments.  The   dividend  would   be  an                                                                    
additional pre-payment  option that DOR would  be holding in                                                                    
the tax filer's  account, the same as they would  for any of                                                                    
the payment options  already. Once a person  filed their tax                                                                    
return, they would  know whether they owed money  or if they                                                                    
could  expect  a return,  just  like  filing a  federal  tax                                                                    
return. She  deferred to Mr.  Spanos about  how withholdings                                                                    
worked. However,  she believed a  person could set  the rate                                                                    
of withholding. Regarding the  dividend amount being changed                                                                    
by the legislature, the intention  of the proposed structure                                                                    
was to make the amount of  funds going into the general fund                                                                    
stable.  Stability would  remove some  of the  need for  the                                                                    
legislature to  reconsider the dividend. She  indicated that                                                                    
the hope was  that the format would protect  the dividend by                                                                    
creating a  stable source of  revenue for  state government.                                                                    
Ultimately, the  legislature had the power  of appropriation                                                                    
and could not bind future legislatures.                                                                                         
Representative Pruitt  provided an  example. He  wondered if                                                                    
the state  had to change the  way in which people  filed for                                                                    
the  PFD. He  asked how  the system  would work.  Ms. Hansen                                                                    
asked if  Representative Pruitt was  referring to  using the                                                                    
dividend   against   the  payment.   Representative   Pruitt                                                                    
responded affirmatively.                                                                                                        
Ms.  Hansen answered  that it  would be  an option  for each                                                                    
individual  filer to  use their  dividend against  their tax                                                                    
liability.  It would  not have  any direct  impact on  their                                                                    
employer  unless  the employee  made  the  choice to  change                                                                    
their   withholding  rate.   Her   conversations  with   the                                                                    
Permanent Fund Division indicated that  there would not be a                                                                    
need to change  the way individuals filed.  Mr. Spanos could                                                                    
speak   to   how   money  would   be   transferred   between                                                                    
departments. Typically, a person  applied for their dividend                                                                    
by the  end of  March and  filed their  taxes in  April. The                                                                    
dividend  was calculated  in October.  If a  person did  not                                                                    
choose  to apply  their dividend  against their  taxes, they                                                                    
would  receive the  full dividend  in October.  If a  person                                                                    
chose to apply  it against their taxes, the  amount would be                                                                    
transferred to  DOR in October  and marked as  a pre-payment                                                                    
for taxes filed the following April.                                                                                            
Representative Pruitt thought it was complex.                                                                                   
Co-Chair Foster  asked if Mr.  Spanos would like  to address                                                                    
the question. Mr. Spanos answered  that the payment would be                                                                    
like any  other payment.  For instance,  if someone  were to                                                                    
select on their  PFD application that they  wanted a portion                                                                    
of  their  dividend  to  be  used for  a  tax  payment,  the                                                                    
department  would  expect it  to  be  similar to  any  other                                                                    
scenario  where  someone  made a  pre-payment  or  quarterly                                                                    
payment.  It  was unlikely  that  someone  getting a  refund                                                                    
would  want to  make  a  payment to  the  tax division.  The                                                                    
division would  piggyback the W-4  Form. There would  be tax                                                                    
payables  for employers  to withhold.  The department  would                                                                    
not  be  releasing  any information  to  employers  on  pre-                                                                    
payments. It would  be up to the employer to  simply put the                                                                    
data into  the system and  to allow the withholding  to take                                                                    
2:35:29 PM                                                                                                                    
Representative Tilton asked if the  state would place a lien                                                                    
on a person's  future dividends if they had  a tax liability                                                                    
greater than what they had  paid in payments and contributed                                                                    
in PFD monies by checking  the box on their application. Mr.                                                                    
Spanos replied that  the division would handle  the issue in                                                                    
the  same  way  it   handled  other  outstanding  tax  payer                                                                    
balances. If  there was a  liability after a tax  return was                                                                    
filed,  the person  would receive  a  bill in  the mail.  It                                                                    
would  have  the payment  information  on  it including  the                                                                    
interest  and penalty  fees. If  a  tax payer  did not  make                                                                    
payments, the division would go  into collections with them.                                                                    
The  division  had an  agreement  with  the PF  Division  to                                                                    
withhold  payments  when  an   individual  owed  tax.  Other                                                                    
methods used by the division  were levying bank accounts and                                                                    
placing liens on properties.                                                                                                    
Co-Chair Foster  suggested that  without knowing  the amount                                                                    
of the  PFD until  the Fall,  it would  be difficult  for an                                                                    
individual to determine the exact  amount they owed in taxes                                                                    
to the  state. He  suspected the  number of  the discrepancy                                                                    
would not likely be large,  but filers would incur penalties                                                                    
and interest  if there was a  shortfall. He asked if  he was                                                                    
correct.  Mr.  Spanos   asked  for  clarification.  Co-Chair                                                                    
Foster reiterated  his question. He  wondered if he  had the                                                                    
timeline correct.                                                                                                               
Mr. Spanos replied that the  PFD application would be at the                                                                    
beginning  of  the  year  between  January  and  March.  For                                                                    
instance, if  he filed  for his  PFD in  March 2017  his tax                                                                    
return  would  not   be  due  until  April   2018.  The  PFD                                                                    
announcement would  be in  October 2017.  If he  selected to                                                                    
make a  payment from his  PFD, it  would be in  October 2017                                                                    
that  the payment  would be  transferred from  the Permanent                                                                    
Fund Division  to the  Tax Division. He  would file  his tax                                                                    
returns between January - April  2018 and would know exactly                                                                    
how much  was transferred  and whether he  owed more  or was                                                                    
receiving a refund.                                                                                                             
Ms. Hansen moved to slide  11: "HB Proposal: Total Estimated                                                                    
Revenue to General Fund FY18  -Half Year of Income Tax." The                                                                    
slide  showed  the estimated  revenue  to  the general  fund                                                                    
which was based  on the numbers before she  received the new                                                                    
fiscal  notes. Using  the new  fiscal note,  the income  tax                                                                    
revenue  would reflect  $321  million in  FY  18. The  total                                                                    
revenue going into the general  fund would be $1.84 billion.                                                                    
There would be $762 million going straight to the dividend.                                                                     
2:40:47 PM                                                                                                                    
Ms.  Hansen  advanced  to  slide  12:  "HB  Proposal:  Total                                                                    
Estimated Revenue to General Fund  FY19 - First Full Year of                                                                    
Income Tax." She reported that in  FY 19, which would be the                                                                    
first full  fiscal year of  the income tax, the  estimate on                                                                    
the new  fiscal note was  slightly lower. She would  have to                                                                    
ask Mr. Spanos  to speak to the changes  in the department's                                                                    
calculations  between   the  years.  The  new   fiscal  note                                                                    
reflected income  tax revenues to  be $640 million in  FY 19                                                                    
The draw was  calculated as slightly higher  at $1.6 billion                                                                    
in FY  19. The total  revenue to  the general fund  was $2.2                                                                    
billion with  an additional $797  million going  straight to                                                                    
the dividend rather than coming out of the general fund.                                                                        
Ms. Hansen  moved to slide  13: "What  kind of Alaska  do we                                                                    
want  to  live  in?"  She  suggested  that,  to  answer  the                                                                    
question  about why  the state  needed to  take action  on a                                                                    
comprehensive  plan, another  question  had  to be  answered                                                                    
first. What kind  of Alaska did people want to  live in? She                                                                    
reasoned that  finding out  the standard  of living  and the                                                                    
services  that   Alaskans  thought  made  the   state  worth                                                                    
investing   in  could   help   legislators  understand   how                                                                    
comprehensive of a  solution the state needed  this year and                                                                    
for the future.                                                                                                                 
Ms.  Hansen continued  to slide  14:  "State Spending."  She                                                                    
noted a pole run by the  Senate Majority of and responded to                                                                    
by  over 7028  participants  revealed that  49.9 percent  of                                                                    
Alaskans believed state spending was  about right or too low                                                                    
compared to with those that  believed state spending was too                                                                    
high. She added  that more Alaskans then in  past years were                                                                    
saying that they wanted to  keep the level of state services                                                                    
that they had currently.                                                                                                        
Ms. Hansen  discussed slide 15:  "Income Tax."  She reported                                                                    
that out of  the same poll conducted by  the Senate Majority                                                                    
when asked  whether they could  support a state  income tax,                                                                    
54.6  percent of  participants  indicated  they strongly  or                                                                    
somewhat  strongly supported  the  idea. The  number was  an                                                                    
increase of more than 6 percent over the previous year.                                                                         
Ms.  Hansen  reviewed  the graph  on  slide  16:  "2017-2026                                                                    
Employment  Forecast  under   Three  Budget  Scenarios."  In                                                                    
looking at  a plan to  address the state's  fiscal situation                                                                    
it was  important to consider how  the legislature's choices                                                                    
would  affect  the  state.  The  majority  of  Alaskans  had                                                                    
indicated that they supported the  current level of spending                                                                    
or that  they believed  that spending was  too low.  All the                                                                    
choices made would  have an effect on  the economy including                                                                    
changing  the dividend  or implementing  a broad-based  tax.                                                                    
However,  if  the  legislature  chose  not  to  implement  a                                                                    
comprehensive fiscal  plan and instead continued  with major                                                                    
budget cuts  as the main  approach, the predicted  effect on                                                                    
employment would be more severe than other choices.                                                                             
Vice-Chair  Gara  was  looking at  Mr.  King's  presentation                                                                    
which had 3 lines. The first  was a line with a combined PFD                                                                    
and income  tax plan  similar to  the one  on the  slide. It                                                                    
stopped job losses in 2017.  Another line reflected only the                                                                    
PFD  without income  tax, which  showed greater  job losses.                                                                    
The  third  line was  one  with  cuts  only. It  showed  the                                                                    
largest job  losses, approximately  25,000 jobs,  that would                                                                    
persist midway through the 2020s.                                                                                               
Ms.  Hansen responded  that the  slide was  from Mr.  King's                                                                    
presentation; it  was his presentation  to the  Senate Labor                                                                    
and Commerce Committee. The slide  did have 3 lines, but the                                                                    
dividend line and the broad-based  tax line were essentially                                                                    
on top of each other.                                                                                                           
Vice-Chair Gara  suggested that the difference  was that the                                                                    
top line was  an income tax or a  restructuring. Whereas, he                                                                    
had a third line that he  provided to House Finance that had                                                                    
a  combined  restructuring and  income  tax,  which had  the                                                                    
least job losses.  He noted that he was speaking  of page 19                                                                    
of Mr. King's presentation from an earlier meeting.                                                                             
2:45:30 PM                                                                                                                    
Representative Wilson asked where  the impact on the private                                                                    
sector was  shown. She noted  the ongoing  discussions about                                                                    
oil  taxes. She  noted  the industry  reporting several  job                                                                    
losses in  the previous year.  She wondered where  she could                                                                    
find  the information  on  the graph.  Ms.  Hansen asked  if                                                                    
Representative  Wilson was  referring to  the discussion  on                                                                    
oil and gas taxes.  Representative Wilson clarified that she                                                                    
was  talking about  job losses  in the  private sector.  She                                                                    
wondered where the private sector  job losses resulting from                                                                    
low oil prices would fall  on the graph. She mentioned other                                                                    
industries such as mining.                                                                                                      
Ms.  Hansen spoke  to slide  16,  which was  looking at  the                                                                    
employment forecast  for the entire state.  She believed the                                                                    
slide  included the  losses to  the  private sector,  rather                                                                    
than  just looking  at state  jobs. It  was looking  at jobs                                                                    
throughout the  state. She highlighted that  the losses that                                                                    
have already occurred  where the lines combined  in 2015 and                                                                    
2016.  The deviation  was the  expected  forecast effect  on                                                                    
employment for  the different choices.  If she  was speaking                                                                    
to  the revenue  impacts  having to  do with  non-residents,                                                                    
there  were not  as many  non-residents working  in the  oil                                                                    
sector which  could be  why DOR  had slightly  revised their                                                                    
estimations for the income tax,  but she would differ to Mr.                                                                    
Spanos to speak to the point.                                                                                                   
Representative Wilson commented that  the jobs were not lost                                                                    
because  the PFD's  were reduced,  because of  a broad-based                                                                    
tax, or because the legislature  was cutting the budget. The                                                                    
jobs were lost due to the change in the price of oil.                                                                           
Vice-Chair  Gara   referred  to  slide  19   of  Mr.  King's                                                                    
presentation ["Forecasting  Alaska's Economy:  2017-2026" by                                                                    
Northern Economics] (copy on file).  Mr. King's point was in                                                                    
alignment  with  what  Institute   of  Social  and  Economic                                                                    
Research  (ISER) had  reported in  the previous  year. Every                                                                    
$100 million in budget cuts  cost about 1000 to 1500 private                                                                    
and public-sector  jobs. According  to Mr. King,  Alaska was                                                                    
down 20,000  private-sector and  public-sector jobs  with $1                                                                    
billion reductions in the budget.  If a plan was implemented                                                                    
along the lines  of those on the slide, job  losses would be                                                                    
2:49:29 PM                                                                                                                    
Co-Chair Seaton  indicated that the  lines on slide  16 were                                                                    
going down from  a high employment in 2015  of about 465,000                                                                    
jobs.  The reduction  in the  lines  down to  2017 to  about                                                                    
425,000 equated to  about 20,000 jobs that  were both public                                                                    
and  private   jobs  and   reflected  actual   numbers.  The                                                                    
legislature was looking at making  decisions about how to go                                                                    
forward.  Both a  reduced PFD  and the  implementation of  a                                                                    
broad-based  tax  had  the same  effect  of  preventing  job                                                                    
losses.  However, if  the  state only  cut  the budget,  the                                                                    
state would  be faced with  losing another 25,000  more jobs                                                                    
between  2017 and  2020.  The  legislation being  considered                                                                    
would include a PFD reduction  and a broad-based tax as well                                                                    
as a restructuring  of the Permanent Fund  for a sustainable                                                                    
Ms.  Hansen noted  that the  boxes on  the chart  were added                                                                    
because  the  lines  were   difficult  to  distinguish.  She                                                                    
thought  the labels  were misleading  because the  chart did                                                                    
not reflect  the effect on  the economy under  the different                                                                    
Representative   Wilson   suggested    that   by   combining                                                                    
industries,  private   and  public,  it  was   difficult  to                                                                    
determine what was contributing  to an upswing. She supposed                                                                    
that an upswing  might be due to  keeping government strong,                                                                    
which would  result in more  jobs in the public  sector. She                                                                    
thought  the  lines  should  be  divided.  She  wondered  if                                                                    
private sector jobs would increase  or if public sector jobs                                                                    
would increase if taxes were  imposed or PFD's were cut. She                                                                    
wondered  what types  of jobs  would continue.  She posed  a                                                                    
question about a private sector  economy versus a government                                                                    
driven economy.  Ms. Hansen replied that  the question would                                                                    
be a  good follow-up question  for Mr. King. She  noted that                                                                    
the slide showed job employed  in the thousands. She did not                                                                    
believe  that  under  either scenario  the  state  would  be                                                                    
hiring 10,000 extra state employees.  Some of the jobs would                                                                    
be  lost from  the  private  sector and  not  just from  the                                                                    
Ms.  Hansen detailed  the budget  scenario on  slide 17:  "A                                                                    
$3.2 Billion Budget Scenario:" She  explained that the slide                                                                    
showed  a  different  perspective   of  what  choosing  $100                                                                    
billion  in  budget  cuts  versus a  plan  that  would  help                                                                    
stabilize  the state's  revenues. There  would be  potential                                                                    
cost shifts  to the  communities. The  slide was  taken from                                                                    
OMB's  presentation  at  the  beginning  of  the  year.  The                                                                    
scenario was  hypothetical. They spread $100  billion budget                                                                    
cut scenario  out among the different  communities based the                                                                    
amount  of   state  funds  that   were  currently   sent  to                                                                    
communities  through education  and other  services provided                                                                    
by the  state. It also  showed the burden on  communities to                                                                    
continue to provide the services they had.                                                                                      
2:53:46 PM                                                                                                                    
Ms.  Hansen scrolled  to  the  Legislative Finance  Division                                                                    
slide  18:  "Real  Per   Capita  Unrestricted  General  Fund                                                                    
Revenue/  Budget History  (2015  Dollars  Per Person)."  She                                                                    
noted the  reliance on volatile resource  revenues resulting                                                                    
in expansions and contractions in  the state budget based on                                                                    
a revenue  factor outside of  the state's control.  It meant                                                                    
that  in   years  when  the  state's   private  economy  was                                                                    
shrinking due  to decreased oil  and gas investment,  as was                                                                    
currently  the case,  it could  not help  to provide  a safe                                                                    
glide path  for the economy. The  only option was to  try to                                                                    
match the  greatly reduced resource revenue  by cutting jobs                                                                    
and  the budget,  which, in  turn, would  have a  multiplier                                                                    
effect on  the state  economy. She  concluded that  to avoid                                                                    
the volatile state budget and  economy, the intention of the                                                                    
state  revenue  restructuring  act  was to  provide  a  more                                                                    
stable   source  of   revenue   avoiding  fluctuations   and                                                                    
contractions. The slide showed  that per capita and adjusted                                                                    
for inflation the  state budget had already  been reduced to                                                                    
some of its lowest levels.                                                                                                      
Ms.  Hansen  asked  members  to consider  why  it  would  be                                                                    
valuable for the State of Alaska  to have a stable source of                                                                    
revenue instead  of a volatile  one. One of the  reasons was                                                                    
the sheer amount  of infrastructure the state  built up over                                                                    
the  previous  30-40  years  when   it  had  money.  If  the                                                                    
legislature chose to cut the  budget drastically to meet the                                                                    
state's expected resource revenue,  the first place the cuts                                                                    
would be taken from would  be the capital budget. She opined                                                                    
that the state  would likely see a growing  list of deferred                                                                    
maintenance.   The  university   had  deferred   maintenance                                                                    
nearing  $1  billion.  There was  a  significant  amount  of                                                                    
differed maintenance  of roads, and  DOT had its own  way of                                                                    
prioritizing how  the roads  would be  repaired and  in what                                                                    
order. She  indicated that if  the state wanted  to maintain                                                                    
some of its core services  and core infrastructure, a stable                                                                    
revenue would  be required for  the state to budget  in some                                                                    
of those deferred maintenance costs.                                                                                            
HB 115 was HEARD and HELD in committee for further                                                                              
Co-Chair Foster noted the agenda for the following meeting.                                                                     

Document Name Date/Time Subjects
HB115 Additional Documents_Income Tax Filing Status Chart_.10.17.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
HB115 Sectional version E_long form_2.10.17.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
HB115 Sectional_Version E_short form_2.10.2017.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
HB115 Sponsor Statement_2.10.2017.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
HB115 Additional Documents_Permanent Fund flow chart_2.11.17.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
HB115 Presentation _2.12.2017.pdf HFIN 2/13/2017 1:30:00 PM
HB 115
NEW FN DOR T&T Tax Division.pdf HFIN 2/13/2017 1:30:00 PM
HB 115