Legislature(1997 - 1998)
02/26/1998 03:06 PM HES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 169 - WELFARE TO WORK TAX CREDITS Number 1172 CHAIRMAN BUNDE announced the next order of business was HB 169, "An Act relating to welfare to work tax credits under the Alaska Net Income Tax Act; and providing for an effective date." He noted this bill had been heard previously and asked Mr. Kreher to give the committee an update. Number 1201 RON KREHER, Special Assistant, Division of Public Assistance, Department of Health & Social Services, testified in support of HB 169. He said there has been a significant reduction in the public assistance caseload since last July and HB 169 would give the department an additional tool to further that progress. The early successes have been the easiest to gain and it is important for the department to use all the available tools to help move clients with limited skills and work experience into employment. Employer involvement is critical and the department needs to capitalize on the growing interest in the employer community to hire welfare recipients and other disadvantaged workers. He said this particular legislation develops a tax credit for employers who hire disadvantaged workers and in essence piggybacks two federal tax credits; the work opportunity tax credit and a welfare to work tax credit that targets specific disadvantaged workers, including long-term welfare recipients, disabled veterans, individuals in vocational rehabilitation, ex-felons and a number of other targeted populations. He pointed out that tax credits appear to work. Judging from the success in other states, it is a positive incentive for employers, attractive to small businesses that are very conscious of the bottom line, and generally reduce the tax burden of corporations that hire, train and retain disadvantaged workers. Number 1310 MR. KREHER noted that under the Governor's proposed legislation, corporations that are certified for the federal work opportunity tax credit and welfare to work tax credits would be eligible for this state's welfare to work tax credit, given amendments to this legislation. He pointed out the Alaska Chapter of the National Federation of Small Businesses, with over 3,000 members, recently conducted a survey and over 75 percent of the businesses surveyed, favored this legislation. There is an additional incentive for this legislation which is driven by the department's need to get as many people as possible into gainful employment to reduce welfare rolls and this will give another incentive for employers to hire disadvantaged workers. He added that representatives from the Departments of Revenue and Labor were on hand to answer questions concerning the legislation. CHAIRMAN BUNDE asked Bob Bartholomew from the Department of Revenue to comment. Number 1358 BOB BARTHOLOMEW, Deputy Director, Income & Excise Audit Division, Department of Revenue, said the division had prepared a revised fiscal note for the original version of the bill. He explained the tax credit is basically to allow businesses to claim 15 percent of the wages paid to a qualified employee, up to a $1,000 tax credit, or up to a $1500 tax credit if training is provided that meets criteria established in a program referred to in HB 169. The division's estimate shows that in the first two years a loss of revenue of $993,000 due to placing welfare recipients on the payroll; however, in 2001 and years forward, it's actually a positive fiscal note. He said, "How we get from the first two years and -- there is an amendment that would make this a three- year program, it was intended to be a three-year program last year -- and our original fiscal note showed three years of revenue loss, then if we amended it, this would become a three year program again and you'd see a revenue loss for three years. But what happens once the program expires, is we currently allow in our Alaska tax code, kind of by default we've adopted a federal credit that has been on the books for years, and whether you hire a worker in Alaska, California, Montana, you're eligible to take that federal credit against your state taxes on an apportioned basis. So the positive fiscal note starting in 2001 of where we would recover $262,000 a year, this bill repeals the adoption of the federal credit completely; it adopts a state credit for a limited number of years - two currently, the amendment would make it three - then both programs would go away, the federal one immediately and the state one at the end of three years. Then we would not be allowing employers who may hire in other states. And the primary beneficiaries of the credit have actually not been Alaska hires; they've been multistate corporations working in other states where they've had programs that have hired a lot of people that have qualified for the federal credits." Number 1561 CHAIRMAN BUNDE commented that it's basically revenue neutral at the end of the program. MR. BARTHOLOMEW pointed out it would be revenue positive to around $260,000 which is historically what the state has been losing to the federal credit. It was his understanding the intent of the legislation isn't to be revenue neutral; it is to recognize there is a cost to providing that additional incentive for helping take people off the welfare rolls. He didn't want to leave the impression that it was going to be revenue neutral; there is a cost to it and in bringing this forward, the position is that the benefit that's going to be gained outweighs the cost. Number 1636 REPRESENTATIVE PORTER referred to the analysis prepared by the department which projects to the year 2004, (indisc.) and asked do we know if the federal program is going to be there in 2004. MR. BARTHOLOMEW responded the assumption is the federal program would be in existence in 2004. He added the federal program has changed shape a couple different times, changing to whatever the current need is, but it has been maintained. Number 1688 REPRESENTATIVE PORTER said he assumed that based on the fiscal note, the federal programs don't provide the same level of credit that's being proposed in HB 169. MR. BARTHOLOMEW responded that page 5 of the fiscal note compares what an Alaska corporation would receive under the federal program versus the state program. For example, a 100 percent Alaska corporation could currently get a $432 benefit on the federal tax, whereas under HB 169 it could be up to a $1500 credit. In short, Representative Porter was correct in that the federal credit doesn't provide the same level of fiscal incentive. REPRESENTATIVE PORTER wondered if the federal program was viewed as ineffective or what was the reason behind this proposal to quadruple the credit? MR. BARTHOLOMEW said it would, in essence, triple for an Alaska- based corporation; mainly, because currently there is no Alaska incentive, it's a federal incentive. His understanding was the reason for the increase is to provide a bigger benefit to try to provide a bigger incentive to hire workers off the welfare rolls. Number 1828 BILL EHLERS, Program Coordinator, Work Opportunity Tax Credit Program, Division of Employment Security, Department of Labor, explained that on the federal side, an employer still receives a substantial credit off their federal income tax. The credit to the state income tax is reduced by this legislation, but the employer would still receive the full benefit of the federal program. Under the work opportunity tax credit, the maximum credit an employer can receive is $2400 and under welfare to work, an employer can receive up to $8500 (indisc.-paper shuffling). REPRESENTATIVE VEZEY asked how many for profit corporations there are in Alaska and how many people are employed by these corporations. MR. BARTHOLOMEW estimated the number of registered corporations at 12,000 but he didn't have the employment figures available at this time. REPRESENTATIVE VEZEY expressed concern that corporations are the only entity in the state that's assessed an income tax. The majority of employers in Alaska are not in the corporate entity form and the majority of employees in the state do not work for corporate entities. He wanted to know why corporations were being singled out to assist with the welfare program. MR. BARTHOLOMEW thought it was indicative of who pays for some of the state services. Only 55 percent of the corporations registered are subject to income tax because of federal provisions that allow an entity to be a subchapter S. The only way to provide an incentive to someone not paying into the state would be a grant. REPRESENTATIVE VEZEY pointed out that less than 6,000 of the registered corporations are subchapter C which are subject to income tax. MR. BARTHOLOMEW interjected there are about 7,000 C corporations. Number 2123 MR. KREHER noted the department is looking at other options for providing incentives to all employers to hire disadvantaged workers, particularly welfare recipients. Through research of other states, the department found that one of the biggest incentives for employers was public recognition by doing their fair share in helping to move forward welfare reform initiatives. The department is also looking at wage subsidies and on-the-job training subsidies for employers who hire welfare recipients and put them into jobs as a way of offsetting the costs of hiring welfare recipients. He pointed out these incentives are still in nascent stages at this point. The department recognizes that many of these people will be moving into entry level jobs offered by smaller employers and smaller businesses, so it is important that some form of incentive be offered them as well. Number 2213 REPRESENTATIVE VEZEY said that Mr. Bartholomew had talked about this being a three year program, but he read it as a five-year program. MR. BARTHOLOMEW explained that HB 169 allows an employer three years of an active program and if there isn't enough liability to use the full credit within the three years, it can be carried forward two more years. So, the credit can be carried on a tax return for five years, but the active hire must have been made before that. He further explained there are three active years of the program in which a hire must have been made to be eligible for the credit, but as is typical with tax credits, a carry forward is allowed in the event the full credit isn't used. The department, for administrative purposes, made a short carry forward period. TAPE 98-15, SIDE A Number 0001 REPRESENTATIVE VEZEY observed this program appears to duplicate a number of programs already in existence and questioned why the state didn't take a pool of money and make it available for incentives to subsidize the minimum wage. MR. BARTHOLOMEW responded it would take an appropriation, which is an increase in the budget. He agreed that a reduction in revenue is the same thing as an appropriation, but it generally doesn't work that way in the budgetary process; credits have a better chance of passing than a direct appropriation. Number 0124 REPRESENTATIVE BRICE surmised that while the employers are receiving the tax credit for hiring these disadvantaged individuals, these individuals are losing their welfare benefits. MR. KREHER replied if the individuals are indeed employed and earning wages, there would be a reduction in their public assistance benefits. Ideally, the individuals would be earning enough money to take them off the welfare rolls quickly, so the department would be realizing program savings for every individual that's employed at one level or another, depending on the earned wages. Number 0196 REPRESENTATIVE BRICE said he didn't see the positive impact from the anticipated decrease in public assistance payments reflected on the fiscal note. MR. KREHER responded the department has no mechanism for projecting how many individuals would be hired. He said, "If I could speculate, if 100 individuals were hired - 100 adults off of 100 cases - and each one of those individuals received a job which paid them $10.50, which is probably unrealistic -- I won't even go at the minimum wage level because that's about what it would take in order for them to be ineligible for assistance based on their income. We paid last month - our average monthly benefit for a temporary assistance case was $720 so for those 100 individuals, it would be a sizeable chunk of change every year that we would save if those 100 cases went off assistance as a result of employment." Number 0299 REPRESENTATIVE J. ALLEN KEMPLEN said he was under the impression the department had previously come before the legislature and requested the program savings achieved from reduced caseloads be reinvested into the training of the welfare recipients. He wondered if the reinvestment funds couldn't be the pot of money referred to by Representative Vezey as incentives to subsidize the minimum wage. MR. KREHER said he really wasn't qualified to respond to that question, and added the department's budget indicates there are funds they would like to reinvest in a number of different areas; e.g., child care. He said there was considerable leeway in the use of the block grant under the federal welfare reform law, but the reinvestment of any money would be dependent on the legislature. Number 0390 REPRESENTATIVE KEMPLEN was of the opinion the legislature had used those funds last year as a way to reduce the operating budget. He pointed out the opportunity does exist however, for the legislature to consider Representative Vezey's proposal. It means that instead of those program savings being used to reduce the operating budget, it would be reinvested in the people of the state. REPRESENTATIVE VEZEY asked what the actual statistics were on the reductions in the welfare rolls. MR. KREHER referred to the division's monthly caseload and benefits summary report and said there is typically a spike in the winter months because it's a low employment period, but currently the public assistance caseload is the lowest since the early 1990s. There are under 11,000 temporary assistance cases currently. REPRESENTATIVE VEZEY observed reductions in food stamp recipients as well as temporary assistance cases; however, there are increases in the Medicaid program and adult public assistance program. MR. KREHER said the increases in the Medicaid and adult public assistance programs are largely driven by an aging population. The Medicaid program is largely federally funded and the expanding need for Medicaid services is what's driving those numbers up. The bulk of effort and costs are associated with the temporary assistance program, from the state's perspective. By focusing on that program in particular, the department believes the savings generated by caseload reductions will partially offset costs associated with growth in other areas. REPRESENTATIVE GREEN expressed concern that if the state gives a tax credit to employers hiring individuals coming off welfare, into what he presumed would be mostly entry level positions, would this be displacing other workers through the normal hiring process. MR. KREHER remarked that many of jobs are entry level jobs, and many of them are seasonal in nature. He pointed out that federal and state laws are very specific in terms of displacing current employees. He didn't believe that hiring disadvantaged workers in any job would necessarily displace other qualified individuals. He was of the opinion this legislation was a win/win situation for employers and for employees. Number 0854 REPRESENTATIVE KEMPLEN noted that many of the jobs are high turnover positions. Employers like Fred Meyers, Carrs and Safeway, which have high turnover positions such as checkers and baggers, viewed this credit as an incentive to train a disadvantaged worker for these entry level positions with the hope the individuals would move on to better jobs. Number 0950 CHAIRMAN BUNDE asked the wishes of the committee with respect to HB 169. Number 0960 REPRESENTATIVE BRICE stated he had a technical amendment for consideration. Number 0990 MR. KREHER explained that because HB 169 was introduced last year, the technical amendment simply changes the dates and adds language that includes the new federal welfare to work tax credit as one of the options. Number 1048 REPRESENTATIVE BRICE offered Amendment 1 which read: Page 1, line 10: Following "liability": Insert "(1)" Page 1, line 1: Following "51": Insert ", or (2) the welfare to work credit allowed as to federal taxes under 26 U.S.C. 51A" Page 2, line 2: Delete "1996" Insert "1997" Page 2, line 3: Delete "2000" Insert "2001" Page 2, line 8: Delete "1996" Insert "1997" Delete "2002" Insert "2001" Page 2, line 16: Following "for": Insert "either (A)" Page 2, line 17: Delete "1997" Insert "1998; or (B) the federal welfare to work credit under 26 U.S.C. 51A, as in effect on January 1, 1998" Page 2, line 24: Delete "1996" Insert "1997" Page 2, line 26: Following "federal": Delete "work opportunity credit" Insert "credits" Following "26 U.S.C. 51": Delete "is" Insert "or 26 U.S.C. 51A are" Page 3, line 8: Delete "1997" Insert "1998" Page 3, line 10: Delete "2002" Insert "2003" CHAIR BUNDE asked if there was any objection. There being none, Amendment 1 was adopted. CHAIRMAN BUNDE noted that House Bill 169, as amended, would be held in committee for further discussion.