Legislature(1999 - 2000)
03/20/2000 01:20 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HJR 47 - CONST AM: PERMANENT FUND [Discussion also relates to SJR 33, the companion resolution in the Senate.] CHAIRMAN KOTT announced that the final order of business would be HOUSE JOINT RESOLUTION NO. 47, proposing amendments to the Constitution of the State of Alaska relating to the permanent fund and to payments to certain state residents from the permanent fund. Number 1170 REPRESENTATIVE GARY DAVIS, Alaska State Legislature, sponsor of HJR 47, came forward, requesting that Senator Mackie join him at the witness table. He reminded members that as presented previously to the committee, the plan under HJR 47/SJR 33 separates the corpus of the permanent fund into two branches. The earnings from approximately 50 percent of the current fund would go to general government services, and the other 50 percent would be a one-time distribution to Alaskans who are eligible for the 2001 permanent fund dividend (PFD). He asked Senator Mackie to explain the charts he had brought with him. SENATOR JERRY MACKIE, Alaska State Legislature, presented some visual aids. He noted that voters would first have to approve the plan, after which $25,000 would be paid to each eligible Alaskan. The PFD program would then end after the one-time payout. The remaining principal of the fund is constitutionally protected; only the earnings would be used, first to inflation-proof the fund and then the remaining earnings would go the general fund. SENATOR MACKIE called attention to a chart comparing projected earnings at 8, 10 and 12 percent. He said the permanent fund has never earned less than 10 percent, and thus he would use the 10 percent projection, at which rate $884 million would be returned to the general fund, after inflation-proofing, to balance the budget in the year 2002. Senator Mackie pointed out, however, that the standard projection from the Alaska Permanent Fund Corporation (APFC) is 8 percent, which he believes to be extremely conservative because returns have been more like 10 to 12 percent. He emphasized that the current constitutional mandate that 25 percent of all oil revenues go into the [permanent] fund wouldn't be changed. He noted that a handout provided at the previous hearing contain those projection charts. [The body of the memorandum he had provided, including the chart, is included in the minutes from the March 1 hearing on HJR 47.] Number 1327 REPRESENTATIVE ROKEBERG offered Amendment 1, which read: Page 2, line 4, after "dividend" Insert: "on a payment schedule selected by each individual as provided by law" REPRESENTATIVE GREEN objected for purposes of discussion. REPRESENTATIVE ROKEBERG explained that the intention is to allow the recipient of the $25,000 dividend to elect a payment schedule that the legislature would be able to pass statutorily. For example, people could choose a one-year lump-sum payment, a three- year payout or a five-year payout. It would allow people to receive the dividend over a period of five years, lowering their [federal] taxes. Also, it may keep other benefits or provisions in their income stream from being disrupted. Furthermore, it may diminish the inflationary results from having some $12 billion, less taxes, enter the state's economy. It would also be less destructive because in certain instances many retail and service businesses in Alaska have relied upon the timing of the PFD for their sales; this will allow those businesses time to adjust or to "make hay when the sun shines" over the three to five years or whatever time would be allowed under statute. REPRESENTATIVE ROKEBERG continued. He said he believes this is defensible from a tax standpoint. He also believes that the legislature, by law, could even establish a check-off system whereby citizens could use direct deposit of the monies into an investment brokerage house, for example, just as there now is direct deposit [of PFDs] into a bank. Representative Rokeberg said he doesn't believes that the APFC should act as a mutual fund for the citizens of Alaska, however. "I think we should work with private industry and investment brokers to encourage people to put this money into long-term use, and their children's money in long- term use, which ... would exceed the perceived potential benefits of receipt of the permanent fund dividend over years," he concluded, saying those are some of the many reasons for offering Amendment 1. Number 1521 REPRESENTATIVE GREEN asked Representative Rokeberg whether he knows for a fact how the Internal Revenue Service (IRS) would treat this. He conveyed concern that the IRS may tax the whole amount, whether it is taken over time or all at once. REPRESENTATIVE CROFT and others mentioned constructive receipt. REPRESENTATIVE ROKEBERG said he hadn't had a chance to check with his accountant. However, he is familiar with deferred compensation plans; as a private contractor over the years, he has constructively deferred income many times for tax purposes. He agreed that it needs to be verified as to whether it would be constructive receipt of a lump-sum payment if one elected to have it deferred over time. To make it work, it may be necessary to stipulate a five-year payout, he added, surmising that arguably that would be more favorable because of the economic impacts of a lump-sum payment. That way, there wouldn't be an election on the part of the recipient. CHAIRMAN KOTT agreed that the latter suggestion would get around the [constructive receipt] problem, if that were the will of the committee. However, that would retain the bureaucracy. "In my own mind, I'd rather sever this if we're going to sever it," he added. REPRESENTATIVE ROKEBERG stated that if the committee wanted to modify Amendment 1 to stipulate a five-year payout because of that concern, he wouldn't have any objection. Number 1631 REPRESENTATIVE DAVIS said he doesn't have any objection to the amendment but has the same concerns that Representative Green had brought up regarding the position of the IRS. The tax impact of the proposal is probably the utmost concern that many people have. If this were an option to mitigate the tax implications, he would approve of it. If not, however, it isn't a viable part of the resolution, he suggested, adding, "It'll be in there, but it will not be enforceable." REPRESENTATIVE JAMES commented that if the state were to go through with this and pay out this amount strictly to the public, she believes the IRS would be involved anyway, because it is likely that the IRS would want to take some first, before anyone else gets it. "Certainly, it's not a public purpose," she added. Number 1684 REPRESENTATIVE CROFT proposed the need to be very sure that it wouldn't be considered constructive receipt before doing it. If a five-year payout were considered constructive receipt, and the IRS asked for taxes up-front on the total amount, a person could receive $5,000 but have to pay $8,000 in taxes the first year. There could be some people very irritated about the effect of Amendment 1. He stated his understanding that there is a difference between a payment schedule that is fairly ironclad - which the IRS would probably consider this - as opposed to a situation where there is some risk involved. He again expressed worry that this would be constructive receipt. REPRESENTATIVE JAMES commented that one could borrow money against it. "It's actually yours," she added. REPRESENTATIVE ROKEBERG remarked that it is advised as year-end tax planning - by almost every "writer of tax code and tax avoidance" - to try to manage income to try to hit the right year, for example. He said he would defer to Representative James, with her accounting background, and to the sponsors. Number 1771 REPRESENTATIVE DAVIS responded that he and Senator Mackie had spoken to a member of the Alaska Society of Certified Public Accountants, who are doing an analysis of the resolution; that question, specifically, is to be addressed by them, but the sponsors haven't received that [analysis] yet. REPRESENTATIVE ROKEBERG surmised that the support of HJR 47 would go up substantially, both within the legislature and the public, if there could be a graduated payout over time. He himself would have a serious problem in supporting this amendment [HJR 47] without some provision for a more staggered payout. "The impacts would be enormous otherwise," he added. Number 1818 SENATOR MACKIE informed members that an accountant had told him that constructive receipt of income would apply here as well. However, he himself thinks that the key work is "elective." If somebody has the ability to elect a five-year payout versus a one- time payment, then that is when the constructive receipt of income applies. A mandatory five-year payout, for example, would be a different situation because there is no choice. Senator Mackie added that he had talked to Representative Rokeberg, and he himself didn't really see a problem with [Amendment 1] because it says "as provided by law," which means the legislature has to change the law to do what Representative Rokeberg wants to do anyway. "And if we don't, ... and the law provides for a one-time payout, then ... it's not that big of a deal," he added. SENATOR MACKIE concluded by saying, "If we were able to give people an option that gave them some tax protection, I, too, would support it. But if it didn't, then I wouldn't." He suggested that until they receive the requested analysis, that is something they will probably have to deal with in the House/Senate Finance Committees, when there is a whole debate about taxes and so forth. Number 1906 REPRESENTATIVE KERTTULA expressed concern that with the payout, no matter how constructed, it would be deemed that a person had the right to get at the money and would, therefore, have to pay the tax. SENATOR MACKIE restated that his accountants had looked at it too. He suggested that if one paid the taxes up-front but "front-loaded" the rest of it, it would be worth far more in 15 years than if it had been received in $1,700 increments. He said people still have to pay taxes on that annual PFD. REPRESENTATIVE KERTTULA asked what would happen if the government set up a fund whereby a person couldn't get at the money for 15 years but had an individual account that the state would invest for people. REPRESENTATIVE JAMES commented that there would be a taxable fund, then. REPRESENTATIVE KERTTULA suggested that wouldn't be the case if it were structured like an annuity, but agreed it would be taxable when it comes out. REPRESENTATIVE JAMES said she isn't convinced totally that it is a preferred public use. The fund itself could be taxable, and then taxable when [individuals] receive it. "I'm not convinced that would pass muster," she added. SENATOR MACKIE responded that, right now, paying out a dividend every year definitely isn't only a public use. REPRESENTATIVE JAMES agreed. SENATOR MACKIE pointed out that this plan not only balances the budget, to his belief, but starts using the fund for a public purchase, "which keeps us away from the IRS jumping down our throats right now, which is what they're ready to do now because we have not used it for a public purpose." REPRESENTATIVE JAMES said she believes the dividend can continue without losing it to the IRS "if we're careful." Number 1973 REPRESENTATIVE GREEN referred to Representative Kerttula's comments and expressed concern that [her suggestion] would create a morass of bookkeeping. He mentioned estate problem for those who died during the 15-year-period and trusts that would exist. He added, "It would have to be contracted out because we wouldn't want to create that kind of a government agency." REPRESENTATIVE ROKEBERG said he is concerned about somebody turning the State of Alaska in for a 20 percent reward of $6 billion from the IRS from improper payment of taxes because of not using the money for public purposes. REPRESENTATIVE JAMES said that was her point. If they set aside this large amount of money to just dissipate to the public, the IRS will be there to get its money off the top. The other part [of the fund], which will be used for a public purpose, will be left alone. Number 2058 REPRESENTATIVE CROFT proposed that perhaps this issue of whether the fund is subject to double taxation, now or under HJR 47, should be addressed in executive session. He said the committee is now having a discussion about possibilities and public policy, but not about the committee's or someone else's legal opinion. REPRESENTATIVE JAMES and CHAIRMAN KOTT agreed. REPRESENTATIVE ROKEBERG took exception to Representative Croft's suggestion about an executive session. He said the public in Alaska should be aware of the very real possibilities of the IRS assessing taxes against the permanent fund. Regarding getting the legal opinions on that from the [APFC], that would be the type of thing that would be handled in executive session, but not the conclusions. REPRESENTATIVE DAVIS referred to concerns expressed by Representative Green at the previous hearing. He brought attention to a letter from Franklin Elder, director of the Division of Banking, Securities, and Corporations, dated March 2, 2000, which addresses those concerns; it indicates the division's belief that they have been very responsive to concerns about scam artists, and it sets forth how the division reacts to scam artists. He noted that the letter had been distributed to members. CHAIRMAN KOTT brought attention back to Amendment 1. REPRESENTATIVE JAMES and several others members stated objection. REPRESENTATIVE CROFT suggested that Amendment 1 be withdrawn and then addressed in the House Finance Committee. REPRESENTATIVE GREEN agreed it would be better handled there. Number 2170 REPRESENTATIVE ROKEBERG, noting that members were all nodding in agreement, withdrew the motion to adopt Amendment 1; it was so ordered. REPRESENTATIVE DAVIS commented, "We share the same concern as Representative Rokeberg. And if it's a legal possibility, we will certainly, I think, strongly consider it." Number 2198 REPRESENTATIVE CROFT made a motion to move HJR 47 from committee with individual recommendations and the attached fiscal note. REPRESENTATIVE JAMES objected. She explained that she has some long-term plans in the House State Affairs Standing Committee, which she chairs; she is awaiting word from the House Finance Committee that those plans will be addressed there. Until then, she isn't sending other plans to them, under her vote. "Besides, it's a dumb bill," she added. REPRESENTATIVE ROKEBERG complimented Representative Davis and Senator Mackie for keeping a discussion going, which he believes is important. He expressed willingness to advance HJR 47 for that reason, although he believes it needs improvement in order to have any chance with the public. REPRESENTATIVE KERTTULA said she would "vote for" Representative James. However, even though philosophically she has concerns about this resolution, she wants to keep up the discussion. CHAIRMAN KOTT said he would echo that: he has difficulty with the resolution in its present form, but the dialogue needs to continue. Furthermore, this is the only plan on the table that is moving. He suggested that the full ramifications would become brought out as soon as the House Finance Committee addresses some financial impacts. From a jurisprudence perspective, he believes that the resolution is legal and constitutional; it is a matter of public policy as to whether the public will buy into it. Chairman Kott requested a roll call vote. A roll call vote was taken. Voting to move HJR 47 from committee were Representatives Croft, Kerttula, Green, Rokeberg and Kott. Voting against it was Representative James. Therefore, HJR 47 was moved from the House Judiciary Standing Committee by a vote of 5-1.
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