Legislature(1999 - 2000)
04/13/2000 01:15 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HJR 49 - CONST AM: PERM FUND INCOME DISTRIBUTION Number 1799 CHAIRMAN KOTT announced that the final order of business would be HOUSE JOINT RESOLUTION NO. 49, proposing an amendment to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation proofing, and to require a vote of the people before changing the statutory formula for distribution that existed on January 1, 2000. [Before the committee was CSHJR 49(STA).] Number 1838 REPRESENTATIVE SCOTT OGAN, Alaska State Legislature, prime sponsor, came forward to present HJR 49, noting that it is a companion measure to a Senate resolution [SJR 35]. He suggested that constitutionally protecting the permanent fund dividend (PFD) program is the only way that Alaskans will be comfortable with allowing the legislature, without serious repercussions, to use any earnings from the dividend program. Representative Ogan noted that he was around when the permanent fund was put into place, and he remembers well the Zobel case regarding equal protection; he believes that history has proven the Zobels right. REPRESENTATIVE OGAN emphasized that the permanent fund is a "rainy day" account. Referring to discussion in the legislative halls and the September 14 [advisory] vote, Representative Ogan said he got a message loud and clear, in his district, that the legislature should keep its hands off of the PFD. This resolution accomplishes that, he pointed out. It constitutionally protects the existing [PFD] program, inflation- proofing and the formula. Mentioning discussion about whether the formula is good at this point, he informed members that most of the naysayers with regard to this resolution have said it could cause the Internal Revenue Service (IRS) to rule that [the fund] is no longer for a public purpose, thereby making the permanent fund itself taxable. Therefore, to alleviate that concern, the effective date for the resolution is whenever the IRS issues a final decision that the corpus of the permanent fund is, indeed, not taxable. REPRESENTATIVE OGAN urged members to pass the resolution out and keep the discussion going. He conveyed his belief that this resolution will instill trust in people that their dividend program will be protected. He also suggested that it is pessimistic to assume that the existing program will go away in a few years. He said he believes in the State of Alaska. Pointing out how young the state is, he suggested there is no need to act like teenagers with a trust account or to think that the state has reached its senior years and, therefore, must use its retirement account. For example, he believes that the possibilities of developing [petroleum reserves] in the Arctic National Wildlife Refuge (ANWR) are greater than ever before; furthermore, there is still a lot of natural gas on the North Slope. Therefore, he doesn't share the fatalistic view that Alaska is in financial dire straits. REPRESENTATIVE OGAN concluded by noting that there have been calls to use the earnings of the permanent fund for a number of years. Because that has been delayed, there is almost $30 billion in the permanent fund now. He expressed the belief that it is in the state's best interest to not be hasty about using the earnings or to depreciate the potential of that account, "because the longer we wait, the more that's [going to] build up." Number 2082 REPRESENTATIVE CROFT referred to Section 30 [the proposed section of Article XV of the constitution to be added by Section 3 of the resolution]. He said he does have a concern that the IRS might decide this [the Alaska Permanent Fund Corporation] should be taxed, as a corporation. He read in part from the first sentence of proposed Section 30, which said: Section 30. Effective Date of Permanent fund Amendment. The 2000 amendment to the Alaska permanent fund (art. IX, Sec. 15) takes effect on the day after the date of a final decision by the Internal Revenue Service deciding that, under the language of the 2000 amendment, the income of the permanent fund will not be subject to federal taxation while it is under the control of the State or an entity of the State. REPRESENTATIVE CROFT asked whether the IRS makes these final decisions. He said he thought it was more that the IRS hadn't taxed the State yet but could at any time. He asked whether there is a decision now that it is not to be taxed, or if the IRS has just not done so. REPRESENTATIVE OGAN answered: All we're doing is enshrining the existing program in place. ... I'm not a tax attorney, and I'm certainly ... not an IRS person, and don't think like them. But it would seem to me if the existing program ... was taxable, they would have done it by now. The reason I put this in is because of the gas pipeline situation, with the pipeline mayors' port authority situation. If I'm not mistaken, they requested a ruling from the IRS [as to] whether or not that would be taxable, and the IRS said that would be tax-free. So, if we can do it with that, we can do it with this. Number 2143 REPRESENTATIVE CROFT said it was important to "the gas group" to know one way or the other. However, he isn't sure that the state wants to ask the IRS. REPRESENTATIVE OGAN replied: I think it will be asked of the IRS, frankly. The people that are opposed to doing this will have raised the issue, and I think it will come to a head. So, I'm not afraid of the decision. ... If they say ... that if we passed this constitutional amendment and made this as a constitutional right that people get this dividend, that that would make it a taxable situation, then I wouldn't want the amendment to take effect. And I'm not afraid of that. That's why, I guess, we do this, as a way to address that question. REPRESENTATIVE CROFT requested confirmation that those determinations can be appealed to superior court and the supreme court eventually. REPRESENTATIVE OGAN said the law and regulations can change as well. Nothing is set in concrete. He suggested that if it were appealed, certainly the legislature would want to take it up and repeal the constitutional amendment, which he doesn't believe would be a problem because people would probably go along with it. Number 2208 REPRESENTATIVE CROFT remarked that if there were an adverse IRS ruling, the state would certainly want to appeal it to the courts. He read from the second sentence of proposed Section 30, regarding the effective date, which said: In this section, "final decision" means a ruling, order, or decision that cannot be appealed to the Internal Revenue Service because the ruling, order, or decision may not be appealed to the agency, all possible appeals to the agency have been taken, or the time for taking an appeal to the agency has expired without appeal. He asked, "What if it can be appealed somewhere else?" REPRESENTATIVE OGAN replied that it could be, feasibly. Someone could appeal it to the circuit courts, or to the district court and then the circuit court and all the way to the supreme court. REPRESENTATIVE CROFT said that isn't what "final decision" means here, however. It means that it cannot be appealed to the IRS. REPRESENTATIVE OGAN explained that it was a policy call he made after discussion with Tamara Cook [Director, Legislative Legal and Research Services, Legislative Affairs Agency]. His choice had been whether to go with a supreme court ruling or the IRS decision. He believes that there probably won't be a lot of opposition if the IRS rules that it is tax-free. Furthermore, going to the supreme court takes an indefinite amount of time. He mentioned not wanting to wait a long time for this to take effect, then said that if the state's financial needs are such that the earnings of the permanent fund need to be used, this is the bottom line. People won't sanction use of the permanent fund earnings until they know that the PFD program is taken care of, and off the table. REPRESENTATIVE OGAN noted that former Governor Hammond, who had emphasized the need to take the PFD question off of the table, hadn't specifically supported this measure but had said this appears to do that. Although perhaps the approach in [HB] 411 might be better, Representative Ogan said he honestly hasn't been able to make that judgment call. Whatever approach the legislature takes, having the PFD program off the table will open up the possibility of using the earnings; he isn't advocating doing that, but it is already in the constitution that those earnings can be used [with a simple majority vote] rather than needing [a two-thirds' majority vote]. REPRESENTATIVE OGAN said that for all practical purposes, the legislature hasn't touched a penny other than to recapitalize the permanent fund; that is because when people hear "earnings of the permanent fund," they equate it with the PFD check. Representative Ogan reiterated the desire to take that PFD check off the table in order to open the possibility, when it is appropriate, for the legislature to utilize those funds. Number 2395 REPRESENTATIVE CROFT remarked that he would like to see a "MOMA run" on some of this. When talking about this the previous year, he noted, there were scenarios under which the current dividend structure would crash because of how it is calculated and how the stock market has been performing. Seeing whether the risk is significant or insignificant would be appropriate. To that end, he proposed having testimony from the [Alaska Permanent Fund Corporation] with regard to the effects of setting in stone the current PFD program, under a variety of circumstances. He stated his assumption that nobody from the Alaska Permanent Fund Corporation was at the hearing to testify. Number 2421 REPRESENTATIVE MURKOWSKI suggested that the average voter, when reading [the language regarding the effective date] at the ballot box, would ask why the state hadn't checked with the IRS first. She conveyed her understanding that one can get a preliminary ruling from the IRS, although it isn't final. She surmised that perhaps a preliminary ruling hasn't been requested for the reason suggested by Representative Croft: maybe the state doesn't want to know what the answer is. TAPE 00-60, SIDE B Number 0023 REPRESENTATIVE MURKOWSKI indicated she has heard conjecture that the IRS will look at this and rule that there are tax consequences. She asked whether Representative Ogan had received advice from legislative legal counsel about getting a preliminary ruling. REPRESENTATIVE OGAN answered that he had received a legal opinion from Tamara Cook, who said she wasn't the right person to ask because she isn't a tax attorney. In this case, the only opinion that really matters will be from the IRS. He added: The urgency that I keep hearing about the permanent fund and our state finances and whatnot - time simply doesn't allow for us to ask for a ruling and get it back in time for this to go on a ballot, this November, and for the people to decide. And so I realized that without some kind of a circuit breaker on here, this legislation was probably as good [as] dead over the speculation of a tax liability. So we tried to build something in there that would ... [pop the circuit breaker] if the IRS said, "Nope, we're after you." Number 0085 REPRESENTATIVE MURKOWSKI asked, "If this were to pass, would you propose to try to ... get a preliminary ruling, even before the vote, so that you could at least tell people that we've requested one and it's in the process?" REPRESENTATIVE OGAN replied yes, he believes that would be very prudent. He cautioned about carefully framing the question to the IRS, but noted that the IRS is no doubt aware of Alaska's permanent fund and the [PFDs]. He suggested that if the IRS were interested, they probably would have already [taxed it]. Number 0130 CHAIRMAN KOTT reported that Ms. Mary Griswold of Homer [the only person signed up to testify] was no longer on teleconference but had provided a copy of her written testimony. REPRESENTATIVE OGAN noted that Ms. Griswold doesn't support the resolution. REPRESENTATIVE CROFT asked to hear from the Alaska Permanent Fund Corporation at some point, even if other public testimony is closed. Number 0173 REPRESENTATIVE KERTTULA informed members that she had received an opinion from [attorney] Ron Lorensen, who was working with the permanent fund and had testified in one of the finance committees about this issue. She suggested it would be worthwhile for Mr. Lorensen to appear before the committee as well. CHAIRMAN KOTT concurred with keeping the hearing open for both the Alaska Permanent Fund Corporation and Mr. Lorensen. He thanked participants. [HJR 49 was held over.]
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