Legislature(2001 - 2002)
04/27/2001 03:30 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 229-EDUCATION TAX ON EMPLOYMENT CHAIR MURKOWSKI announced that the first order of business would be HOUSE BILL NO. 229, "An Act imposing a tax on employment; and providing for an effective date." Number 0105 REPRESENTATIVE GARY STEVENS, Alaska State Legislature, testified as the sponsor of HB 229, which is a companion bill to SB 165. Representative Stevens paraphrased his sponsor statement, which read as follows: Throughout the session, legislators have been approached by numerous educators requesting an increase in K-12 education funding. Bills to increase the foundation formula have been introduced in both bodies, each requiring additional general fund dollars, but without a new source of revenue for that increase. HB 229 will solve that dilemma by creating an education head-tax. Under HB 229, the state will impose a tax of $100 a year on each employed individual age 19 or older, including the self-employed. HB 229 would require the employer to deduct $50 from the employee's salary on each of their first two regular payrolls after January 1 of the calendar year. A provision has been added to prevent this tax from being taken out more than once when the employee provides proof to their new employer that the tax has already been satisfied. Preliminary estimates by the Department of Revenue indicate that the state would collect between $35 and $36 million a year in new revenue generated by this legislation. Approximately $2 million a year would be required to administer the increased workload by staff in that division if this measure becomes law. This revenue would more than fund the $145 per student increase in the foundation formula as proposed in SB 1 and HB 105. The tax collected under AS 43.45.021 would be deposited into the state's general fund, but accounted for separately. In turn, the legislature may then appropriate the amounts collected under the section for education. This authorization is not intended to create a dedication of fund in violation of Article IX, Sec. 7, of the Constitution of the State of Alaska. I urge you to join me in showing a commitment to public education in Alaska by supporting HB 229. Number 0272 REPRESENTATIVE HAYES asked whether Representative Stevens had considered making a statutory designation in order to make more of an opportunity for this money to be used for education. REPRESENTATIVE STEVENS answered that such wasn't part of Senator Austerman's original bill. If that is of interest, it could be reviewed. REPRESENTATIVE HAYES inquired as to why this tax wouldn't be implemented until February 1, 2003. He related his belief that June 1, 2003, would probably be a better date because he recalled that June or July is the highest month for employment in this state. REPRESENTATIVE STEVENS said that was a good idea. Furthermore, it may be more difficult to collect this money in January, after the holidays. Representative Stevens indicated his openness to consider various options. CHAIR MURKOWSKI remarked that collection of this tax from the self-employed or commission-based employees would be more difficult. Therefore, she asked if the difficulties had been worked through. REPRESENTATIVE STEVENS said that he hadn't worked through that. He noted that such would need to be handled through the Department of Revenue. Number 0435 REPRESENTATIVE CRAWFORD said that he remembered the $10 education tax, which he was glad to see eliminated. He related his personal experience in which he worked for many employers in a year and thus would have to wait for a specific time of year to obtain a rebate from the education tax. He asked if the financial burden this creates had been reviewed. REPRESENTATIVE STEVENS pointed out that under HB 229 it would be a matter of proving whether the money had already been collected versus a rebate situation. REPRESENTATIVE HAYES inquired as to how this would work for military personnel and those who work outside of the state, but claim residency in Alaska. REPRESENTATIVE STEVENS answered that military personnel would pay this tax. However, he acknowledged the difficulty in collecting the tax from checks that are cut in Washington, D.C. Representative Stevens acknowledged the need to work on that. REPRESENTATIVE HAYES also inquired as to why the age 19 was chosen instead of 18. REPRESENTATIVE STEVENS said that Representative Hayes could chose 18 years of age if he wanted. REPRESENTATIVE HALCRO asked if there is any institutional knowledge regarding how the $10 education tax was collected then from military personnel. Number 0763 CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department of Revenue, related his understanding that such a tax can be collected from military personnel who are legal residents of Alaska, but not from personnel that are assigned to Alaska who aren't legal residents of Alaska. REPRESENTATIVE HALCRO asked if there is a process in place to account for such a contribution in order to avoid double dipping. MR. HARLAMERT said in order to avoid double dipping it looks as if HB 229 places the responsibility on the employee to show a second employer that the employee had already had the tax withheld by a former employer. REPRESENTATIVE HALCRO related his understanding then that those in the military in active service wouldn't pay the $100 education tax. MR. HARLAMERT answered, "Correct." In further response to Representative Halcro, Mr. Harlamert related his belief that other federal employees would have to pay the education tax. Number 0875 REPRESENTATIVE KOTT posed a situation in which an active duty military person, who is a resident of the state, is assigned to Elmendorf. He related his understanding that the state is going to approach the federal government's Department of Finance office in Colorado and request them to withhold $100 and send it to the state. MR. HARLAMERT replied, "I think your understanding of it is probably as good as mine." REPRESENTATIVE KOTT said he felt that would be problematic. He then inquired as to the difference between applying the $100 education tax to military personnel stationed in Alaska who aren't residents of this state and any other person, nonresident of the state, who seasonally works in the state and would be taxed. He indicated that there would be an equal protection problem. MR. HARLAMERT explained that the military personnel aren't being taxed due to a federal law. REPRESENTATIVE KOTT asked if the working spouse of military personnel in the state would be taxed. MR. HARLAMERT related his belief that such a spouse would be taxed. Number 1005 SENATOR AUSTERMAN pointed out that federal military salaries are exempt from state taxes. However, if military personnel worked in a cannery, for example, as an extra job, then that person would be taxed. REPRESENTATIVE KOTT related his understanding then that military personnel are exempt due to their federal pay rather than their military position. Therefore, federal government workers that are nonresidents would not pay the education tax. CHAIR MURKOWSKI interjected her belief that this relates to the Soldiers & Sailors Civil Relief Act, which says that specific taxes aren't paid as long as the persons income is from military employment. She agreed with Senator Austerman that military personnel who have a job separate from military service would pay the education tax through that separate job. REPRESENTATIVE KOTT requested a copy of the aforementioned Soldiers & Sailors Civil Relief Act. REPRESENTATIVE HAYES inquired as to which month is the highest month of employment for the State of Alaska. MR. HARLAMERT remarked that he wasn't sure that would matter because the bill calls for withholding $50 per paycheck from the first two paychecks of the year. Therefore, it would be dependent upon the effective date of the law. Regardless of whether an employee starts work on January 1 or July 1, the employee would pay the same. REPRESENTATIVE KOTT posed a situation in which an employee begins work December 1 and thus would receive the first two checks in December. He asked how much time the employer has to submit that [withheld education tax] to the Department of Revenue. He also asked if there is enough time built into HB 229 that would allow the department to make the disbursement on February 1. MR. HARLAMERT explained that in Representative Kott's situation, the withholding would be payable in February 1 of the following year. Therefore, he didn't foresee that being a problem. A more problematic scenario is one in which an full-year employee has the [education tax] withheld in January, but it isn't turned over to the department until February of the following year. REPRESENTATIVE KOTT asked if 30 days is enough time. MR. HARLAMERT answered that the department didn't see it as problem. The money collected in February 2002 would be fiscal year 2002 money and would be appropriated by the legislature in the 2003 budget, he suspected. Number 1313 BRETT FRIED, Economist, Department of Revenue, explained that withholding would begin January 1, 2002, and continue for that entire calendar year. However, the department wouldn't receive the returns with the payments until February 1, 2003. REPRESENTATIVE HALCRO remarked that the aforementioned didn't make much sense to him because allowing an employer to hold onto payments doesn't make sense for the state. Furthermore, there are seasonal employers. Representative Halcro felt that once the money is withheld from the employee, it should be filed in conjunction with some monthly report, which would help the cash flow side of this. MR. HARLAMERT said that the department drew the same observations and felt that the delay from the point of withholding and the point of payment was unusual and subjects the state to the risk of loss. However, a monthly withholding would result in a more expensive tax to administer. One suggestion within the department was to have a payment date of February of the same year the employer withheld, [the tax]. A monthly report is of concern. Number 1444 REPRESENTATIVE HALCRO related his belief that waiting an entire year for every employer's education tax was due on February 1, then it seems to indicate that auditing and enforcing of this will be tremendous. Therefore, he suggested having multiple reporting times throughout the year. It seems that the employer holding the receipts for a year lends itself to fraud and nonpayment. MR. HARLAMERT acknowledged that [the department] shared Representative Halcro's observations when reviewing the bill. In regard to the risk of loss, Mr. Harlamert felt that Representative Halcro was on target. However, Mr. Harlamert wasn't sure that more routine filings would result in better compliance. He mentioned that seasonal employers represent compliance issues. Therefore, Mr. Harlamert viewed the cash flow issue as the most valid point and thus it was thought that the collection would occur February 1 for money withheld on January 1. REPRESENTATIVE HALCRO reiterated concern over the seasonal workforce in Alaska. He felt that it would be beneficial to the employer to have an additional box for the education tax on the ESC [Employment Security Cost] report. Therefore, the first quarter that the ESC taxes are done, the education deduction would be submitted with it and then the next quarter, the employer can check a box indicating that the contribution has already been made. From a reporting standpoint from the employer, such would seem more convenient. Number 1669 REPRESENTATIVE CRAWFORD asked whether an employee showing the employer an original pay stub illustrating that they had already paid the education tax would suffice. MR. HARLAMERT explained that the bill actually requires that the department supply a form that enables the employee to prove to a subsequent employer that the education tax has already been withheld. REPRESENTATIVE KOTT posed a scenario in which an individual opens a business in mid-June and closes it in mid-July. This employer has two or three employees. In such a situation Representative Kott inquired as to the mechanisms that the state currently has in place to identify these employees. Furthermore, what assurance is there that this employer would deliver the education tax deductions to the department. He also inquired as to the provisions in law that would penalize the employer if the employer didn't forward the education tax to the department. MR. HARLAMERT noted that the Department of Labor would have the wherewithal to know who is employed and who isn't. Mr. Harlamert pointed out that there isn't a provision at this time that would hold the employer who withheld the money responsible. However, there is a penalty if the employer fails to forward the money to the department. Essentially, the employee's money is held in trust by the employer to be turned over to the department and thus there should be some enforcement and penalty provisions placed on the employer to pay for this. In further response to Representative Kott, Mr. Harlamert said that HB 229 doesn't include a penalty. However, a reference to existing penalties under Title 43 could be inserted. REPRESENTATIVE KOTT asked if the department has taken a position on HB 229. MR. HARLAMERT answered that the department has not taken a position on HB 229. Number 1919 REPRESENTATIVE MEYER related his understanding that this education tax will collect about $35-$36 million. MR. FRIED noted that was a preliminary estimate. However, the fiscal note actually estimates that $38.2 million will be collected. In further response to Representative Meyer, Mr. Fried explained that it would cost $822,000 to collect this education tax in the first year. REPRESENTATIVE MEYER pointed out that Representative Stevens' sponsor statement estimates a cost of $2 million for the collection cost and thus there seems to be a discrepancy between that [and the department's fiscal note]. Representative Meyer inquired as to why the collection costs so much. MR. HARLAMERT said that the education tax is a reasonably simple tax to collect. The difficulty lies in the volume, predictability, and seasonality. He informed the committee that about 28,000 returns are received per year and he expected [HB 229] to generate about 50,000 as well as 50,000 payments. REPRESENTATIVE MEYER related his assumption that the money collected from the education tax goes to the general fund to be allocated to the schools through the foundation formula in order to be equitable. Number 2101 REPRESENTATIVE HAYES asked if more than eight folks would be necessary to perform the computing. He assumed that people will attempt to "play the system" and thus he wondered if the department had enough people to perform enforcement if someone decides not to pay. MR. HARLAMERT answered that in the department's preliminary review, the principle enforcement types were included at some level. That is, either reviewing returns for reasonableness or going out in the field examining returns. He indicated that the hope was to achieve compliance goals through technology. REPRESENTATIVE HAYES expressed his fear is that there wouldn't be enough people doing enforcement and thus people will slip through the cracks, which is what happened with the ABC Board. Representative Hayes didn't believe three [enforcement] folks for the state would be enough. Representative Hayes inquired as to how this education tax would work for those that are self- employed. MR. HARLAMERT said that he thinks that the paycheck provision would be ignored for self-employed people and the self-employed would pay the $100 for the year, if they qualify. Mr. Harlamert noted that there would be no way to pick up the self-employed under the ESC rules. "This tax base really doesn't fit perfectly with any existing program that the state has, that I'm aware of," he said. Number 2186 SEAN REILLY highlighted that thus far the committee has focused on how people would potentially be able to fall through the cracks. Although there have been some valid questions, he expressed the need to emphasize the positive aspects of this bill. Mr. Reilly said that a large portion of the revenue that would be generated from this bill would come from out of state to earn money and return home, where their state has the opportunity to tax them. Therefore, this legislation would provide the state with an opportunity to obtain a portion of that tax. MR. REILLY pointed out that this session the legislature has given the Department of Education & Early Development (EED) a strong dictate to implement a program for an exit exam. He expressed the need to provide EED with the tools to implement such a program. One tool would be to fund the programs. Additionally, Mr. Reilly remarked that school board members request additional funds due to declining enrollment, which he felt was partially due to the lack of services. Therefore, funding the schools would alleviate that problem. This legislation is a wonderful way to implement that funding, which would give EED a clear indication of support. In conclusion, Mr. Reilly said that HB 229 is a step forward in addressing a long-term fiscal planning. MR. REILLY recalled an earlier question regarding going after employers that didn't report for their employees. He recalled that AS 23 addresses action regarding the reporting of wages and workers' compensation and thus perhaps similar wording could be utilized with this. MR. REILLY, in response to Representative Meyer, recalled that the school tax, $10 at that time, was eliminated around 1980. REBECCA NANCE GAMEZ, Director, Division of Employment Security, Department of Labor & Workforce Development, responded to Representative Halcro. She said that the Division of Employment Security receives the ESC reports. She explained that employer taxes are due to the division 30 days after each quarter. TAPE 01-69, SIDE B MS. NANCE GAMEZ continued by explaining that the division verifies wages and investigates possible fraudulent failure to report taxes. Although she knew that there are penalties, she wasn't sure of the specifics. REPRESENTATIVE HALCRO asked if the division's staff is proactive in ensuring that people are compliant. MS. NANCE GAMEZ informed the committee that the division has auditors that audit employers. Furthermore, the division proactively works with the employer community in helping them understand the best tax rate that the employer could achieve. There is also the fraud detection unit. Number 2400 CHAIR MURKOWSKI announced her intention to hold HB 229 while recognizing that this is a piece of a larger puzzle. She indicated the need to address some of the details discussed today. REPRESENTATIVE HALCRO indicated agreement that this education tax is one way to get out-of-state residents to contribute. Furthermore, he felt that a very easy reporting system could be created in conjunction with the ESC by working with various departments and utilizing existing infrastructure. REPRESENTATIVE MEYER asked if this education tax would be deductible from the federal income tax. [REPRESENTATIVE CRAWFORD] indicated that this could be deducted from one's federal tax, if one itemizes their deductions. There seemed to be agreement with Representative Crawford's remark from members of the Department of Revenue. REPRESENTATIVE ROKEBERG pointed out that there are constitutional provisions preventing poll taxes and other types of head taxes. REPRESENTATIVE KOTT related his belief that this is an ingenious way to generate revenue for the state. Certainly, the revenue could be applied to education. He wondered whether the department would be interested in developing an exception for the working poor. Number 2253 REPRESENTATIVE STEVENS related his belief that the meeting was a fruitful discussion that has highlighted some issues that need further attention. Representative Stevens reminded the committee that the education tax worked in Alaska in the past. He informed the committee that the companion bill is in the Senate Finance Committee. REPRESENTATIVE KOTT remarked that perhaps the department may want to review the possibility of filing this tax on-line with a credit card. REPRESENTATIVE HAYES reiterated the need to review how this would relate to the self-employed. [HB 229 was held.]
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