Legislature(2015 - 2016)BARNES 124
02/12/2016 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB248 | |
| HB252 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 194 | TELECONFERENCED | |
| += | HB 248 | TELECONFERENCED | |
| += | HB 252 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 252-ELCTRNC TAX RETURNS; VESSEL PASSENGER TAX
3:39:59 PM
CHAIR OLSON announced that the final order of business would be
HOUSE BILL NO. 252, "An Act requiring electronic submission of a
tax return or report with the Department of Revenue; repealing
the tax reduction for local levies for the commercial vessel
passenger excise tax; amending the definition of 'voyage'; and
providing for an effective date."
3:40:05 PM
The committee took an at ease from 3:40 p.m. to 3:41 p.m.
3:41:26 PM
JOHN BINKLEY, President, Alaska Cruise Association/CLIA Alaska
(ACA/CLIA), disclosed a conflict of interest with the
legislation as he serves as the chairman of a family tour
business in Fairbanks, which is managed by his adult children.
Mr. Binkley provided a PowerPoint presentation entitled, "Alaska
Cruise Association/CLIA Alaska." He informed the committee that
ACA/CLIA represents twelve member lines, who bring almost one
million passengers to Alaska each year [slide 2]. In 2015, 31
ships made 487 voyages, and of those passengers, about two-
thirds are round trip visitors through Southeast Alaska, and
one-third either come up through Southeast, travel across the
Gulf of Alaska to various ports in Southcentral, and then travel
by land tours throughout Southcentral and Interior Alaska, or do
the reverse [slide 3]. Mr. Binkley said he would discuss three
subjects related to HB 252: the history of entry fee taxes;
legal issues related to entry taxes; and relevant public policy.
Cruise passengers are roughly one-half of the volume of visitors
to Alaska: 967,500 travel by cruise ship; 898,500 travel by
air; and 80,400 travel on the Alaska Marine Highway System
(AMHS) and/or on the Alaska Highway [slide 4].
3:45:43 PM
CHAIR OLSON asked for the breakdown of the percentage between
travelers by road or AMHS.
MR. BINKLEY did not have that information. He continued to
explain that the tourism industry spends $1.8 million in
Southcentral, $519 million in the Interior, $1,004 million in
Southeast, $115 million in Southwest, and $25 million in the Far
North, for a total of $3.4 billion of economic impact to Alaska
[slide 5]. Historically, the cruise industry grew steadily from
1995 to 2007 [slide 6]. However, beginning in 2007, there were
economic changes in the U.S., and in 2008 and 2009, there were
dramatic tax policy changes in Alaska specific to the cruise
industry, as embodied in [the Alaska Cruise Ship Tax Initiative,
Measure 2, approved 8/22/06 (cruise ship initiative)], which
implemented five new taxes in 2007. The new taxes affected
large cruise ship visitors and generated $68 million, not
including $15 million in local entry fee taxes. In addition,
there were new regulatory requirements and a requirement for
full-time state contractors onboard ships, referred to as Ocean
Rangers [slide 7]. In response to the new taxes and
requirements, the cruise line companies reviewed the return on
investment for their assets, seeking to be responsible to their
shareholders. One benefit of the cruise industry is that its
assets are mobile, and companies can move assets from one
destination to another for the highest rate of return, so
companies redeployed ships to other destinations in order to
gain a better rate of return on their investment. As a result
of the redeployment of ships, Alaska lost about 142,000 cruise
visitors, an estimated $150 million in less spending, and over
5,000 jobs [slide 8]. Proportionally, the losses were higher in
Southcentral because more voyages across the Gulf of Alaska were
lost. Mr. Binkley spoke of his personal experience of
downsizing his business.
3:49:56 PM
CHAIR OLSON asked about the impact to Fairbanks.
MR. BINKLEY said his family business downsized from 210
employees to 140 employees.
REPRESENTATIVE KITO asked for figures on the 2008 [stock] market
crash and collapse of the economy in the U.S., and opined that
both would have had measurable impact on the cruise industry.
MR. BINKLEY agreed. The economic downturn in 2008 and 2009
affected all travel to Alaska; the assets were moved from Alaska
to a different destination in order to get a better return on
those assets, and there was a combination of causes involved.
Returning to the presentation, he said that subsequently the
administration and legislature sought to return the lost jobs to
Alaska, and the industry filed litigation in federal court to
determine how the entry fee tax revenue could be spent.
Subsequently, there was a settlement agreement between the state
and the industry and new legislation was enacted which reduced
the entry fee tax from $46 to $34.50, directed that all cruise
ship visitors pay the same amount, and changed state law to
parallel federal law and clarified how the funds could be spent.
For example, a key provision ensured that the funds were used
for the passengers and the ships. Therefore, any entry fee
taxes collected must be expended in a service to a ship and a
passenger. In addition, the original cruise ship initiative
provided that any port with an existing head tax, such as Juneau
and Ketchikan, was not eligible to receive the $5 head tax; in
the new legislation, this provision was changed and thus reduced
the amount the state retains from the entry fee taxes to about
$2 million per year [slide 9].
3:56:15 PM
MR. BINKLEY expressed ACA/CLIA's belief that HB 252 raises the
following legal issues: could jeopardize the 2010 settlement
agreement and existing taxes; could raise constitutional issues
asserted under the 2009 litigation [slide 10]. The
aforementioned legal issues are based on the following [slide
11]:
· Tonnage Clause of the U.S. Constitution, which addresses
the "laying on of any duty of tonnage," possibly pertaining
not only to the displacement of the vessel but to its
passengers as well
· Commerce Clause of the U. S. Constitution
· 33 U.S.C. Section 5 and Supremacy Clause, which is not an
issue because state law now parallels federal law
MR. BINKLEY returned attention to slides 4 and 12, entitled
"Visitor Volume," which illustrated that nearly one million
cruise passengers were charged an entry fee of $34.50 by the
state. He reminded the committee that HB 252 raises the fee on
cruise ship passengers by $15, and suggested an alternative
source of revenue could be raised by charging an entry fee of
$34.50 to visitors who arrive by air, AHMS, or highway. He
acknowledged that his suggestion is "a bit absurd," because the
Commerce Clause directs that there is free travel and commerce
between the states. Mr. Binkley opined the Commerce Clause is
one of the "problems" when the state decides to charge a toll to
cruise ship passengers for coming into Alaska, although the
state can charge a fee as long as a service is provided to the
passenger and the ship, in the same manner as motor fuel fees,
licenses, and taxes which are charged for highway use.
4:01:06 PM
REPRESENTATIVE KITO inquired as to the average fare paid by a
cruise ship passenger.
MR. BINKLEY said he did not know what an average fare would be,
but current fares are available on the Internet. He added that
fares to Alaska can be as low as $399 per person, and some
luxury lines charge up to $17,000. He pointed out that for some
passengers $34.50 per person is meaningless, and for those
seeking the lower-priced cruises, the entry fee can make a
difference in their travel destination decision.
REPRESENTATIVE KITO surmised that during settlement negotiations
the state [agreed to] modify a statute so that entry tax revenue
could only be used for certain purposes that benefit the
passenger and the vessel.
MR. BINKLEY said correct.
REPRESENTATIVE KITO questioned whether the aforementioned change
is being repealed by HB 252.
MR. BINKLEY recalled that previous testimony before the
committee on 2/10/16 suggested "maybe we're better to leave well
enough alone," and there could be a legal challenge to the tax.
He restated that the state and the cruise lines entered into a
settlement agreement to which the cruise lines adhered by
bringing ships and passengers back. Mr. Binkley opined HB 252
could be seen as "going back" on that agreement.
REPRESENTATIVE KITO pointed out that discussion during the
hearing has been related to the use of the revenue and not to
the level of the tax. He questioned whether the Tonnage Clause,
the Commerce Clause, or the Supremacy Clause identify a
reasonable amount the state can charge for the tax.
MR. BINKLEY said an amount was not specified; however, every
jurisdiction may be different. He said compliance requires that
there is a service to the passenger and the vessel, but a
service may cost $34.50 or may cost much less, such as fees for
a private dock that are paid by the cruise lines. He said,
"People get confused about this and think that ... wherever the
passenger is utilizing a service, that you can take that tax and
follow it to that service ...." Towns in Southeast have found
that the way to capture the economic activity of the cruise
industry is by levying a local sales taxes.
4:06:12 PM
REPRESENTATIVE KITO expressed his understanding that the state
tax is $34.50 and will remain so, but the change brought by HB
252 is that the local tax assessed by municipalities would be
added on top, thus the local municipalities would choose whether
to implement said tax. The state would not be adding a tax, but
is removing an exemption for local taxes.
MR. BINKLEY said from the perspective of the visitor, there is
an additional tax of $15 if there are stops in Ketchikan and
Juneau.
REPRESENTATIVE KITO restated that in statute, the tax will
remain $34.50.
MR. BINKLEY restated that the fares are increased by $15 each.
REPRESENTATIVE HUGHES asked whether it is more common now for
families and groups to visit Alaska on a cruise, which
multiplies the effect of the tax.
MR. BINKLEY said that is true. Generally, all visitors to
Alaska are getting younger, and more family oriented, and
grandparents are taking grandchildren on cruises.
REPRESENTATIVE HUGHES directed attention to [slide 5 of the
PowerPoint presentation entitled, "Commercial Passenger Vessel
Tax HB252," provided to the committee at the hearing on 2/10/16]
which indicated that additional revenues would be $14.8 million
to the state and $1.8 million to municipalities. She asked for
Mr. Binkley's opinion as to how the additional revenue would be
used - subject to federal directives - and whether said revenue
would help close the fiscal gap, as purported by the governor.
MR. BINKLEY turned attention to slide 13, which contained
excerpts out of a letter to the legislature from Legislative
Legal Services, Legislative Affairs Agency, dated 9/4/09, which
he characterized as a cautionary note that the funds are not
general funds (GF), but are restricted funds under federal law.
The legislature was advised to be cautious because 33 U.S.C.
5(b)(2), and the case law, require a service to the vessel, in
addition to the passengers. He further explained that as part
of the settlement agreement, AS 43.52.230 was amended to
parallel federal law [slide 14]. He remarked:
There has to be, for the expenditure of these funds, a
nexus to the ship, so you can't just follow the
passenger, it has to benefit the ship as well. So it
becomes problematic, the farther you go away from the
dock, the service that the ship requires ... then you
start to run afoul of U.S. Constitution and federal
law, and now state law, that says the same thing.
4:13:46 PM
MR. BINKLEY informed the committee that the City and Borough of
Juneau receives approximately $13 million per year in local and
state entry fee taxes. Proposed for the city is a bronze whale
monument and reflecting pool [slide 15]. Although private funds
will pay for the bronze whale, entry fee taxes paid by cruise
ship passengers are going to fund the foundation, water-works,
and transportation to the area. He said, "This is an example of
what we think has gone wrong with this and why it's apparent to
us that too many entry fee dollars and taxes are being collected
by the visitors, because this is where those monies are now
going." Although a phenomenal project for Juneau and Alaska, he
said it should not be paid for by visitor entry fees and taxes.
He further described the project in detail, noting the bill for
the entire structure is $13 million [slide 16]. He concluded
that this is an example of projects that concern the industry,
as there is no real benefit to the ship and very little benefit
to the passengers; in fact, he questioned whether the city
should "try and lure them away from the business district down
to view this whale sculpture when they could be spending money
in Juneau and paying sales taxes to the local community." In
austere times, a manmade island, elevated causeway, and a whale
sculpture are an egregious example of the use of tax dollars.
4:18:27 PM
MR. BINKLEY restated his opposition to HB 252: potential legal
problems; a settlement agreement is in place; potential jeopardy
to existing state and local taxes; restricted use of funds.
Although the governor is to be applauded for trying to fix the
fiscal problem, these are not GF, they are restricted funds that
cannot be used to close the budget gap; HB 252 is not a
legitimate method of generating revenue. Furthermore, there is
no good analysis on how the existing funds are being expended,
no indication within HB 252 on how the additional funds will be
used, and no economic analysis on the impact of the bill on
private sector jobs [slide 17].
4:20:28 PM
REPRESENTATIVE HUGHES asked for confirmation that HB 252 would
direct $2 million to close the fiscal gap.
MR. BINKLEY said that's correct. He said his understanding is
about $2 million would be retained by the state and the
remainder goes to communities. He recalled previous testimony
that the fund was overspent last year.
CHAIR OLSON asked for two other examples of how entry fees are
spent by port communities.
MR. BINKLEY said some ports have collected an "accumulated pool
of money, looking for projects." He acknowledged that some
expenditures are legitimate and used in GF for general
government expenses, and it is believed [by certain port
communities] that it is legitimate to utilize these taxes for
general government use.
4:22:53 PM
REPRESENTATIVE KITO stated that the money in the [Commercial
Passenger Vessel Excise Tax, Tax Division, Department of
Revenue] is designated toward activities specifically related to
cruise ships such as crossing guards, additional ambulance
response, and other direct support services. The projects are
vetted and analyzed for compliance with the statute which
requires that projects are affiliated with a cruise ship and
passengers, and enhance their experiences. He pointed out that
the aforementioned future park in Juneau is already on a route
accessed by cruise ship passengers, and is a legitimate expense.
Further, the money received by Juneau is not state money, but
cruise ship tax assessed by Juneau for Juneau, thus any increase
is not going to a specific community, but is designated to be
used in the area or region, and for the benefit of any of the
first seven ports that can support cruise ships and cruise ship
passengers.
REPRESENTATIVE HUGHES directed attention to slide 13, and
remarked:
It's saying that according to the federal limitations
and case law it actually has to go to a specific
vessel, that's collecting, it should be supporting
that specific, not even just generally, vessels. ...
It almost sounds like we're, we're running adrift of
that. Would you agree?
MR. BINKLEY said our interpretation is that it has to follow the
specific vessel. Thus, if taxes are collected from passengers
departing a vessel, the funds cannot be used in another port.
He said, "You can't, for example, collect the tax off a vessel
that calls in Juneau, and then use that to, for a service to a
vessel that calls in Ketchikan."
REPRESENTATIVE HUGHES questioned whether ports that have a pool
of money - and have legitimate services to provide - need
additional money at this time.
REPRESENTATIVE KITO suggested that the Department of Law is
better equipped to address issues of a legal nature.
MR. BINKLEY disclosed that he is not a lawyer.
4:27:41 PM
REPRESENTATIVE ORTIZ recalled that an independent audit related
to the legitimate use of the cruise ship tax funds was completed
recently.
MR. BINKLEY has heard there was an audit requested by the
Legislative Budget and Audit Committee, Alaska State
Legislature, over how the funds were expended. There was a
proposal to the Senate Finance Committee, Alaska State
Legislature, for the state to hold the funds back from local
communities, and he said the opinion in the Senate Finance
Committee was that the funds were overspent, however, ultimately
the funds were appropriated to communities.
4:29:28 PM
CHAIR OLSON said the audit was requested and should be received
in March or April, [2016].
REPRESENTATIVE KITO expressed his understanding that the audit
would be available in March [2016].
4:30:20 PM
FRED REEDER provided a PowerPoint presentation entitled, "ALASKA
ACT Alaska Alliance for Cruise Travel," dated 2/12/16. Mr.
Reeder informed the committee he is a member of Alaska Act, a
lifelong resident of Sitka, and has five family members working
in the visitor industry. He provided a brief history of Alaska
Act, noting that at the time of the 2006 cruise ship initiative,
Alaska businesses unsuccessfully relied on the cruise lines to
fight the initiative. Because cruise lines establish their
schedules two years in advance, the effect of the tax was not
felt until 2009, when itineraries were changed. After the
effects of the decrease in passengers were felt, Alaska Act was
formed by Alaskans to get the passengers back [slide 2]. Mr.
Reeder related hardships faced by his business. The purpose of
Alaska Act was to find a way to modify the legislation, which
Alaska Act members believed to be illegal in the manner in which
the legislation was written, and in how the funds were been
expended. He said the over 900 members of Alaska Act - who are
Alaskans, business owners, and workers - generated substantial
newspaper articles on its goals and plans of action [slide 3].
The organization made thousands of contacts with legislators,
and mobilized resources, because the cruise ship initiative had
severely impacted its members and local communities.
4:34:12 PM
MR. REEDER stated that after years of significant growth, the
cruise ship passengers left, and Alaska Act saw a direct
connection between the regulatory aspects of the state, and the
impact said aspects had on local businesses. Mr. Reeder
cautioned that before taxes are implemented, it should be
determined what the impacts of the taxes will be. He
acknowledged that Alaskans need to work to restore revenues;
however, legislators are expected to look ahead at potential
impacts. In fact, it is known that if the cruise ship tax is
raised Juneau will probably lose 156,000 passengers. Mr. Reeder
said he has been working for his company since 1996 and he
tracks all of the passenger numbers. In 2008, Juneau had
1,032,000 passengers, and in 2011, there were 875,000
passengers, which was a loss of 156,000 passengers. He
estimated that each cruise ship passenger spends $188 in Juneau,
which would be $29 million in lost revenue. The loss in general
sales tax averages about $2 million [slide 4]. Mr. Reeder,
speaking from his experience as a former mayor of Sitka, said he
would rather have sales tax revenue than other types of revenue
because it can be used without restriction.
4:38:42 PM
REPRESENTATIVE JOSEPHSON has heard that Southeast Alaskans are
worried about the impact of a second sales tax, because so many
communities already have them.
MR. REEDER observed that he is familiar with local and state
taxes in other states, and that like he, most people are used to
paying sales taxes.
REPRESENTATIVE JOSEPHSON observed that sales taxes may impact
passengers even more than a $15 fee.
MR. REEDER asked whether Representative Josephson noticed sales
taxes prior to traveling.
REPRESENTATIVE JOSEPHSON said no.
MR. REEDER advised that most tourist destinations recoup the
cost of visitors through a sales tax.
REPRESENTATIVE JOSEPHSON pointed out that the state needs
revenue because a $1.8 billion budget "would absolutely
devastate the economy." He questioned whether the impact of
operating budget cuts should also be part of the economic
analysis.
MR. REEDER said, "I think it has to be."
REPRESENTATIVE JOSEPHSON recalled that the impact of the
recession was so profound that it had to be a major factor in
the downturn.
MR. REEDER stated that the ships were redeployed after the tax,
but before the recession. In fact, the ships are always filled
1 percent to 3 percent higher than what is originally forecast.
4:43:42 PM
REPRESENTATIVE KITO observed that sales taxes may not be a
concern for those making a certain level of income; however, a
single parent with two kids living on a fixed income may have
significant problems because he/she would be paying a higher
percentage of his/her income, and in Juneau there is no sales
tax exemption for food. A community sales tax may not have a
dramatic impact on a tourist, but would have a dramatic impact
on residents in the community who are struggling to survive. He
opined that a $15 per head tax on a $300 cruise is like a 5
percent sales tax; if a tourist spends $300 on purchases, they
have paid 5 percent in sales tax. Representative Kito pointed
out that statutes are in place to address the issue of where the
money can be spent, which was the point of the lawsuit. He
remarked:
So, it seems like we're just talking about a value and
then, our job as the state, is to make sure that that
money is spent appropriately. ... I'm just concerned
about a sales tax and that impact of that sales tax on
lower-income individuals in our community.
4:45:32 PM
MR. REEDER said he can appreciate that a state sales tax can be
a hardship. Many localities don't assess sales taxes on food or
housing, but on luxury items, and sales taxes could "target
those items that [visitors] may be involved with, hotels ...."
Mr. Reeder returned to the history of the cruise ship initiative
and noted that the tax was reduced from $46 to $34.50, providing
for an additional offset for head taxes that communities already
charged, and that the funds are to be used for facilities and
services for passengers and ships. He further explained that is
why an increase in the tax does not help the state's fiscal
problem, and the fund must be reviewed every three years to
ensure that communities are not spending the money in a way that
does not benefit the ship and the passenger; in fact, the
industry understood that as ports develop, less money would be
needed, and the amount of tax would be reviewed and perhaps
lessened. He opined that the cruise lines would not sue but
warned that a passenger offended about improvements that did not
benefit the ship may bring a class action lawsuit. Part of the
goal of Alaska Act was to prevent a single community from having
a head tax that presents a deterrent to the cruise lines. He
acknowledged that there are legal port expenses that need to be
paid by ports that have cruise ships, and the statewide head tax
accomplishes that goal. He stressed the importance of the
review and that the projects have been vetted by the Department
of Law (DOL). The final change was that all ports receive $5
per passenger [slide 5]. Turning to the impacts of the
settlement agreement and legislation, Mr. Reeder said the cruise
lines agreed to bring back more ships - passengers will number
more than one million this year in Juneau - and Alaska Act
believes that the state should honor its agreement. A dedicated
tax on the industry will not help Alaska, and can only be used
in the ports that serve the cruise ships [slide 6].
4:51:29 PM
REPRESENTATIVE JOSEPHSON observed that the state has shrunk its
capital budget to the amount required to qualify for a federal
match, and he said there must be great infrastructure needs in
Southeast Alaska.
MR. REEDER said there were infrastructure needs that pertain to
cruise ships and their passengers; however, Sitka saved its head
tax money and is redoing its tender dock area, as well the
visitors' center. He said Sitka does not need much else in the
near-term, and other communities are the same. Mr. Reeder
opined that the number of projects that qualify for head tax
funds will decrease, and he again warned of a lawsuit.
REPRESENTATIVE JOSEPHSON surmised that the vulnerability of a
lawsuit would still be true, given the settlement was largely
based on the reduction of the tax.
MR. REEDER agreed; however, the important aspect of the
settlement was the review process of the law, which ensures that
the amount of the tax is appropriate to the changing needs in a
port community and applies only to legal projects. He concluded
that the position of Alaska Act is that the $15 increase is not
warranted, cannot be used to address the state's fiscal problem
- which the visitor industry recognizes - and data proves that
HB 252 will cause the loss of thousands of jobs and millions of
dollars of tax revenue [slide 7].
REPRESENTATIVE KITO stated that Juneau and other ports in
Southeast have infrastructure needs such as accommodations for
larger vessels, and accommodations in smaller communities for
more vessels; in fact, Juneau is spending a lot of money on a
facility to accommodate larger vessels scheduled to arrive in
the future.
MR. REEDER agreed; however, he questioned the budgeting methods
of certain communities. The purpose of the tax was for
communities to save over time and fund projects.
REPRESENTATIVE HUGHES asked whether the whale sculpture falls
into the definition of a service, in the same manner as
restrooms, under federal law.
MR. REEDER was unsure.
5:00:54 PM
CHAIR OLSON announced that HB 252 was held over.