Legislature(2001 - 2002)

04/27/2001 03:30 PM L&C

Audio Topic
* first hearing in first committee of referral
+ 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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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-                                                               
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                                                               
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.]                                                                                                              

Document Name Date/Time Subjects