Legislature(1993 - 1994)
04/03/1993 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 226: INTEREST RATES: JUDGMENTS/TAXES/ROYALTIES CHAIRMAN VEZEY read the title to HB 226, noted its introduction at the request of the Governor, and invited a representative of the Attorney General's office to explain the intent of HB 226. Number 313 JOE GELDHOF, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, outlined HB 226. He noted Section one dealt with pre and post judgment interest rates prior to and after court cases involving either state funds or money owed the state, and Section two dealt with oil royalties and tax repayment and the interest to be paid on them. He stated the provisions of Section one would create a statutory interest rate as opposed to the arbitrary 10.5% rate now being paid. He stated the advantage to setting a statutory rate would be that it would not be at the mercy of the market, and that would in turn save the state money. MR. GELDHOF added the administration wished to set a market based rate, which in HB 226 would be dependant on the Treasury bill rate for each successive week. Number 400 CHAIRMAN VEZEY agreed the interest rate statutes must be rewritten, but felt HB 226, as written, was nothing more than giving the state license to steal. He noted the state payment of simple interest on overpaid taxes over a period of years was unfair, since the debt of the common person is compounded over that time. He also noted the rate would favor guilty parties who underpaid their taxes, and asked if anyone knew how to borrow money at the Treasury bill rate except for the government. Number 435 MR. GELDHOF replied the Treasury bill rate was chosen because it is used by the federal government. Number 440 CHAIRMAN VEZEY's experience was that the rate used is actually the cost of money to the government. Number 445 MR. GELDHOF stated the administration was not married to the Treasury bill rate, as long as the rate finally chosen was market based. Number 450 CHAIRMAN VEZEY stated under the scenario presented, the state could whittle away at a debt by applying simple interest to a compounded debt it owes while stalling a case in court. Number 460 MR. GELDHOF explained it would be difficult for clerks to deal with compound interest rates, and that was why the administration chose a simple interest solution. Number 470 CHAIRMAN VEZEY perceived the state was only asking for a change in the system because of a poor choice earlier. He noted under an old system, the state paid seven percent, then paid 10.8% when the rest of the market was at 12%, and now that the money market has dropped interest rates, the state wants to address compound interest debts with simple interest rates. Number 485 MR. GELDHOF advised people could build compounded interest rates into contracts with the state if they wished. Number 490 CHAIRMAN VEZEY had additional objections to HB 226 as drawn up, noting the state could condemn someone's property, then be taken to court, and while the case was pending, the debt on the property would outstrip the amount owed on the property even if the state lost its case. Number 499 REPRESENTATIVE OLBERG noted the two percent add-on to the Treasury bill rate in court and tax settlements under HB 226, and stated he would like that deal himself, since he was paying 12.5% on his land. He favored a market based rate. Number 524 CHAIRMAN VEZEY agreed with the concept of a market based interest rate that would be fair to both sides of any disagreement, but objected to the use of the 52-week Treasury bill rate as the base interest rate. He stated the Treasury bill rate was not consistent with what an average citizen could expect in the "real world." Number 534 MR. GELDHOF said if there was an objection to the Treasury bill rate, he felt the administration would not object to another market based rate instead. Number 540 CHAIRMAN VEZEY saw two options: Either the administration could come up with a new proposal, or work with the committee on a committee substitute version. MR. GELDHOF expressed a willingness to work on a new version of HB 226. Number 570 REPRESENTATIVE OLBERG volunteered for a subcommittee to work on the bill, saying he saw a need to find a fair interest base. CHAIRMAN VEZEY stated he would appoint a subcommittee later. Number 595 LARRY MEYERS, DIRECTOR OF INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE, testified on one section of HB 226, Section three. He said there was a great difference paid out by the state in case of overpayment under current law and that provided by HB 226, but there was actually no difference if such an overpayment was treated as a correction in the tax return. Number 636 CHAIRMAN VEZEY asked if under the old law it would be an advantage to overpay one's taxes because the government's interest rate was better than most banks. Number 650 MR. MEYERS thought that was a distinct possibility. Number 655 CHAIRMAN VEZEY asked the difference in the interest rates for under- and overpayments under current law. MR. MEYERS stated under current law, there was none. Number 663 CHAIRMAN VEZEY preferred to see a difference of some kind for those who underpaid their taxes, saying there should be some sort of penalty. He stated there should not be an incentive for anyone to overpay their taxes as well. Number 681 REPRESENTATIVE OLBERG inquired into the current rates being paid. Number 685 MR. MEYERS advised the rate for overpayments, corrections and earnings is currently the short-term discount rate plus three percent, or 11%, whichever is greater. Under HB 226, that would change to the discount rate plus two percent, or 11%, whichever was greater, he added. TAPE 93-37, SIDE B Number 004 REPRESENTATIVE OLBERG perceived the state was trying to build a spread for the interest rates, with the five percent add-on charged going for administrative costs. Number 030 CHAIRMAN VEZEY felt it would be at least a week before HB 226 would see any further discussion in committee, and asked Mr. Meyers if he could provide the figure the federal government used in over and underpayment of taxes. Number 048 MR. MEYERS stated the federal government charged a one percent penalty for those who underpaid their taxes. Number 069 CHARLES "CHRIS" CHRISTENSEN III, STAFF COUNSEL FOR THE ALASKA COURT SYSTEM, opposed HB 226, which he said was unusual for the court system to do, but necessary. He stated there was a series of technical problems with HB 226 and the court could not support the bill because it would place undue strain on the system's clerical staff with no increase in personnel. He stated the work load to track down and then distribute the interest rate to 58 court sites and 2,500 lawyers in the state would be enormous. He noted the court handles close to 15,000 cases a year, and stated providing the financial information for each case would be unfair to expect. Number 228 CHAIRMAN VEZEY perceived the creation of a miniature Federal Reserve in Alaska. Number 258 REPRESENTATIVE OLBERG thought the idea was good, and the interest rate itself was not the problem, but how it was created. MR. CHRISTENSEN stated it was the creation of the rate, and more importantly, how it was to be distributed through the system. Number 268 CHAIRMAN VEZEY called for testimony via teleconference. Number 278 KEN REITHER, AN EMPLOYEE OF EXXON USA, testified by teleconference from Anchorage in opposition to the disparity in the interest rates applied to the under- and overpayment of royalties. It appeared to him to be a six percent spread. Number 292 CHAIRMAN VEZEY expressed interest in hearing the business community's point of view, and announced the committee would defer action on HB 226. He then called a short at ease at 8:47 a.m.
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