Legislature(2003 - 2004)
03/17/2004 07:02 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 236-EMPLOYMENT TAX FOR EDUCATION Number 0150 CHAIR HAWKER announced that the first order of business would be HOUSE BILL NO. 236, "An Act imposing a tax on employment; and providing for an effective date." CHAIR HAWKER informed the committee of his intent to move both HB 236 and HB 298 out of committee and on to the [House Finance Committee] after discussion and public testimony today. Number 0219 REPRESENTATIVE WILSON, sponsor of HB 236, moved to adopt the proposed committee substitute (CS) for HB 236, Version 23- LS0921\V, Kurtz, 3/16/04, as the working document. There being no objection, Version V was before the committee. CHAIR HAWKER noted the arrival of Representative Gruenberg. REPRESENTATIVE WILSON read from the sponsor statement for CSHB 236. For many years ... Alaska had [a school tax] that was paid by all employed persons in the state. She continued to read: The money went into the general fund and became a portion of the dollars legislators earmarked for education. However, when Alaska thought that they were rich beyond their wildest dreams and the supply of oil money, of course, would never end, the school tax was repealed, and so, this is just trying to bring back a school tax. This bill imposes a $100 education tax to be paid by all employed persons, self-employed or regularly employed, who earn more than $600 in Alaska. This is a way to assure that all persons who earn money in Alaska pay something for the services that they all receive. It's a way to collect some money from the 18.2 percent of workers who work in this state, earn their living here, but reside and spend it somewhere else. This bill contains a trigger. We talked about several different things last time. The education tax would be imposed only in calendar years following the June 30 fiscal year end when the cash balance in the Constitutional Budget Reserve Fund [CBRF] is less than $1.5 billion. The tax would be suspended in subsequent calendar years following the June 30 fiscal end, when the cash balance of the CBRF is greater than $2.5 billion. So, the trigger is if it falls below $1.5 billion it goes into effect, and if money's coming in and we've replenished that fund, which we're supposed to be doing, which we have not been doing up to this point, but, when that happens, then it would be automatically suspended until a time would come when we would need it again. The tax would be deposited into the state's general fund and accounted for separately. The legislature may then appropriate the amounts collected under this section for education. The Department of Revenue [DOR] projects that the annual earnings from this would be approximately $43 million. Number 0536 CHAIR HAWKER noted that there is a new fiscal note from DOR and asked that it be distributed to the members. He said the sectional analysis provided is a more technical analysis of the individual sections of the proposed CS. Number 0555 REPRESENTATIVE WEYHRAUCH directed a question to Representative Wilson about employees such as students who live outside the state but return to work for seasonal employment in the summer, who don't make in excess of $600 a year. He asked if they would be taxed on earnings made outside the state. REPRESENTATIVE WILSON answered that the tax would be on earnings made in Alaska at a rate of zero percent on the first $600 they would earn, 10 percent on the next thousand, and zero percent on any other earnings. If they were making $650, it would be 10 percent of that amount, which would be $65, she explained. CHAIR HAWKER clarified the issue in terms of nexus [the power of a state to tax extraterritorial entities]. If the student has nexus to Alaska, if there is an Alaska nexus to the taxpayer, then the tax would be collected, he said. REPRESENTATIVE WILSON added that if the student is a resident, the tax would be collected. Number 0737 CHAIR HAWKER reviewed the major changes in the bill from the previous version. He stated that wages were easy to quantify for state residents, but a mechanism was needed to capture earnings from self-employment: fishers, doctors, lawyers, and others who operate as independent contractors, sole proprietors, or subchapter-S corporations or partnerships. He explained that after much deliberation, a simple definition of "self-employment net income" was determined, which is a clearly defined term in the Internal Revenue Code (IRC) under Title 26, Chapter 2, Section 1402(a), "Net earnings from self-employment". Net earnings from self-employment means "if you've got to fill out a social security self-employment form in a federal 1040, the net earnings from self-employment, which is gross income derived by an individual, less allowable deductions, become the taxable line." That would include independent contractors and partnership income. A key point of the net earnings from self- employment Internal Revenue Service (IRS) definition is that it has extensive provisions that take partnership income and back off passive income such as rents, royalties, and interest, he explained. He said it was a tried and tested definition and opined it was a good basis for capturing [income] from self- employed individuals. He emphasized that that was the major change in [the proposed CS]. Number 1027 CHAIR HAWKER explained some of the smaller changes to the bill. The "collars" were defined at $1.5 and $2.5 billion. The employers will continue to be responsible for collecting from wage-earning employees. A new section provides for a sanction by DOR to make employers post a bond to assure payment for the withholding, if an employer is not good at remitting the payment in a timely fashion. The [proposed CS] indicates that self- employed individuals must remit individually to themselves. If any individual subject to this tax pays more than $100 by operation of multiple employers or by their own contributions, DOR shall refund [that amount of overpayment], he said. There is a provision that requires anyone hiring a self-employed individual who has to file with the federal government informational reports, the 1099 reporting, to file copies with DOR for cross-checking and audit purposes. The bill clearly indicates that the disposition is for education, which is very timely, he opined. Last, definitions have been cleaned up and referenced to specific sites of the IRC, he said. CHAIR HAWKER noted the arrival of Representative Rokeberg. Number 1244 REPRESENTATIVE WILSON expressed her appreciation for the work done by Representative Hawker on the proposed CS, especially for making it understandable to taxpayers. CHAIR HAWKER thanked Representative Wilson for her assistance on the bill. Number 1319 REPRESENTATIVE WEYHRAUCH inquired about the "kick-in" in the proposed CS, and wondered why it just doesn't say, "When it is less than $2.5 billion." REPRESENTATIVE WEYHRAUCH, in reply to a request from Representative Wilson, restated his question and said it is now written as having a floor and a ceiling. He suggested just having a floor. REPRESENTATIVE WILSON replied that part of the reason is to let the people of the state realize that [Alaska] can reach a point where the tax is no longer needed, and that is a better selling point. It also helps the legislators realize that there is some leeway because the CBRF is supposed to be replenished during good times, she added. REPRESENTATIVE WEYHRAUCH said, "So, this is an educational provision rather than a management provision." REPRESENTATIVE WILSON said it is both. CHAIR HAWKER compared it to a thermostat regulating temperature in a room. He said, "There is a point at which the furnace kicks on, but there is also a zone, in there, where the heat fluctuates before the furnace kicks off again. In this case, it's providing a window of area there that allows for the fact that this is a very dynamic world with a lot of other economic variables in it." He acknowledged Representative Rokeberg's term of art, "It's a collar on ranges subject to judgment." Number 1539 CHAIR HAWKER noted specifically that when money is taken from the CBRF in this state, as Representative Wilson said, it is owed back to that fund by the general fund. It is a receivable of that fund, and that is why the language [in the proposed CS] very carefully chooses the words "cash balance" in the CBRF, because the CBRF has a cash balance of $8-plus billion at all times, made up of a combination of cash and receivables from the general fund, he explained. "So, in this case, we are truly tying to the cash balance in the CBRF, rather than the accountant's value balance in the CBRF," he stated. REPRESENTATIVE WEYHRAUCH asked, "Could, then, you go through a process of selling equities to bring that cash balance up prior to, well, to determine the June 30 balance, either to avoid the tax or, alternatively, put it into an illiquidity to cash out from the CBRF to make an illiquid cash balance to impose the tax?" CHAIR HAWKER deferred to Mr. Dickinson. Number 1705 DAN DICKINSON, Director, Tax Division, Department of Revenue, said he believes that in the CBRF, most of the money is in cash or cash equivalents and is held in a way such that it will be liquid. "There is a special account which is held in other securities. To be more precise, it could be defined as current asset balance," he explained. CHAIR HAWKER noted that "cash and cash equivalents" is the commonly used term. Number 1800 REPRESENTATIVE ROKEBERG said he appreciates the statements about cash and cash equivalents, but opined that CBRF does have other investments and securities. He said he isn't sure that a short- term bond is equivalent to a cash equivalent. CHAIR HAWKER noted that idea is found in the Statement 312 [of the 2003 "Comprehensive Annual Financial Report" (CAFR)]. REPRESENTATIVE ROKEBERG continued to say that there is a provision for longer-term investments that is statutorily enacted. He recalled several years ago when there was a higher balance in the CBRF and DOR was directed to look at a portion of the CBRF for a longer-term investment to boost the yield somewhat. He said there could also be other securities. CHAIR HAWKER added, "Requiring the five-year investment horizon." Number 1900 MR. DICKINSON noted that in Statement 311, which is the combining balance sheet that includes the CBRF, the categories that make up the assets are "cash" and "investments," at $2 billion, and "due from other funds", at $5-plus billion. He suggested a more accurate way of reconciling this would be to say "cash investments." He made the point that the bill does not refer to the CAFR, which does not come out until December 15. He said the language Chair Hawker inserted says that the commissioner will certify [the cash balance] based on the cash balance that is there. He advised looking at the latest KPMG audit to see how those funds are characterized. Number 1945 REPRESENTATIVE WEYHRAUCH suggested it may just be semantics, because if it is going to be imposed, it is going to be imposed by regulation, not by legislation. He said that the administration is given the authority, once they know what is in the CBRF in the calendar year, and then, in the following year, DOR follows the statutory requirements and sends out the forms for the education tax. MR. DICKINSON said he believes the conditions are being established by legislation. REPRESENTATIVE WEYHRAUCH agreed. He explained that the legislature sets the policy and delegates to DOR to send out the tax forms. He emphasized that the legislature does not have to make another legislative determination for delegating to the agency when the CBRF limit goes below $1.5 billion. MR. DICKINSON said that is correct. REPRESENTATIVE WEYHRAUCH mentioned that that was his idea on the sales tax, also. Number 2104 REPRESENTATIVE OGG remarked: I kind of like this thought process you've put in of having two levels, one when [the cash balance] drops below a certain level, the legislature making that draw knows that they are now moving to impose a school tax - "income tax," or 10 percent of income - and that the only way to move away from that is to start making those deposits to get that fund back up to $2.5 billion. Number 2203 REPRESENTATIVE ROKEBERG thanked the chair for his recognition of the collar methodology, which would benefit the people in the state if the oil prices and natural resources revenues reached a point where there would be an automatic stay of that particular taxation. It is a policy statement to the people that the legislature recognizes that there should be tax relief when there are other revenue sources available. He said it could be comforting for people to know that there won't be taxes just for taxes' sake. Number 2316 REPRESENTATIVE ROKEBERG asked for clarification about the cash balance definition as it relates to the statutory revisions of a few years back, concerning the boosting of yield. He wondered if the broader term, "current assents", could be used. MR. DICKINSON replied that the cash and investments listed in the category used in the CAFR would include both the main fund and the "sub" fund, which has been specially designated to be invested for a longer-term horizon and for a higher rate of return. He said he wanted to look at the audit report issues regarding cash holdings. He said, "I believe if we use cash and investments, or maybe cash and liquid investments, or maybe even specifically, went off and said, investments other than the receivable from the general fund -- there may be a cleaner way of doing it." Number 2431 CHAIR HAWKER noted that the term "current assets" is not used in government accounting anymore. He suggested coming up with some expansion of that term, and making a conceptual amendment to have "and investment" incorporated in the three necessary places, before the bill goes to the [House Finance Committee]. REPRESENTATIVE WEYHRAUCH asked if that includes cash investment. CHAIR HAWKER replied that it does. He said the KPMG standalone report of the CBRF may use a slightly different word, and he would like to compare the two and find a balance between the words. Number 2540 REPRESENTATIVE GRUENBERG reported that HB 466 would eliminate the sub account and if it passes, there would be money in only one account. He asked if Representative Hawker could reference the money in the account as established by statute. MR. DICKINSON replied that it could be done, but care would have to be taken because accounts in the budgeting system are not like bank accounts. Number 2636 REPRESENTATIVE SEATON said the collar mechanism is a good idea, but he expressed concern if there was a situation where there is $2 billion in the CBRF and, at one time, at that amount, the tax is in effect and, at another time, it is not in effect. He said: It is confusing if you've been below $1.5 billion, and now you're at $2 billion in the CBRF, you're taxing people. If you, at some point in time, have been above $2.5 billion, you take the tax off, and now you're down to $2 billion and you're not taxing people. You go to $1.8 billion -- you're not taxing people. It seems to me that the idea of having the trigger is a good mechanism, but I'm not sure about the confusion that you get about sometimes taxing people, and sometimes not taxing people, on the same amount of money in the CBRF. Number 2745 MR. DICKINSON responded that if there was a single point instead of a collar, it would be equally confusing. If the CBRF hovered around that balance, a tax in year one, no tax in year two, a tax in year three, et cetera, in other words, if the CBRF bounced around the trigger point, it would be more frustrating to people, he opined. If there is a $1-billion collar and the CBRF stays within that collar, there won't be those kinds of changes, he predicted. CHAIR HAWKER used the thermostat example again to show that, during the range in which the temperature is declining, the furnace is off until it hits the trigger point. It comes on until it reaches a higher point and then kicks off, so at any given time at the mid-range of the setting, the furnace may be on or off. He termed it a smoothing mechanism. If there was a single point, one penny less than the trigger point would trigger the tax; one penny more, and the tax would go off. He said he found that concept harder to justify than a range in which the revenue mechanism would be applied. Number 2914 REPRESENTATIVE ROKEBERG offered the wording for a potential amendment which changes, on page 2, line 12, the amount of the floor trigger to $1 billion rather than $1.5 billion. He explained the change creates a lower threshold for the imposition of the tax, which would create less tax on the people and create a greater spread between $1 billion and $2.5 billion, which should overcome some of the concerns raised by Representative Seaton. He noted that the governor has spoken on this issue, the Conference of Alaskans discussed using the $1 billion trigger, and the public understands that figure better. He said [the committee] needs to look at the current cash balances, the cash flow, and what may be done in terms of entering the CBRF. He suggested that [the committee] should look at the structural fiscal gap in the $1-billion range, not the $1.5-billion range. He remarked that this was supposed to be the "shock absorber" for the future economy. He referred to Mr. Corbus's testimony during the Conference of Alaskans which indicated that the state requires between $300 million and $400 million a year just for cash flow needs. Even if the state were flush with money in terms of revenue collection, there needs to be that extra cushion because the cash flow has variable requirements, notwithstanding the fiscal situation, he opined. Number 3146 CHAIR HAWKER explained that the rationale behind the $1.5 billion was recognized in the governor's $1 billion-floor in the CBRF because of the six-month lag period between the measurement date and the effective date of a revenue mechanism. There is the presumption that if there is a continuing draw into the CBRF, that draw would continue for another six months, so that by the time the revenue mechanism actually takes effect, [the amount in the CBRF] may be substantially below the $1 billion at the time of the draw, he explained. At any given time the "checkbook float" for the state is about $0.5 billion, and the incremental amount of $500 million would give the assurance that, at any given time, there would be a $1-billion cushion in the bank, he surmised. REPRESENTATIVE ROKEBERG said he appreciated that information, but maintained that there is a difference between $300 million and $500 million, and a few million here and there starts adding up. He asked Mr. Dickinson why the cash balance analysis of the CBRF is on June 30 and not July 1. He also asked when the FY 04 budget will be reconciled to see what type of draw will be needed from the CBRF. Number 3400 MR. DICKINSON answered it is his understanding that there are no cash transfers that occur between June 31 and July 1, and said [the date] is purely an accounting measure. He explained that when DOR prepares the CAFR they can say, "Here, to the penny, was the draw in the CBRF." He said there is a memorandum of understanding between the treasury and the administration to set up a cash efficiency management to make sure there is always enough money in the general fund to make payments. [The general fund] is kept within a $100 million to $200 million range, and if it looks as if there will be cash over $200 million for over 30 days, money from the general fund will be put back into the CBRF. If it looks as if the amount will go below $100 million, money is taken out of the CBRF. There is no cash difference between June 30 and July 1, and nobody makes a deposit or withdrawal on the last day of the fiscal year or the first day of the new fiscal year, he concluded. REPRESENTATIVE WEYHRAUCH said, "Didn't we do that last year?" MR. DICKINSON said he believed a financial adjustment was made on the books. REPRESENTATIVE ROKEBERG stated that he was mystified by Mr. Dickinson's testimony because he felt there should at least be a year-end date, which would be June 30, when all of the accounting and balance sheets are reconciled to that date to determine if any draws are needed. He said there should be a notional amount, anyway, which is what the Alaska Permanent Fund Corporation uses, and what he calls "windage." He emphasized that the bill needs to be very clear as to the amount of the trigger, and whether or not the draw for that current fiscal year, presumably June 30, has an impact on the balance that is in the CBRF. Number 3721 CHAIR HAWKER replied that June 30 was chosen because then it does become very empirical and, ultimately, an audited number, which would give the public the greatest assurance and confidence that the books have been reconciled at that point in time. MR. DICKINSON responded that there are several things going on. For everyone's convenience the tax needs to on a calendar-year basis, and there needs to be, for software purposes, a five- month notice period. He explained that on July 31, the [DOR] commissioner will estimate the balance that will show up five months later. He said the money is not segregated in different bank accounts. REPRESENTATIVE ROKEBERG returned to his original question whether the draw was attributable to June 30 or July 1. He said: It seems to me that you're actually making the drawdowns on a cash flow basis as you identify what's actually happening as a practical matter. This particular legislation would have you jump another hurdle here, in terms of that, is all I'm getting at. I was wondering if the effect is if the amount that we want to use as a trigger would take into effect that current fiscal year of June 30 impact on the draw of the CBR [Constitutional Budget Reserve]. That's what I'm driving at. MR. DICKINSON replied that he thought it would be fairly immaterial which [date] is used, and the reason that June 30 is used is, "Five months later you could say, here's the CAFR, there's the date, June 30." REPRESENTATIVE ROKEBERG said, "If you're going to use a notional amount at the end of July to make the calculation, it may not be consistent with the report anyway, though, right? And that would just expose your judgment, good or poor, because it wouldn't necessarily be consistent with the audit." MR. DICKINSON said that was a good point. He added, "It probably won't hit exactly on, but hope would be that it would be very close. You'd probably have a lot of explaining to do about why it wasn't exactly on, especially if the difference moved it from one to the other." REPRESENTATIVE ROKEBERG added, "Or you missed it by $50 or $100 million like you mentioned." MR. DICKINSON added, "Or if it flipped you on one side or the other of a measuring line." CHAIR HAWKER suggested the committee move on if Representative Rokeberg was finished with his comments. REPRESENTATIVE ROKEBERG replied that he would be offering an amendment soon. Number 4100 REPRESENTATIVE OGG asked for clarity about how much tax someone with an income of $650 would pay. REPRESENTATIVE WILSON explained that $600 is cut off as if it didn't exist, and then $601 would be taxed at 10 percent of $1, or 10 cents, and [the tax on $650 would be $5]. REPRESENTATIVE OGG said that clarifies one point. He said he appreciated the time and effort put into getting the self- employed people into the bill. He wondered about the "coupon clippers, dividend folks, or people who are just landowners." Number 4219 MR. DICKINSON answered, "We haven't gotten coupon clippers unless they owned part of the company whose coupons they were clipping through a subchapter-S-type arrangement. That is correct. People who are living off of pure investment income would not qualify." CHAIR HAWKER said that was by intent of the bill drafters. MR. DICKINSON said it would just be earned income. REPRESENTATIVE OGG said it appears that someone who received a permanent fund dividend would be excluded, as well as people who just receive rental income. He asked if that was the intent of the bill. MR. DICKINSON replied that was the effect of the bill. He suggested if a person formed a subchapter-S corporation to hold rental properties, there might be a payment, but said, generally, for pure rental, there would not [be a tax payment]. REPRESENTATIVE OGG asked if a dividend would be taxed if it was a person's sole income. MR. DICKINSON said it would not be taxed. CHAIR HAWKER noted that was the intent of the bill and explained that is why the "net earnings from self-employment" definition was chosen, which keeps to earned income as an active services- type income excluding rentals from real estate, from personal property, et cetera. The idea was not to go after the passive retirement income of elderly folks, nor the bank account income and permanent fund income of children. It was designed for income-generating activities in the state, he concluded. Number 4400 REPRESENTATIVE OGG remarked that he wanted that information to be clear on the record because he had heard earlier comments that some children should pay a portion of their education if they were receiving a dividend. He said he appreciates the clarity which shows that is not the intent [of the bill]. CHAIR HAWKER opened the meeting to public testimony. He referred to a paragraph in the members' packets from Don Rulian, head of the Alaska Society of CPAs, which expressed Mr. Rulian's comfort, from an accountant's perspective, with the [proposed CS] version of the bill. Number 4521 MARY HAKALA, Member, Alaska Kids Count, said she is working actively with a large network of concerned parents advocating for increased funding for schools. She said her organization is nonpartisan, parent-initiated, based in Juneau, but a statewide network. She reported that the members of the organization were asked to consider the revenue side of the education equation and voice their preferences to legislators. Parents want excellence in their schools, and to reach that goal it will require even more than the $80 million-plus that is currently under consideration by the legislature, she opined. She said they realize that new revenue measures are necessary to make that a reality in Alaska. She noted that today she was speaking as an individual, and has a concern with the $600 threshold in the bill because of the burden it places on college kids and young people who have limited earnings in the summer months. TAPE 04-13, SIDE B MS. HAKALA continued to say that this population would pay a disproportionate share of the tax. She added, as an adult, she has no problem paying the tax, but would prefer an amendment be made to change the trigger point. She suggested, though she supports the bill, that there are more effective ways to fund education such as revisiting the economic limit factor (ELF) to ensure that Alaskans truly maximize their fair share of oil profits, enacting the percent of market value (POMV) method to utilize a portion of the permanent fund earnings for services such as education, and initiating a broad-based state income tax that is not regressive. She thanked the committee for their time. Number 4502 REPRESENTATIVE SEATON said he has heard many comments from people who are willing to pay taxes for education, and pointed out that the way the bill is structured now, the tax would not be collected because there is a $1.5 billion cutoff and [the CBRF] is above that. He asked Ms. Hakala if she thinks the situation the state is in now would benefit from a tax for education. MS. HAKALA said her opinion is that there must be some mechanism put into place so that income begins to be generated in the near term. Number 4354 ROGER GAY from Big Lake testified as follows: Article 1, Section 1, of the state constitution states that all persons have the natural right to life, liberty, the pursuit of happiness, and the enjoyment of the rewards of their own industry; that all persons are equal and entitled to equal rights, opportunities, and protection under the law; and that all persons have corresponding obligations to the people and to the state. HB 236 not only deprives the worker of the enjoyment of the rewards of his own industry, but it also imposes an unequal obligation to the people and to the state. Under the equal protection clause, everyone should be subjected to the same tax regardless of their age or their source of income. I don't understand why you want to pick on workers, instead of nonworkers, and turn them into second-class citizens. Furthermore, this bill is obviously an attempt to circumvent the constitutional provision prohibiting the dedication of funds under Article 9, Section 7. As to this bill suspending the taxes if the CBR exceeds $2.5 billion, HB 236 basically ensures that the government will never allow the CBR to exceed $2.5 billion. The government has no incentive to suspend any tax. [HB 236] is not an employment tax, it is an employment penalty. Thank you. Number 4209 REPRESENTATIVE KOHRING responded, "Amen, thank you, good job, and I agree with you." CHAIR HAWKER asked if there was any further public testimony. Hearing none, he announced that public testimony was closed. He asked for consideration of amendments. Number 4100 REPRESENTATIVE ROKEBERG moved to adopt Conceptual Amendment 1, on page 2, line 12, after the word "than", to change $1.5 billion to $1 billion. CHAIR HAWKER objected for purposes of discussion. REPRESENTATIVE ROKEBERG stated that he thinks the $1-billion amount is a more realistic floor trigger mechanism, given the current amount in the CBRF, and given the prospective demands for the CBRF in the near term. It also would lower the trigger point at which the tax would be imposed. He said he believes, from testimony he has heard on other occasions, that the $1- billion figure is a fair approximation of the amount of shock- absorber cushion the state needs, structurally, as well as for cash flow management issues. CHAIR HAWKER asked Representative Rokeberg if he envisioned lowering the top end of the collar or keeping it at the same level. REPRESENTATIVE ROKEBERG replied it is fine as it is. Number 3936 REPRESENTATIVE SAMUELS, continuing the discussion of the collar issue, predicted that eventually this legislature, or a future legislature, will fix the funding mechanism so the CBRF is not dependent on a cash flow. When that time comes, when money is not being drawn out of the CBRF, he suggested that the tax could be collected for 10 to 15 years at $43 million a year, not counting the compounded interest, and yet not be needed. He said, "If you never need it, why would you collect the tax?" REPRESENTATIVE ROKEBERG said it was a good point and he would support an amendment to lower the amount to $2 billion. REPRESENTATIVE SAMUELS deferred to those who know the numbers better than he does. CHAIR HAWKER asked Mr. Dickinson to comment. Number 3743 MR. DICKINSON replied that it would take many years to build up to $1.5 billion. He said it is a judgment call, that there are other bills being considered that have the same trigger mechanism in them, and that this tax could never carry the burden. He said he hopes that all the "tools" would have similar triggers. CHAIR HAWKER said it could be argued that this component, at the current fiscal note of $40-plus million, would be one of those elements that would keep the budget balanced and allow the state to not have to draw from the CBRF, which is why a collar is needed. REPRESENTATIVE ROKEBERG emphasized that this particular bill is only one of a number of pieces of legislation. The primary amount of build-up and return from the CBRF, if the POMV were to pass, would be from excess amounts of money spun off from the permanent fund, but more importantly, natural resource revenues that don't have to be utilized. That would be a primary source of funding for any reloading or build-up of the CBRF, he opined. He said a collar speeds up the process and he would not object to an amendment for the $2-billion amount. Number 3540 REPRESENTATIVE SAMUELS said he did not mind either lowering it or keeping it and letting the [House Finance Committee] take care of making the triggers all the same. CHAIR HAWKER asked Representative Samuels if he would like to propose an amendment to [Conceptual Amendment 1]. REPRESENTATIVE SAMUELS replied that he did not know what the numbers would be and suggested that the [House Finance Committee] make all of the trigger points the same. Number 3514 REPRESENTATIVE SEATON said he was confused because the discussion seems to be saying that the tax is a CBRF-refill tax, rather than an education tax. He characterized the comments he has heard from constituents as being pro-education funding. He said the tax was not quite a dedicated tax and yet was primarily for education, but what he is hearing today is that Alaska does not need money for education, because there is enough money in the CBRF, so Alaska doesn't need the tax. He argued that to take the amount down to $1 billion means that even if there is less money than is there today, and the CBRF is even drawing less than $1.5 billion, the tax wouldn't be needed. He said the design of the tax is to fund education, which people have repeatedly said needs more funding, so he suggested raising the floor, instead. Number 3309 REPRESENTATIVE WILSON asked what the trigger points in the other bills were. CHAIR HAWKER said he didn't know, and suggested following Representative Samuels' suggestion to have the [House Finance Committee, or House Rules Standing Committee] identify consistent parameters. REPRESENTATIVE WILSON said she agrees with Representative Seaton's comments and is not comfortable with waiting [for the amount] to get below the $1-billion amount, because at least that much is needed in the CBRF for insurance for emergency expenses. Number 3141 REPRESENTATIVE ROKEBERG noted that the idea is to try to develop confidence about taxation between the legislature and the people. He said this bill is not an income tax and is intended to generate additional revenues for the state; the fact that it is a "soft tie" to education is, in part, to alert people to the need for those monies. "The fact is, there has to be a balanced approach in this bill, by delaying its impact until the money is really needed, rather than rushing out when the price of oil is at $36 a barrel and start laying taxes on people," he opined. He said the legislature has to be very careful not to lose support from the public. Number 3022 CHAIR HAWKER asked if there was any further discussion of the amendment. He maintained his objection and requested a roll call vote. He said the question before the committee is whether to pass Conceptual Amendment 1, which would change on page 2, line 12, the $1.5 billion to $1 billion. A roll call vote was taken. Representatives Weyhrauch, Kohring, Samuels, Rokeberg, and Hawker voted in favor of Conceptual Amendment 1. Representatives Ogg, Moses, Wilson, and Gruenberg voted against it. Therefore, Conceptual Amendment 1 passed by a vote of 5-4. Number 2844 REPRESENTATIVE OGG moved to adopt Conceptual Amendment 2 to also include passive income such as rentals from real estate, royalties, and dividends in the bill. CHAIR HAWKER objected for discussion purposes. REPRESENTATIVE OGG first declared a conflict of interest because he is a landlord, and then opined that it is not right to let some folks who make money and pay taxes to the federal government not pay this education tax. He stated that the intent of the bill is to have citizens of the state contribute toward education through a school tax. He noted that sometimes employment is passive, but that does not mean a person is not making money. As a landlord, he said he makes repairs, which is physical labor, but because it is passive income it is not going to be included [in the bill]. He concluded by saying, "If you make money in this state, and we're going to go forward with something like this, you should participate." Number 2731 CHAIR HAWKER stated that the amendment would be, in his opinion, a substantial change of intent in the manner in which the bill was drafted. He remarked, speaking as an accountant, that it would be a fairly complicated and difficult provision to enforce. He questioned what would be targeted: corporate rent payers, or individual citizens' interest earnings, or exemptions for those over 65 years old whose only source of income might be a rental property. He said those issues were considered, but the focus of the bill is on people working for remuneration. Number 2606 REPRESENTATIVE ROKEBERG agreed that the intention of the bill is for "1099 incomes," or those incomes that are reportable. He mentioned that there currently is no tax on rentals and that [Conceptual Amendment 2] would be a huge change in public policy, and he argued against that change. He said that by pursuing [Conceptual Amendment 2] in this form, business income is not being considered. If there is a business formation above a sole proprietorship or family partnership, there would be 1099 income that would be reportable under this bill, which he said he considers to be adequate. Number 2446 REPRESENTATIVE GRUENBERG spoke in favor of the amendment. He said the issue is one of fairness, and arguments against the amendment have been fairly technical. He argued that the concept of personal income, as opposed to corporate income, is fairly well defined in the IRC, and it could be drafted to change the definition to include personal income. He called it a drafting issue. "The justification that was given for excluding this type of income was that you don't want to tax elderly people and children," he said. "I'm not sure, constitutionally, if you can draw that distinction, or if there is a question of denial of equal protection." REPRESENTATIVE GRUENBERG emphasized it was a question of fairness because the means of not taxing children and the elderly is being addressed in the bill by not taxing passive income. He pointed out that there are elderly who work and are getting taxed. The people who are not getting taxed are people who don't work, and they could be people who are not elderly and not children, so the means that is being used is overbroad, he opined. There are people who are escaping the tax who are neither elderly nor children, such as the wealthy who do not work. He said that is not fair and he supports the amendment. He suggested the taxing of rental property is not the issue here, but an education tax is, and the two should not be confused. Number 2139 REPRESENTATIVE SAMUELS asked Mr. Dickinson about the relationship between rental property and limited liability corporations (LLCs), and whether an LLC would be responsible for paying the $100 education tax. MR. DICKINSON replied: If you have multiple sources [of income] and one of them is taxable, you'll get the $100 taken out. So, in some ways, it's very hard for us to figure out who would just have rental income and who wouldn't have anything else. So, I think, in some senses, the notion that folks who have multiple sources, one of them may qualify, the others may not, makes that a very hard number to estimate. REPRESENTATIVE SAMUELS asked if it was only for the individual. He said: If I owned a series of apartments and a couple of duplexes or something, and my LLC was the company that got the rent checks, the company is not on the hook for the $100, so, to me, it is kind of a moot point, almost. We're not talking about that many people that ... have nothing else other than rental income. MR. DICKINSON suggested that federal filers could be checked to see how many had only Schedule F income. He guessed it would be a fairly small number. Number 2010 REPRESENTATIVE ROKEBERG noted that self-employed individuals are going to pay tax under this bill if they have an LLC because they would have self-reporting income under a 1099. MR. DICKINSON said that was correct for LLCs that opted to be partnerships. REPRESENTATIVE ROKEBERG asked if, typically, the vast majority [of LLCs] select self-employment income. MR. DICKINSON said he didn't have the numbers in front of him. REPRESENTATIVE ROKEBERG replied, "I would be surprised if 95 percent of LLCs in the state are S-corps and didn't take it as individual incomes." CHAIR HAWKER added that was the reason most entities exist. He noted the arrival of Representative Harris, co-chairman of the House Finance Committee. Number 1700 CHAIR HAWKER strongly maintained his objection to [Conceptual Amendment 2]. He restated the question before the committee: Shall we adopt a Conceptual Amendment 2, which would be to restructure this bill, and Representative Ogg, I will call attention to the title of the bill which was a limited tax on wages and net earnings from self- employment, to include, in some manner, taxing the folks that earn income solely from real estate investments. REPRESENTATIVE OGG said his intent was to target employment income that individuals, and not corporations, made. He said it would be in the area of self-employed individuals, and would exclude folks who received income from real estate. He explained that the tax would be determined from federal income tax. CHAIR HAWKER clarified the amendment: "Your amendment is to restructure the bill to eliminate or change the tax base here from wages and self-employment income, to all income earned by individuals." Number 1606 REPRESENTATIVE OGG said he was not an accountant, but if that is how it reads from adding in [other self-employment wages], that is his intent. REPRESENTATIVE GRUENBERG said, as he understands the amendment, it is to include the concept of personal income as defined in the IRC, which would include rental income and other forms of passive income such as dividends. REPRESENTATIVE OGG added, "And royalties." Number 1518 CHAIR HAWKER suggested that Representative Ogg's intent is to eliminate the concept, in this bill, of having the revenue base be wages and self-employment income, and change it to being the much broader concept of personal income, the entire federal taxable income. REPRESENTATIVE ROKEBERG replied, as a point of order, that the amendment is inappropriate because it is so far-reaching that it almost rewrites the whole bill. He said he was not sure that was Representative Ogg's intention. CHAIR HAWKER concurred with Representative Rokeberg's point that the amendment would be a complete rewriting of the bill, and asked the maker of the amendment to reconsider it. Number 1307 REPRESENTATIVE OGG restated his intent, saying it appears to him that people who own real estate are getting by without paying this tax, and spoke of his own personal experience as a landlord. He opined that passive income - rental from real estate, royalties, and dividend income - should be included. He said those who pay federal income tax should also pay an education tax. REPRESENTATIVE GRUENBERG responded to Representative Rokeberg's point of order. He said he believes the amendment is in order according to Mason's Manual. The fact that it expands the bill is not a valid point of order, he opined. CHAIR HAWKER asked that the amendment be reduced to writing. REPRESENTATIVE OGG said he would be happy to write out his amendment and submit it to the chair and perhaps the [House Finance Committee] would take it up. REPRESENTATIVE OGG withdrew Conceptual Amendment 2. CHAIR HAWKER announced that Conceptual Amendment 2 by Representative Ogg is withdrawn with the concurrence of the objector. Number 1027 REPRESENTATIVE ROKEBERG responded to Representative Gruenberg's point and defended his point of order on the basis that the amendment would have taken the head tax, or employment tax, and turned it into an income tax. "It would be removing the bill from the committee and totally changing it," he said. Number 0940 REPRESENTATIVE WEYHRAUCH moved to adopt Conceptual Amendment 3, page 2, line 11, where the words are "cash balance". He said he is not sure those words adequately cover the intent of the bill. He asked for help with additional wording. CHAIR HAWKER objected only for discussion purposes, stating he thought it was a good amendment. He suggested the words "and investment" be added to the three places where "cash balance" is mentioned. He suggested the bill drafters find a succinct definition that would "capture the amount of money that appears on the top line in the CAFR." Number 0830 REPRESENTATIVE WILSON suggested those words be added to lines 11, 15, and 18 [of the proposed CS]. REPRESENTATIVE WEYHRAUCH said it was okay to add it wherever it says "cash balance" in the bill. Number 0808 CHAIR HAWKER acknowledged the amendment to the amendment and noted that there were no objections. He explained that the amendment would expand the words "cash balance" to be a more- encompassing, technically correct description of "something that gets us to that amount that appears on the first line of the CAFR." He removed his objection to the amendment. He repeated Conceptual Amendment 3, "which is to have in three locations identified, line 11, line 15, and line 18, page 2 of the V version of the bill, where the words 'cash balance' appear, have the concept of cash and investment incorporated into those lines, the specific verbiage to be worked out in coordination with DOR." CHAIR HAWKER, hearing no further objections, announced that Conceptual Amendment 3 [as amended] was adopted. REPRESENTATIVE ROKEBERG said there is an intent by the committee and the bill to focus on education, but nothing in the title of the bill seems to indicate that. Number 0651 REPRESENTATIVE ROKEBERG offered Conceptual Amendment 4, which would add a new Section 1, short title, "Alaska Education and Employment Tax", and then renumber accordingly. REPRESENTATIVE GRUENBERG objected for purposes of discussion and offered a friendly conceptual amendment to also change the wording in the title of the bill. [The title in Version V read, "An Act imposing a limited tax on wages and on net earnings from self-employment; relating to the administration and enforcement of that tax; and providing for an effective date."] REPRESENTATIVE ROKEBERG said he has no objection to that idea, but that the amendment was intended to be for a statutory short title so that the people understand the intent [if it becomes law]. Number 0523 REPRESENTATIVE WEYHRAUCH wondered if the words "self- employment", which are contained in the title of the bill now, would change to "employment", or if "self-employment" would be used in the proposed short title. REPRESENTATIVE ROKEBERG replied that "employment" is both employment and self-employment, and he didn't think the issue needed to be confused in the short title. "We don't want a long title in the short title," he added. "We don't want 'Alaska Self-Employment' in the short title." REPRESENTATIVE WEYHRAUCH said he understands that, but that the title says self-employment. REPRESENTATIVE ROKEBERG replied that is why there is a distinction between a short title and a legal, constitutional one. REPRESENTATIVE GRUENBERG removed his objection to Conceptual Amendment 4. REPRESENTATIVE OGG asked why it couldn't say "Alaska Education Tax". REPRESENTATIVE ROKEBERG replied that it was an employment tax requiring money for education. Number 0410 REPRESENTATIVE OGG moved to adopt an amendment to Amendment 4, to delete the word "Employment" and just have "Alaska Education Tax". CHAIR HAWKER asked Representative Rokeberg if he would accept that as a friendly amendment. REPRESENTATIVE ROKEBERG said he would. Number 0304 CHAIR HAWKER replied that now Conceptual Amendment 4 says to adopt a short title, "The Alaska Education Tax", as Section 1, and renumber accordingly. REPRESENTATIVE ROKEBERG mentioned, "We run the risk of a truth- in-advertising claim, if we're not careful. That's the only problem I have with that, because we have a dedicated fund for education." CHAIR HAWKER asked Representative Ogg if, upon the acceptance of his friendly amendment, he wanted to withdraw his objection. REPRESENTATIVE OGG withdrew his objection to Conceptual Amendment 4 [as amended]. CHAIR HAWKER clarified that before the committee now is Conceptual Amendment 4, a short-title amendment, which adds a new Section 1 and renumbering accordingly, referring to the bill as "The Alaska Education Tax." CHAIR HAWKER, hearing no further objections, announced that Conceptual Amendment 4 [as amended] was adopted. Number 0122 REPRESENTATIVE KOHRING addressed Representative Wilson and voiced a concern about out-of-state workers. He used North Slope workers as an example, and asked what benefits they are getting from state services that would justify this tax. He asked Representative Wilson if she had any research on this issue. REPRESENTATIVE WILSON replied, "They use our airports." REPRESENTATIVE KOHRING responded that they are paying for that use through the tickets they purchase. Number 0003 REPRESENTATIVE WILSON remarked that [the North Slope workers] were not the only out-of-state workers. She maintained that the workers in other parts of the state far exceed the numbers that work on the North Slope. TAPE 04-14, SIDE A CHAIR HAWKER added, "Use our services and extract our wealth." Number 0042 REPRESENTATIVE KOHRING replied, "You said, 'far exceed', how does that break out, then?" REPRESENTATIVE WILSON said she did not have the figures in front of her, but could get them. REPRESENTATIVE KOHRING requested information about how many dollars would be generated for this tax from out-of-state workers. Number 0100 CHAIR HAWKER answered Representative Kohring's question by saying, based on the most recent Department of Labor & Workforce Development information, there are approximately 70,000 employees who are not Alaska residents per year in the state. The average salary is around $15,000 per person, so $100 from each of the 70,000 would be extracted for the state treasury, he said. REPRESENTATIVE KOHRING thanked Representative Hawker for the information. REPRESENTATIVE ROKEBERG asked Representative Hawker if he has discussed this bill with the governor's office, because he understands that they have an amendment for the bill. CHAIR HAWKER said that it is not "ready for prime time." Number 0224 REPRESENTATIVE WILSON moved to report CSHB 236, Version 23- LS0921\V, Kurtz, 3/16/04, as amended, out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE KOHRING objected. Number 0400 A roll call vote was taken. Representatives Weyhrauch, Ogg, Moses, Wilson, Samuels, Rokeberg, Gruenberg, and Hawker voted in favor of reporting CSHB 236, as amended, out of committee. Representative Kohring voted against it. Therefore, CSHB 236(W&M) was reported out of the House Special Committee on Ways and Means by a vote of 8-1.
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