Legislature(2023 - 2024)DAVIS 106
04/17/2023 06:00 PM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| HB156 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 156 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 156-INCOME TAX
6:08:00 PM
CHAIR CARPENTER announced that the only order of business would
be HOUSE BILL NO. 156, "An Act relating to the taxation of
income of individuals, partners, shareholders in S corporations,
trusts, and estates; repealing tax credits applied against the
tax on individuals under the Alaska Net Income Tax Act; and
providing for an effective date."
6:09:51 PM
REPRESENTATIVE ALYSE GALVIN, Alaska State Legislature, prime
sponsor of HB 156, presented a PowerPoint presentation, titled
"HB 156: Income Tax." She began on slide 1 by mentioning she
had originally intended to start the discussion with a broader
look at the subject and putting the income tax "into context,"
but that she paired down her presentation to focus specifically
on HB 156. She gave an overview of the presentation agenda on
slide 2, which read as follows [original punctuation provided]:
High Level Overview of HB 156
What it Does and What it Doesn't Do
Why HB 156 Should be Considered
A Broad-Based Revenue Source Should Be Part of a
Sustainable Fiscal Plan
An Income Tax is the best choice for a Broad-Based
Revenue Source
Income Tax Structure in General
What income can be included
What are the options for structuring an income tax
Fiscal Impact of various income tax options
HB 156 Details
Implementation and Costs
Public comments received
Sectional Analysis
Question and Answers
6:11:02 PM
REPRESENTATIVE GALVIN provided an overview of what HB 156 does
on slide 3, which read as follows [original punctuation
provided]:
Proposes a 2% income tax on high earning Alaskans
(only applies to income above $200,000 per year), and
a $20 head tax on all other Alaska wage and income
earners.
Is estimated to generate approximately $120M to $150M
per year in revenue
Provides a legislative vehicle to discuss the merits
of
A broad-based tax to raise revenue rather than more
cuts to the PFD;
An income tax rather than a sales tax;
The options (levers) that can be adjusted with an
income tax to best fit the Alaska economy and state
revenue needs.
Can function as a component of a sustainable fiscal
plan, as a broad-based stabilizer of our currently
unpredictable revenue stream based on oil prices.
REPRESENTATIVE GALVIN misspoke and said that there would be a 20
percent head tax.
CHAIR CARPENTER corrected for the record that it would be a $20
head tax.
6:12:33 PM
REPRESENATIVE GALVIN continued on to speak about what HB 156
does not do on slide 4, which reads as follows [original
punctuation provided]:
Raise any revenue for the FY24 Budget year.
Solve Alaska's fiscal crisis on its own.
Significantly burden Alaska's economy.
REPRESENTATIVE GALVIN suggested that a broad-based income source
was an important part of a sustainable, long-term fiscal plan.
6:13:01 PM
REPRESENTATIVE GALVIN recognized that [the state of Alaska] has
approached a fiscal cliff and considered how HB 156 can offer a
solution on slide 5, which read as follows [original punctuation
provided]:
Our long-term structural budget deficit can no longer
be filled solely by draws from savings and/or PFD
cuts.
A broad-based revenue source should be considered as
part of a sustainable fiscal plan.
A broad-based revenue source will provide a
stabilizing source of revenue, not dependent on
volatile oil prices, and will grow with our economy.
An Income tax has benefits over other broad-based tax
options, such as a sales tax.
6:13:59 PM
REPRESENTATIVE GALVIN moved to slide 6 and discussed the general
agreement that was reached by many economic experts that broad-
based revenue was needed in Alaska. She showcased this point by
referencing the Thirty First Alaska State Legislature's Fiscal
Policy Working Group's (FPWG) final report with text on slide 6,
which read as follows [original punctuation provided]:
The FPWG recommends the legislature consider
additional annual revenues, working towards revenues
on the order of $550-$775 million, as a part of a
comprehensive solution.
Though the FPWG was not able to make a specific
recommendation for type of revenue, the FPWG generally
recommends adoption of a broad-based revenue measure,
in addition to other revenue measure, as a part of a
comprehensive solution.
6:14:33 PM
REPRESENTATIVE GALVIN reported that in the opinion of herself
and many tax and economic experts "in Alaska, an income tax is
preferable to a sales tax." She detailed the reasoning behind
this opinion on slide 7, which read as follows [original
punctuation provided]:
There are several reasons an income tax should be
preferable in Alaska
1. Sales taxes are more regressive than income taxes
hitting poorer families hardest
2. Sales taxes creates complication with the over 100
municipalities with current local sales taxes.
3. Regional price disparities would disproportionally
hurt rural residents if a sales tax is put in place.
4. The burden on non-residents is different:
1. Income tax: Visiting Workers tax on wages
and earnings generally not subject to income tax in
their resident state;
2. Sales tax: Tourists - placing a competitive
disadvantage on tourist industry's marketing efforts.
6:15:23 PM
REPRESENTATIVE GALVIN referred to a graph on slide 8 from an
Institute on Taxation and Economic Policy (ITEP) study on the
regressive nature of a sales tax. She described the visual,
which showed how generating $500 million with a sales tax versus
an income tax would impact tax payers based on their economic
status. She recognized that the figures in the graph were
slightly different than the ones purposed in HB 156, but the
general idea of the visual remained the same, and she opined
that from the figures in the graph "taking 212 percent from the
poorest Alaskans affects their lives far more than taking an
extra 2.8 percent from the highest earning Alaskans."
6:16:39 PM
REPRESENTATIVE GALVIN explained the visuals on slide 9 and said
there are many models for income taxes. Once a model has been
chosen, she relayed that it can be further tweaked by changing
the "gears" within the model depending on the desired function
of the tax model.
6:17:03 PM
REPRESENTATIVE GALVIN described the variety of income types that
could be included in an income tax on slide 10, which read as
follows [original punctuation provided]:
Wages, salaries
Retirement income
IRA, pension, annuities, Social Security
Business income
Sole proprietorship, Partnerships (LLC, Limited
partnerships, S-corporations)
Investment income
Capital gains, Dividends, Interest
Other
PFD, Unemployment, Farm
6:17:25 PM
REPRESENTATIVE GALVIN reported that most states build their
income tax off of the federal tax system to simplify the choices
and the impact on taxpayers. Using a visual on slide 11, she
explained the federal tax process and how it has been used to
inform state income tax calculations. She gave three options
for identifying income that are derived from the federal tax
process and provided an explanation of each. The options were
using the Adjusted Gross Income (AGI); using the Federal Taxable
Income; or using the Federal Taxes Due.
6:18:33 PM
REPRESENTATIVE GALVIN moved to slide 12 to show which structural
options for an income tax she chose for HB 156. She started by
explaining her decision to use the federal AGI, because that was
what most states used. She explained that she went with a
standard deduction model, because being able to set the
deduction at a certain amount helped her create a proposal that
would garner maximum support, both from the public and within
the legislature, which she believed was an important part in the
success of the bill. Between the choices of a flat tax rate or
a graduated tax rate, she reported that HB 156 included a flat
tax rate with an additional $20 head tax. She stated her belief
that this combination of tax rate and head tax would create a
heightened sense that all taxpayers were stakeholders in Alaska.
6:20:25 PM
REPRESENTATIVE GALVIN returned to the topic of support for HB
156 on slide 13, which read as follows [original punctuation
provided]:
This version is responsive to what I'm hearing from
other legislators
In discussions with others in the building, it seems a
lighter income tax take is needed to attain passage
This lighter version would need to be paired with more
revenue from other sources (e.g. Oil Tax Reform and/or
greater PFD reduction) to create a sustainable fiscal
plan (not my preferred outcome, but a compromise that
could gain the votes needed to pass)
6:20:53 PM
REPRESENTATIVE GALVIN continued to slide 14, which included a
bar chart showing the current tax structure purposed in HB 156.
She first explained the $20 per person head tax by stating that
every person or family making less than $200,000 annually would
pay only the $20 tax. She further explained that the flat rate
of 2 percent would only be applied to taxpayers that have an
income above $200,000, and only the amount above $200,000 would
be taxed. The $20 head tax would also be applied to the total
amount, and she referred to the bar chart to give specific
examples.
6:22:01 PM
REPRESENTATIVE GALVIN spoke about the technical provisions of HB
156 on slide 15, which read as follows [original punctuation
provided] :
Tax paid by nonresidents on income earned in the state
Tax is paid by Alaska residents on all their income
regardless of where earned
A credit is given for income taxes paid to other
states for income earned in that state(so no double
taxing of income)
Tax also applies to income earned by trusts and
estates, not on their asset value
Detailed provisions to establish what income is "from
a source in the state"
Employer withholding from wages with periodic payments
from employers to the state
Employers send employees annual wage statement similar
to the federal W-2
Annual tax returns due same day as federal return
Department of Revenue to establish regulations to
provide further details
Income tax exempted from general DOR requirement to
file electronically
Most state income tax payments are deductible from
federal taxes for those who itemize; thus a portion of
taxes paid will be saved due to reduced payments to
the IRS
6:24:22 PM
REPRESENTATIVE MCCABE referred to an earlier comment he believed
Representative Galvin had made that "nonresident income tax
would raise more money than a sales tax."
REPRESENTATIVE GALVIN stated that she did not remember saying
that, and it was not her intention to imply as such.
REPRESENTATIVE MCCABE emphasized that taxing nonresidents would
not create more revenue than a broad-based sales tax and
referenced FPWG findings from the previous legislature.
REPRESENTATIVE GALVIN reiterated that she had not intended to
compare a sales tax and an income tax on nonresidents based on
their revenue generation, but rather on their impact to
taxpayers. She explained that Alaska residents who live in
communities that already have a municipal sales tax would feel
especially burdened by an additional statewide sales tax. In
comparison, she shared her belief that nonresident workers would
not feel as burdened by an income tax, as the proposed 2 percent
was much lower than what they might experience in other states,
and she added that a rate as low as this would not deter out-of-
state workers from coming to Alaska.
6:26:41 PM
CHAIR CARPENTER inferred that the revenue specifics of the bill
would be addressed later in the presentation.
REPRESENTATIVE GALVIN confirmed Chair Carpenter's statement.
REPRESENTATIVE MCCABE referenced that HB 156 uses the federal
AGI model and questioned whether the $200,000 deductible was
based on individual or total household income.
6:27:05 PM
REPRESENTATIVE GALVIN confirmed that it depends on how they file
their federal tax returns. She stated that for most people it
would be very simple.
REPRESENTATIVE MCCABE posed a hypothetical situation in which a
married couple each made $199,000 and sought confirmation that
it would be better to file separately in this case.
REPRESENTATIVE GALVIN agreed with Representative McCabe's
assumption, and referred to an upcoming slide that discusses
this as one area of HB 156 that will need a fix.
6:28:29 PM
REPRESENTATIVE GRAY referred to a point made on slide 15
regarding credits for Alaskan residents who work outside of the
state and pay income tax to that other state. He asked whether
the income tax would be applied to all nonresident workers, no
matter what.
REPRESENTATIVE GALVIN repeated that no matter what, the Alaskan
income tax would apply to nonresidents.
6:29:20 PM
CHAIR CARPENTER clarified that it would apply assuming the
nonresident made over $200,000.
REPRESENTATIVE GALVIN replied yes. She shared her understanding
that there are a couple of sectors where there may be exceptions
but deferred to other experts for that information.
6:29:51 PM
REPRESENTATIVE GALVIN continued with her presentation on slide
17, which read as follows [original punctuation provided]:
86% of Alaskans will have no paperwork associated with
this tax
They will just see a $20 reduction note on their
first paycheck of the year
The 14% who will pay the 2% tax will likely use the
same tax preparation method they currently use for
their federal taxes (i.e. Turbo Tax, CPA, etc.)
Some taxpayers can choose to pay their income tax as a
reduction of their PFD
6:31:06 PM
REPRESENTATIVE GALVIN moved onto a discussion about possible
amendments to HB 156, starting on slide 18, which read as
follows [original punctuation provided]:
The $200K deduction limits the impact of the income
tax to about 14% of Alaska income earners
A $50K standard deduction would limit the impact to
50% of Alaska income earners
REPRESENTATIVE GALVIN additionally referred to a graphic on the
slide that showed estimated revenue generated by the two
different deduction limits and stated that if HB 156 was amended
to use a $50,000 standard deduction instead, they could expect
revenue of $240 million.
6:32:03 PM
REPRESENTATIVE GALVIN explained adjusting the head tax as
another possible amendment on slide 19, which read as follows
[original punctuation provided]:
The $20 per person head tax is estimated to raise
approximately $10.5M
If the head tax were $100 per person it would raise
$52.5M
The current bill makes the head tax in addition to the
income tax; it could [be] a minimum paid only if you
don't pay any income tax (i.e. your income
is less than $200K)
REPRESENTATIVE GALVIN suggested that raising the head tax may
significantly affect lower-income households, but that she has
heard opinions that $20 was not enough, and wanted the committee
to have an idea of what changing the head tax could do to the
estimated revenue.
6:32:56 PM
REPRESENTATIVE GALVIN continued to slide 20 which showed a
graphic categorizing the public comments she had received. She
reported that the majority were in support of HB 156 and that it
was "the will of the people" for Alaska to institute a state
income tax based on the HB 156 model.
6:33:50 PM
REPRESENTATIVE GALVIN concluded the presentation on slide 21,
which read as follows [original punctuation provided]:
A sustainable fiscal plan for Alaska should include a
broad-based tax
An income tax is preferable to a sales tax for a
variety of reasons
HB156 can serve as a useful component to a sustainable
fiscal plan
I am open to work with the House Ways and Means
Committee to amend HB156 to fit the preferences of the
committee members
6:34:38 PM
REPRESENTATIVE GALVIN reported that she had an appendix of
additional slides that provided further context to the issue of
an income tax. For the sake of not repeating information that
the committee may already have, she wrapped up her presentation
and stated she was available for any questions.
6:35:11 PM
CHAIR CARPENTER asked to go over the fiscal note before
answering specific questions.
REPRESENTATIVE GALVIN replied yes and offered a reading of the
sectional analysis as well.
CHAIR CARPENTER confirmed he would like to hear both. He asked
if Mr. Spanos from the Department of Revenue (DOR) was available
to explain the fiscal note.
6:35:53 PM
The committee took a brief at-ease.
6:37:14 PM
BRANDON SPANOS, Deputy Director, Tax Division, Division of
Revenue (DOR), introduced himself for the record.
CHAIR CARPENTER requested that Mr. Spanos go over the fiscal
note for HB 156.
MR. SPANOS reported that DOR estimates that revenue would be
$120 million for FY25, the first full year of implementation.
He revealed that there was a possibility that some of that
revenue might be shifted to FY26 due to quarterly payment plans.
Impact by household will vary widely, which he explained was due
to the proportional nature of the proposed tax model. He also
mentioned that some impact will be mitigated by the deduction of
state taxes from federal taxes, which will affect taxpayers that
chose to itemize their taxes. He explained that DOR based the
HB 156 model on aggregated federal income data for Alaskan
residents, and that they expect an income tax on non-residents
will raise Alaska's AGI by approximately 5 percent. This was a
net income estimate based on the total nonresident income minus
the income of Alaskan earned elsewhere. He emphasized that the
model does not account for population growth, inflation, or
economic impacts from the income tax itself. He mentioned that
the model was adjusted for the standard deduction and the
Permanent Fund Dividend (PDF) exemption, and that although the
bill projects that there will be changes in taxpayer behavior in
regard to how families file, the model does not adjust for these
changes. He moved on to discuss the cost of implementation,
which he reported would be steep due to the robust nature of the
proposed broad-based tax. There would be a 12-month minimum
implementation process at an estimated cost of $9.5 million,
which he said would include working with DOR's current outside
contractor to add an income tax module to the existing tax
revenue management system (TRMS). These modules would also
include software to prevent identify theft in relation to filing
tax returns, which he described as standard practice. He
posited that there would be a low rate of scamming due to the
high deductible of this model. After implementation, an
estimated $2.25 million in support and maintenance would be
required through FY 25 but would decrease to $1.5 million from
FY 26 onward. He explained that implementing an income tax
module would be a multi-year process, beginning with
establishing a tax withholding system and DOR regulations
surrounding the income tax by January 1, 2025. HB 156 would
allow taxpayers to use their PFD to pay their income tax,
necessitating the addition of interfacing capabilities between
DOR's and the Permanent Fund Dividend Division's systems. He
listed additional costs of implementation that were included in
the fiscal note, such as travel for outreach to Alaskan
businesses, and additional programming for integration with
national tax services. He reported that the second phase would
be DOR staff, in concert with the outside contractor, building
the following: the tax return itself, the online filing
component, examination modules, and communication between the
existing accounting, imaging, and collection systems. He noted
that there was an exemption for electronic filing in HB 156 and
that DOR's imaging system allows processing of paper returns.
The state has seen great success with online filing in the past,
and he hoped they would be able to move towards more online
filing with the new model, increasing taxpayer compliance. The
legislation would create an annual tax starting January 2026, to
be filed by April 2026. He spoke further on the return
structure for the income tax and reported that HB 156 would
generate 400,000 plus returns. Although only taxpayers with
incomes over $200,000 would be taxed, he shared DOR's
understanding that all residents and nonresidents would have a
filing obligation as well for the purpose of reporting their
incomes. In order to estimate costs for implementation, he
reported that DOR communicated with tax administrators Montana
and Vermont, due to their comparable population to Alaska. DOR
used a per capita based adjustment of the number of staff those
states utilize to come up with an estimate of staff needed for
implementation in Alaska, and due to a list of factors, such as
lack of experience and an anticipated high call volume, the
department recommended that Alaska employ 70 people, which was
the higher end of the estimate. These new staff would be split
between the offices in Anchorage and Juneau, but he added that
the department would continue to look for ways to increase
automation and improve efficiency in administration. He
reported that the state currently processes a much smaller
number of paper returns than what they estimate for the new tax
model, and this would require a larger staff in their imaging
department. He explained the travel costs, which are for public
education efforts and for training staff across the state in the
tax management system. There will also be additional services
costs, which he reported reflect internal core services, such as
rent for additional office spaces and further costs for their
contractor. He ended his analysis of the fiscal note with
noting that it included a breakdown of the 70 employees DOR
anticipates adding on.
CHAIR CARPENTER questioned whether the state was required to use
FAST as the contractors for the programming, or whether the
process of including an income tax allow the project to go to an
open bid.
MR. SPANOS replied that since the state already has a contract
with FAST they would only go to a public bid if the state was
interested in looking into using a new program. He opined that
staying with the current program and having FAST create a new
module for the income tax would be more efficient than going to
a completely new program for just the income tax. He referenced
refenced that the program has been integrated across
departments. He emphasized that although the state would be
able to create a separate system for an income or sales tax, he
believed it would be less efficient than staying with one
program across the board.
6:51:22 PM
REPRESENTATIVE MCCABE inquired about the 62,100 nonresident
employees estimated to work in Alaska, and asked whether there
would be staff specifically hired to manage those tax returns.
He opined on the various taxes required to be filed by those
taxpayers and guessed that they would require extra management.
MR. SPANOS answered that DOR did not break down the cost between
a resident or nonresident return. From an administrative
perspective, he said "a return is a return." He referenced the
breakdown between resident and nonresident in HB 156 as
necessary to establish whether a state has the authority to tax
someone. He did not believe that there was enough difference
between a resident versus a nonresident return to make one cost
more than the other, and offered the necessary information for
calculating how much exactly processing just nonresident returns
would be.
REPRESENTATIVE MCCABE questioned whether the FAST program
included tax filing reciprocity between states automatically.
MR. SPANOS replied that many are done by the multi state tax
commission, but they can also be processed state by state. He
said the department already has reciprocal tax agreements for
the state's corporate income tax, so they would continue to use
the multi state tax commission or deal with each state
separately. He added that they do not typically share returns
with other states directly from their systems, but rather export
a file share with the Internal Revenue Service (IRS) or other
states.
6:55:15 PM
REPRESENTATIVE TILTON referenced the portion of the fiscal note
that budgeted money for integrating the Permanent Fund Dividend
Division systems with the DOR tax systems to allow taxpayers to
use their dividend to pay their income tax. She questioned
whether this amount would also cover proposed changes to the PFD
application or whether those would require a separate fiscal
note.
MR. SPANOS relayed that he had not discussed that particular
issue with the division recently, but that he had discussed how
it would be done with them in relation to previous iterations of
this bill. He inferred that the large fiscal note
Representative Tilton was referring to might be relating to
moving the whole division. He assured the committee that the
programming changes covered by the fiscal note for HB 156 would
be quite small, as it would not require moving the entire
division, but rather creating a way for the division to report
to the DOR which taxpayers have decided to use their PFD for
their income tax and facilitating the transfer of that money.
He assumed that DOR would be absorbing as much of FAST
contractor's costs themselves, but that there could be a
possibility that the division would need to put some of their
own funds towards that.
REPRESENTATIVE TILTON stated that the bill she was referencing
was not the bill about moving divisions that Mr. Spanos
mentioned. She clarified that she was speaking about a bill
that would allow PFD recipients to give their PFD back to the
state's general fund.
6:58:25 PM
REPRESENTATIVE GROH expressed how impressed he was by the
content of HB 156. He said he was struck by a graphic in the
presentation that stated, "Alaskans would pay less in an income
tax over a sales tax," and asked for Representative Galvin's
opinion on why many Alaskans seem to prefer a sales tax over an
income tax when they would end up paying more.
REPRESENTATIVE GALVIN hypothesized that it might be a lack of
understanding and that taxpayers may be thinking of sales tax in
the small, daily increments they pay and not be considering how
much they spend in a full year. She referred the question to
economist Gunnar Knapp, who would be able to speak more about
common patterns of thinking around taxes.
7:01:01 PM
CHAIR CARPENTER reminded the committee that they are speaking at
large about a comprehensive fiscal plan and to keep revenue
comparisons in mind. He stated that the estimated revenue from
a previously proposed state sales tax was $900 million, while in
comparison HB 156 would generate about $120 million. He
inferred that these two options would have very different
impacts due in part to the amount of revenue they are
generating.
REPRESENTATIVE GALVIN agreed that there was a large discrepancy
between the two amounts of revenue generation and reiterated
that changing the "levers" of the bill, such as implementing a 5
percent instead of a 2 percent tax, could get the revenue
generation of HB 156 closer $900 million. She also posited that
there could be confusion among the public about the differing
fiscal plans that may be affecting their support of the
legislation.
CHAIR CARPENTER asked Mr. Knapp if he could provide insight on
the tax behaviors of Alaskans as it pertains to the two
different broad-based tax plans.
7:02z:45 PM
GUNNAR KNAPP, Professor Emeritus of Economics, University of
Alaska Anchorage, Institute of Social and Economic Research,
replied that he did not know the answer to Representative Groh's
earlier question. He confirmed that he had heard the sentiment
about lower income taxpayers that even though they'd pay less in
the income tax, would prefer a sales tax, presuming an income
tax would be raising the same amount as a sales tax. However,
he did not know where that idea comes from.
REPRESENTATIVE GROH suggested that many Alaskans think that the
alternative to a broad-based tax would be "painless budget cuts"
and referenced discussions on the House Floor to support his
claim that "this isn't the case." Another alternative he
mentioned was the toll system currently in place across many of
Alaska's highways. He asked Professor Knapp and Representative
Galvin to discuss taxpayers' perceptions about alternatives to a
state-wide income or sales tax.
REPRESENTATIVE GALVIN replied that there may be a lack of
awareness [from the public] on the size of the state's budget
deficit. She inferred that there are also decisions waiting to
be made within [the legislature] about how much money they want
to dedicate to "filling the hole." The answer to this question,
she said, depends on the direction [the legislature's] wants to
go with the state and which services and issues will take
priority. As far as options for creating revenue, she stated
that most Alaskans did not understand how much of a hole oil and
gas was filling. She provided a breakdown of the state's
current revenue streams, stating that oil and gas made up a
third, another third comes from the savings earned on the
Permanent Fund, and last third was attributed to smaller state
fees and taxes, such as licenses and the cigarette tax. She
related that some Alaskans she had spoken to thought the tax on
marijuana was going to solve the revenue issue, but she reported
that it brought in only $50 million, much of which was held for
specific purposes. She suggested that this amount was not
sufficient to fix the "hundreds of millions" [budget deficit]
that Alaska faces. She shared her belief that [Alaskans] have
"a shared responsibility to come up with an answer." An income
tax would create "a lot of stakeholders who understand that they
put money from their hard-earned paycheck into [the state],"
which she felt would force the government to have a higher
accountability for the services they provide. She recognized
that there are different ways that revenue could be generated,
but reemphasized her belief that although a lot of revenue could
be generated through a sales tax, it may not be the best way
forward for the state due to its regressive nature. She noted
the three biggest expenditures were the PFD, education, and
health services and that building a bigger sense of ownership
within the public of Alaska's spending decisions was crucial.
7:10:32 PM
MR. KNAPP added that it was a broad question, but at the core of
the issue there are government services that every state has to
provide and there has to be a way to pay for them. The most
common way to pay for those state services was with a broad-
based income or sales tax, and he stated that almost every state
besides Alaska has implemented one, if not both. He opined that
Alaska has been fortune for the last 40 years to levels of oil
and PFD revenue high enough to make a broad-based tax
unnecessary. However, he reported that the current decline in
oil revenue has made Alaska face the hard reality that paying
for government services and PFD's that Alaskans have become
accustomed to will require a new revenue source. Unless the
state decided to cut the budget or the amount of the PFD, which
he suggested was something the government was unable or
unwilling to do, a broad-based tax was the only way to make up
the loss in revenue. He agreed with Representative Galvin's
sentiment that a broad-based tax increases citizen engagement in
the government.
7:13:36 PM
REPRESENTATIVE TILTON referred to slide 17 regarding the bill's
promise of no additional paperwork for Alaskans by removing the
$20 head tax from the taxpayer's first paycheck of the year.
She posited that the burden to pay the first tax would then fall
to the employer, and asked for clarification on how the process
would work.
REPRESENTATIVE GALVIN referred the question to Mr. Spanos due to
its technical nature.
7:15:02 PM
MR. SPANOS confirmed that there was a component in the bill to
withhold the $20, so it would be the employer's responsibility
to remit this tax. He added that in the case of a taxpayer with
multiple jobs, an employer would have to rely on the employee to
disclose if they have already received their first paycheck of
the year from a different employer. He suggested that there
would be two options for the DOR to regulate this. The
regulation could require the employer to withhold the $20 head
tax for every new employee and the taxpayer would need to file a
return to get a refund if they had the $20 withheld from
multiple jobs. Alternatively, the regulation could state that
an employee would sign an affidavit upon being hired in which
they disclose whether or not they have had the $20 withheld that
year. He spoke on the benefits of each option, stating that the
first regulation would generate more revenue and would be easier
for the Tax Division to administer, and the second regulation
would be less burden on the taxpayer, especially if they have
multiple job changes during the year.
REPRESENTATIVE TILTON questioned how tax disputes would be
resolved between employers and employees.
7:17:29 PM
REPRESENTATIVE GALVIN deferred the question to Alexi Painter.
CHAIR CARPENTER asked Mr. Spanos if he could answer the
question.
7:17:45 PM
MR. SPANOS replied that the state has not dealt with this issue
before, so it would require some brainstorming from the DOR. He
reported that at the federal level, the dispute was handled by
the employer. Employees fill out a W-4 form at the beginning of
employment, which then dictates how much would be withheld, and
an employee would bring any issues with too much or too little
being withheld directly to their employer. He did not imagine
the Tax Division getting involved in these disputes.
REPRESENTATIVE TILTON redirected her question to disputes
specific to the $20 reduction note on the paycheck, and in the
case that an employee never has the $20 withheld, asked how the
liability dispute would be addressed.
7:20:11 PM
REPRESENTATIVE GALVIN deferred the question again to Mr. Painter
but reiterated that her intention was to lessen the paperwork
burden on the taxpayer and would be happy to work with the
various state departments to make that happen.
CHAIR CARPENTER interjected that it was an interesting question
since there are many people who work multiple jobs, and
questioned how disparate employers would discern whether they
were the first to withhold the $20.
7:20:44 PM
ALEXEI PAINTER, Director, Legislative Finance Division, added
that there have been past bills that included head taxes that
were implemented through the Department of Labor & Workforce
Development (DLWD) since they already have the structure in
place due to the unemployment tax. However, DLWD was not
equipped to handle the same process for an income tax, and he
suggested that splitting the model in HB 158 into two separate
taxes would allow the head tax to be administered through the
existing DLWD structure and then use the proposed structure in
HB 158 to apply to the income tax. He said that there could be
some efficiencies for employers from this course of action,
since they already use the DLWD system for the unemployment tax.
CHAIR CARPENTER sought to clarify whether the bill would
implement two different taxes through two separate departments,
DLWD and DOR, who would be responsible for identifying how the
State would collect the money.
MR. PAINTER explained that currently the bill puts all of the
tax management on DOR. He said that he had suggested separating
the head tax as an option the legislature could take to reduce
the amount of work for employers. He added that an income tax
would still create a filing obligation for individuals.
7:23:08 PM
REPRESENTATIVE TILTON inquired about a potential fiscal note
from DLWD if the tax was split up.
MR. PAINTER answered yes; however, he was unsure whether the
fiscal notes would show that involving DLWD would create enough
efficiencies for there to be a net savings for the State.
7:24:01 PM
REPRESENTATIVE MCCABE referred to Representative Galvin's
earlier statement that she was proposing an income tax in part
because she and others in the legislature feel that it was less
regressive than a sales tax for lower income workers. However,
he referenced the executive summary of the Institute of Social
and Economic Research (ISER) report which stated that PFD cuts
are more impactful to that population and that the effects of an
income tax on all Alaskans would be more than a sales tax. He
quoted directly from the ISER study to say that the difference
in impact comes from tourists and nonresident workers paying up
to 10 percent of all revenue from a sales tax versus 7 percent
from an income tax. He posited that this information may be
why Alaskans "instinctively know that a sales tax is actually
less regressive than an income tax."
CHAIR CARPENTER asked Representative McCabe to name the study
and page numbers he was referencing for the public.
REPRESENTATIVE MCCABE replied that the study was entitled
"Short-run Economic Impacts of Alaska Fiscal Options" by Gunnar
Knapp, Mathew Berman, and Mouhcine Guettabi from ISER on March
30, 2016. He reported he was referencing the executive summary
on pages 1 and 2.
7:26:50 PM
REPRESENTATIVE GALVIN asked for Mr. Knapp to speak more about
this study and specifically how regressive an income tax was in
comparison to PFD cuts.
CHAIR CARPENTER asked Mr. Knapp to speak to the ISER study as
one of the authors.
7:27:43 PM
MR. KNAPP acknowledged that there are two separate issues. The
first was comparing the different methods for filling the fiscal
gap for how regressive they are. He explained that cutting the
amount of a PFD was highly regressive because the amount taken
away from a person's yearly income with a PFD cut would be a
much higher percentage for a low-income individual than it would
be for someone with a higher income. He stated that data shows
that a sales tax would also be more regressive in comparison to
an income tax. He suggested that the various forms of filling
the fiscal gap will have different impacts on Alaskans, and who
will be impacted was important to consider when coming up with
the right balance of revenue measures. The second question
relates to getting money out of non-residents, which he
emphasized was an important but different question. He reported
that the study accounted for sales and income taxes raise
revenue from nonresidents, just in different ways. He explained
that a sales tax would include revenue from tourists and
nonresident workers, and an income tax would only collect
revenue from non-resident workers. He shared that his study did
suggest the state may get more revenue from non-residents
through a sales tax. However, he opined that the most important
factor should not be the amount that will be raised from non-
residents, but rather what the tax burden will be on Alaskans.
REPRESENTATIVE MCCABE referenced table 2.2 on page IIV of the
report, which shows the difference in revenue generated from
non-residents between a 2.5 percent income tax and a 3 percent
sales tax, and he described this difference as huge. He
emphasized that Alaskans instinctively understood that this
amount is significant. He further implied that the focus on an
income tax as the least regressive option may be overlooking the
"high regressivity" of [reducing] PFDs.
7:33:46 PM
CHAIR CARPENTER reminded members that they are talking about one
particular bill and how it could be part of a larger fiscal
plan.
REPRESENTATIVE GALVIN responded by agreeing that PFD reductions
are the most regressive thing the legislature could do, which is
why she proposed an income tax that would minimize the need to
reduce PFDs. She restated that the proposed model allowed for
adjustments to be made by "pulling levers" to increase revenue
if desired. As the bill stood, it included a $200,000 "floor"
that she agreed may not make as much as the sales tax. She
pointed out that the amount of revenue brought in by
nonresidents does not affect the regressivity of a tax on
Alaskans and referred to the remarks made by Knapp and Spanos.
She reported that Alaskans have expressed that people who come
out of state to work the highest paying jobs in Alaska should be
contributing in some way. Putting the proper systems in place
to ensure Alaskans are getting those jobs instead is her
ultimate goal, but she stressed that in order to get there the
state needs a stable fiscal plan that does not depend on the
volatile prices of the oil industry.
CHAIR CARPENTER asked the committee to consider whether their
goal was to raise revenue or to promote economic growth. He
stated that the regressivity of a tax was a good measure if the
goal is revenue, but other measures should be looked at if the
goal is economic growth.
7:37:50 PM
REPRESENTATIVE GROH expressed "his excitement" over his
interpretation of Representative McCabe's previous statement,
suggesting that Representative McCabe would be joining his
efforts in raising rail taxes in order to avoid cutting PFDs.
REPRESENTATIVE MCCABE opined that Representative Groh's comment
was uncalled for.
REPRESENTATIVE GROH asked Representative Galvin and Professor
Knapp to state their ideal role for HB 156 to play in an overall
fiscal fix. He further requested that they give a concise
explanation that would help the committee and the Alaskan public
understand.
7:39:06 PM
REPRESENTATIVE GALVIN shared that she views HB 156 as the
starting point to consider a fiscal plan that includes looking
at more factors than regressivity, raising revenue, having
state-wide accountability for that revenue, and keeping Alaskans
in Alaska without driving them further into poverty.
MR. KNAPP agreed that this bill would be a starting point for
the State to look at a broad-based tax as a way to generate
revenue. He stated that as other forms of revenue prove to not
be enough, the proposed income tax was a way for Alaskans to
"start helping to pay for what they receive" from State
government, which is the status quo in almost all other states.
7:41:17 PM
CHAIR CARPENTER asked whether the information on slide 8
represented what the bill does.
REPRESENTATIVE GALVIN replied no, the graphic on slide 8 did not
represent the bill at all. Instead, she stated, it was a "broad
stroke" comparison between two broad-base revenue measures and
how each would impact Alaskans across various levels of income.
CHAIR CARPENTER sought to confirm that Representative Galvin's
explanation of slide 8 showed what an income tax would look like
for all categories of earners.
REPRESENTATIVE GALVIN said yes. She circled back to the topic
of regressivity and gave an anecdotal example of a family of
four that makes $31,000. In order for the state to raise $500
million, it would require a $2,400 overall cut to that family's
PFDs, which she expressed was exceptionally regressive and why
the state needed to look at other ways to raise that money.
7:43:07 PM
REPRESENTATIVE ALLARD stated that a family of four making
$31,000 would already on several state services and receiving
aide in the form of food stamps. She inferred that a family in
those circumstances would not be purchasing high priced items,
like a car, which would incur a high sales tax, and then
questioned whether a sales tax would actually be as regressive
to lower income Alaskans as the graphic on slide 8 depicted.
REPRESENTATIVE GALVIN replied that all families buy goods, and
the sales tax would apply to all goods. She reiterated that it
is relatively more of a burden to pay a sales tax to lower
income families.
REPRESENTATIVE ALLARD emphasized the use of the word
"relatively."
REPRESENTATIVE GALVIN said that all taxpayers would feel a
burden from a sales tax, but a millionaire would feel that
burden relatively less than a lower income person.
REPRESENTATIVE ALLARD mentioned the nonresidents working in
Alaska and posited that they are doing so because there are
Alaskans who are unable or unwilling to do those jobs. She
wondered whether imposing a tax on those out of state workers
would "scare them off," leaving a hole in the job market Alaska
is unable to fill.
REPRESENTATIVE GALVIN responded by comparing tax rates across
the country. She reported that Alaska would have a 5.8 percent
combined state and local tax rate, and the state with the next
lowest has 7 percent. She guessed that the low tax rate
combined with the natural beauty of Alaska would be a selling
point for sought after professionals like engineers. She
emphasized that she wanted to see Alaskans in those jobs and
that [the legislature] should work toward that.
REPRESENTATIVE ALLARD opined that Alaskans have chosen to not
take those jobs which is why they have to be filled by
nonresidents and that making money was the appeal for those
workers, as being in Barrow or Prudhoe Bay in the winter may not
be "the dream gig." She expressed concern about the $200,000
deduction creating a situation where "the 20 percent" would pay
for "the 80 percent" and that this would be discriminatory to
high income earners. She included dual military families among
those who may be impacted. She concluded that an income tax
with this model would not be a sound fiscal plan.
7:47:26 PM
REPRESENTATIVE GRAY quoted former Alaska Governor Jay Hammond's
thoughts on the repeal of Alaska's income tax in the 1980's,
which stated that removing the tax would severe the connection
between "the citizens pocketbook" and the state's budget,
reducing the total revenue and eliminating the primary
"restraint on government spending". He suggested that
heightened government spending had come to pass and asked how
the proposed $20 head tax may work toward keeping state spending
in check.
REPRESENTATIVE GALVIN noted that there is not recent data on
taxes to pull from in Alaska but referenced studies that have
been done in other countries around the benefits of an income
tax that aligned with the thoughts of Governor Hammond. She
stressed that even if the state decided to choose another broad-
based tax over an income tax, taxpayers are still going to be
taxed, which she identified as a common misunderstanding. A
family of four may spend thousands of dollars annually "buying
stuff" all of which would be subject to a sales tax. In regard
to the fiscal plan as a whole, she wanted the committee to
question which [tax mechanisms] are going to keep Alaskans
engaged in the process. If the legislature decides to use
broad-based taxes as one of those mechanisms, she asked that
they consider the close to 50 percent of Alaskan families make
$50,000 or less and how different aspects of a tax will affect
them. She reminded the committee that the $20 head tax would be
enough to pay for implementing the tax plan set forth in HB 156
and the 2 percent tax would all be additional revenue. She
emphasized that it is not a bill intended to "pick at people"
but was what she believed to be an easily implemental plan that
can start the discussion on how Alaskans will handle the shared
fiscal responsibility.
7:51:18 PM
MR. KNAPP added that Alaska used to have head tax dedicated to
schools which was also deducted from first paycheck. He stated
that Governor Hammond's idea that public contribution to the
government increases the value of services they expect in
exchange was still relevant today. He pointed out that every
tax has flaws associated with it and the administration of the
tax will dictate the economic impacts, but neither an income or
a sales tax is "the ideal solution". Regardless of which tax
was used, he emphasized the importance of thinking carefully
about the "levers" within them. He reiterated that the
essential difference between the two types of taxes will be who
bears the most burden from the tax. He reinforced the idea that
the tax model can be adjusted by maneuvering the "levers" within
it to fit different standards.
CHAIR CARPENTER asked Mr. Knapp to expand on how a person's
income dictates who creates business and economic growth and who
acts on their entrepreneurial spirit.
MR. KNAPP spoke on the many different elements of economic
growth. He mentioned that there are economic growth
implications for both income taxes and sales taxes, and although
there is an assumption that an income tax is bad for economic
growth, the answer to that question is very complex.
CHAIR CARPENTER commented that perhaps his question was too
specific, as it had not been directly addressed.
7:56:11 PM
REPRESENTATIVE TILTON referred to slide 10, which listed the
various types of income that could be considered in an income
tax and asked which income sources would be considered in HB
156. Additionally, she asked whether taxpayers that were
getting income exclusively from sources other than employment
would be required to pay the head tax.
REPRESENTATIVE GALVIN replied that the income considered taxable
was defined in the bill and listed several examples, including
salaries, business ownership or partnership, and ownership of s-
corp. She also noted a possible amendment to remove social
security as taxable. She asked for clarification on
Representative Tilton's second question.
REPRESENTATIVE TILTON restated her question on the head tax by
confirming that the head tax would be taken out of the first
paycheck of actively working taxpayers, and then asking about
folks whose income does not come from employment but is still
considered taxable. She questioned whether these people would
have to pay the $20 head tax and how the state would go about
collecting it.
REPRESENTATIVE GALVIN answered yes, they would need to pay the
head tax. All taxpayers will still need to file their taxes,
even when they are no longer receiving actual paychecks. She
explained that there were several ways for the taxpayer to make
the payment once they have filed their taxes.
8:00:02 PM
REPRESENTATIVE MCKAY made comments on previous parts of the
discussion, including how hirable Alaskans are and that the PFD
was the current string between citizens and state spending. He
continued by providing information from his experience in the
oil industry in regard to the taxable incomes list on slide 10,
and insisted it needed to be vetted. He expressed his
particular concern with taxing s-corporations as all of the oil
and gas operations in Cook Inlet are s-corporations. He quoted
data from the Department of Natural Resources (DNR) to explain
how much oil needed to be produced to provide for the state and
how much money it costs to drill the oil wells for this
production. He cautioned that further taxing these corporations
could prevent them from continuing their work in Alaska, leading
to huge losses of jobs and potentially running out of gas, and
that the list of taxable income should be thoroughly vetted to
avoid such unseen consequences.
REPRESENTATIVE GALVIN agreed that including s-corporations on
the list of taxable income was misleading, and she had to
question herself in the making on HB 156 whether it would be
closing the "s-loop." She answered that no, the income tax only
applies to the owner of an s-corporation making income above
$200,000. She further clarified that this bill would tax
individuals and not corporations, and that the types of
businesses listed were included because if the person who owns
that business makes more than $200,000, the amount above
$200,000 would be taxed at 2 percent. She assured the committee
that she had asked the same questions about the implications of
the bill because tax law is complicated, and the intent is not
to scare people away from the state. She returned to Chair
Carpenter's earlier question about economic growth and agreed
that was very important and inferred that regressivity plays an
important role in economic growth because consumption is a big
economic driver. Taking money directly from the poorest Alaskans
will impact consumption. She wrapped up her comments by
mentioning Warren Buffet's theories on middle-income workers and
how this bill can be one tool to help reach the goal of a
vibrant economy with Alaskans all prospering.
8:06:24 PM
CHAIR CARPENTER announced that HB 156 would be held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0156A.PDF |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB 156-Sponsor Statement.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB 156-Section Analysis.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Revenue Forecast 2023.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| ITEP Alaska Fiscal Solutions 4.10.21.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB156-Fiscal Note.pdf |
HW&M 4/17/2023 6:00:00 PM |
HB 156 |
| 2021_Fiscal_Policy_Working_Group-Final_Rep.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| ITEP_Alaska-Distribution-Analysis-2020.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Matthew Berman_ADN_2023April.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| Telling_The_Story_Of_Taxes_In_Alaska.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |
| HB156-Emailed_Comments.pdf |
HW&M 4/17/2023 6:00:00 PM |
HB 156 |
| HB 156-Initial Presentation-Final2 4-17-23.pdf |
HW&M 4/17/2023 6:00:00 PM HW&M 2/26/2024 6:00:00 PM |
HB 156 |