Legislature(2003 - 2004)

04/16/2003 07:00 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 236-EMPLOYMENT TAX FOR EDUCATION                                                                                           
[Contains discussion pertaining to SB 137, the companion bill.]                                                                 
CO-CHAIR  WHITAKER 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."                                                                               
Number 0120                                                                                                                     
REPRESENTATIVE  WILSON, sponsor  of  HB 236,  told members  she'd                                                               
brought the  bill forward because  of the state's  current fiscal                                                               
situation.  There are no stable  sources of revenue in the state;                                                               
the Constitutional  Budget Reserve (CBR) is  almost depleted; the                                                               
state's fixed  expenses such as insurance,  fuel costs, Medicare,                                                               
Medicaid, and  so forth  keep increasing;  and the  population is                                                               
growing  rapidly.    When  the  economy  is  down,  there  is  an                                                               
increased need for services.   She said this leaves two practical                                                               
answers:   cut more from  the budget or  find a stable  source of                                                               
revenue.    Thus  HB  236   establishes  an  employment  tax  for                                                               
education; its companion bill in the Senate is SB 137.                                                                          
REPRESENTATIVE  WILSON, calling  this a  work in  progress, noted                                                               
that she'd requested  a legal opinion from  Legislative Legal and                                                               
Research Services as  to whether the proceeds  could be dedicated                                                               
based on  precedent.  She  reported that  there was a  school tax                                                               
prior to  statehood, but  it was  repealed in  1980; in  1962 the                                                               
proceeds were paid  into the general fund.   She said Legislative                                                               
Legal  and Research  Services told  her that  the new  school tax                                                               
could not  go into  a dedicated fund,  but the  legislature could                                                               
create a special  account within the general fund  to receive the                                                               
proceeds and  would then be  able to appropriate the  proceeds to                                                               
education and better keep track  of the amount collected.  Noting                                                               
that the Department  of Revenue had many questions  about how the                                                               
money would be collected and so  forth, she offered to go through                                                               
the bill section by section.                                                                                                    
Number 0417                                                                                                                     
CO-CHAIR HAWKER moved to adopt  the proposed committee substitute                                                               
(CS),  Version  23-LS0921\H, Kurtz,  4/14/03,  as  a work  draft.                                                               
There being no objection, Version H was before the committee.                                                                   
Number 0437                                                                                                                     
REPRESENTATIVE  WILSON explained  that  Section 1  creates a  new                                                               
chapter in  Title 43  that imposes  an employment  tax of  $100 a                                                               
year  on  each   individual  19  years  or   older  who  receives                                                               
compensation  of  at least  $1,000.    It requires  employers  to                                                               
withhold the tax  from the employee's paycheck; a  return must be                                                               
filed [by  the employer], who  sends the money to  the Department                                                               
of  Revenue.   A  provision  deals  with  whether the  amount  is                                                               
deducted from two  or more paychecks, which she  said spreads the                                                               
impact for  low-income people and  deals with paychecks  that are                                                               
less than  $50.  Section  1 also  makes employers liable  for the                                                               
tax unless there is proof provided  by the employer - in the form                                                               
of a paycheck stub, for instance  - that the tax already has been                                                               
withheld.   In order  to include  the self-employed,  it requires                                                               
individuals  who are  subject to  the tax  but haven't  had taxes                                                               
withheld by an employer to file a return.                                                                                       
REPRESENTATIVE WILSON  noted that Section 1  permits employees to                                                               
claim  a  refund from  the  state  if  there was  an  overpayment                                                               
because the  employee was  unable to prove  to the  employer that                                                               
the money was withheld already;  she said the department believes                                                               
this  is the  most effective  manner to  deal with  overpayments.                                                               
This section  also requires the  money collected to  be deposited                                                               
into  the general  fund (GF)  and accounted  for separately.   It                                                               
permits  the   legislature  to   appropriate  the   proceeds  for                                                               
education, and  defines the tax year  as July 1 through  June 30,                                                               
the state's fiscal year.                                                                                                        
Number 0704                                                                                                                     
REPRESENTATIVE  WILSON   discussed  Section  2,   the  transition                                                               
provision.   The  initial tax  is to  be remitted  and [a  return                                                               
filed] before  the 15th day of  the fourth month that  the tax is                                                               
in effect.  This is so  employers don't have to file every single                                                               
time  they [deduct  money], she  said, thus  reducing the  filing                                                               
frequency for small employers.   Furthermore, the timeframe gives                                                               
the department  and the  taxpayers more time  to prepare  for the                                                               
tax, simplifying  filing, and  improving customer  service during                                                               
the start-up phase.  Section 3 provides for an effective date.                                                                  
Number 0900                                                                                                                     
REPRESENTATIVE WEYHRAUCH asked whether this  tax would be owed by                                                               
an individual who  is self-employed, has a  business license, has                                                               
a simple LLC  [limited liability company], has  no employees, and                                                               
earns a couple of thousand dollars a year.                                                                                      
REPRESENTATIVE WILSON replied yes,  under proposed Sec. 43.45.021                                                               
[page 2, lines 16-18, subsection (d)].                                                                                          
Number 1008                                                                                                                     
REPRESENTATIVE  WEYHRAUCH  asked  whether  it is  a  function  of                                                               
employment or compensation,  and then surmised that  a person who                                                               
receives more than $1,000 and is over the age of 19 would pay.                                                                  
REPRESENTATIVE WILSON affirmed that.                                                                                            
REPRESENTATIVE WEYHRAUCH  asked whether the education  tax is the                                                               
way it was in the old statute, repealed in approximately 1981.                                                                  
REPRESENTATIVE WILSON said yes.                                                                                                 
REPRESENTATIVE WEYHRAUCH asked  why, if the intent is  to use the                                                               
funds  for education,  the [bill's]  title  doesn't say  so.   He                                                               
surmised that it is a "legislative sentiment."                                                                                  
REPRESENTATIVE WILSON said  she didn't know whether  it should be                                                               
in the title.                                                                                                                   
Number 1145                                                                                                                     
CO-CHAIR HAWKER offered his experience  that most payroll systems                                                               
are designed on a calendar-year  basis consistent with income tax                                                               
reporting  requirements of  the Internal  Revenue Service  (IRS),                                                               
whereas  this bill  uses [the  state's]  fiscal year.   He  asked                                                               
whether  Representative  Wilson  is  comfortable  that  business,                                                               
computer,  accounting,  and  reporting  systems  can  accommodate                                                               
multiple  tax years.   He  also asked  whether the  mechanism for                                                               
refunds is consistent  with the current mechanism  for refunds of                                                               
overpayments of ESC [Employment Security Contribution] taxes.                                                                   
REPRESENTATIVE  WILSON  said  [the  mechanism in  the  bill]  was                                                               
recommended by  the Department of  Revenue.  She deferred  to Mr.                                                               
Persily for further response.                                                                                                   
Number 1348                                                                                                                     
LARRY  PERSILY,  Deputy   Commissioner,  Department  of  Revenue,                                                               
indicated he would present his  testimony first.  Noting that the                                                               
original  bill  version  used  the calendar  year  of  January  1                                                               
through December 31, he pointed out  that Version H is similar to                                                               
the committee substitute  for SB 137 in [the  Senate], which uses                                                               
July 1 [as  the beginning of the year] and  has an effective date                                                               
of July  1, 2003.   Mr. Persily  told members that  although this                                                               
starting  date  doesn't  give  the   department  much  time,  the                                                               
department believes this date can be met.                                                                                       
MR.  PERSILY offered  to prepare  a fiscal  note [for  Version H]                                                               
either when the bill moves out  of committee or while it is under                                                               
consideration, and  said the  department would  have to  spend "a                                                               
fair  amount of  money fairly  quickly," depending  on when  this                                                               
bill  passes  this  session.    He estimated  a  need  for  about                                                               
$900,000 as a  "supplemental" for fiscal year 2003  (FY 03), with                                                               
a lapse  date to carry  into FY  04, and offered  the expectation                                                               
that a  lot of  the work would  be contracted out  to set  up the                                                               
program, a  web site, interaction  with employers,  and outreach.                                                               
He said  employers will need  withholding information by  June in                                                               
order to  set this  up for  their first payroll  in July.   Other                                                               
than that,  the fiscal note  would be  fairly similar to  the one                                                               
for  the original  HB 236.   He  emphasized that  with Version H,                                                               
funds  would be  needed  this year  to get  started  so that  the                                                               
program runs  well in FY  04 and there  is a full  realization of                                                               
the estimated $39 million a year in revenue.                                                                                    
Number 1623                                                                                                                     
CO-CHAIR HAWKER  asked about the ability  to accommodate multiple                                                               
tax  years  and  whether  there has  been  any  communication  or                                                               
concurrence with  industry, employers,  or vendors  of accounting                                                               
and payroll software in this regard.                                                                                            
MR.  PERSILY acknowledged  that  this is  a  little unusual,  but                                                               
offered his  belief that it wouldn't  be a problem to  change the                                                               
software settings to  recognize July 1 as the  [beginning of the]                                                               
fiscal  year, just  as the  state does.   He  suggested a  bigger                                                               
problem for employers might be  getting into the habit of closing                                                               
out the  fiscal year for their  employees on June 30;  this might                                                               
take a couple of years to get used to.                                                                                          
CO-CHAIR  HAWKER inquired  about communications  with vendors  or                                                               
people  who  write their  own  payroll  packages or  market  them                                                               
MR.  PERSILY, in  response to  this and  further questions,  said                                                               
there  have been  conversations with  "a couple,"  and the  first                                                               
reaction was that July 1  was unusual, but could be accommodated.                                                               
Existing systems can  handle it, but a change  would be necessary                                                               
because most have January 1 as a  default.  "But the ones we have                                                               
talked to  didn't believe it  would be an  insurmountable problem                                                               
to change  that date," he added.   "They would just  like as much                                                               
notice as possible."                                                                                                            
Number 1821                                                                                                                     
REPRESENTATIVE WILSON  explained that many e-mails  were received                                                               
from people  who didn't want the  money taken out of  their first                                                               
two paychecks  of the  year, right after  they'd spent  all their                                                               
money on  Christmas.   She said,  however, that  she was  open to                                                               
putting it back to January 1.                                                                                                   
Number 1943                                                                                                                     
REPRESENTATIVE  SAMUELS   asked  whether  someone  who   has  two                                                               
different  seasonal jobs  would  have to  go  through the  refund                                                               
process [if  too much  money had been  withheld] or  could he/she                                                               
stop the tax from being taken out [by the second employer].                                                                     
MR.  PERSILY highlighted  the provision  for  showing the  second                                                               
employer that the  tax has been paid, by showing  a pay stub, for                                                               
example.   If  it  were taken  out twice,  the  process would  be                                                               
similar to the way unemployment  taxes are refunded; for those, a                                                               
person fills out a form and sends  it in to request a refund.  If                                                               
an  employer  or  employee  made  a  mistake  and  there  was  an                                                               
overpayment, forms  would be available  [at the  department's web                                                               
site] and the person could file for and receive a timely refund.                                                                
Number 2014                                                                                                                     
REPRESENTATIVE GRUENBERG asked about  people who have substantial                                                               
income from investments.                                                                                                        
REPRESENTATIVE WILSON  answered that  this is  [a tax]  on people                                                               
who work,  not on money earned  from a portfolio.   She suggested                                                               
that  people  [with  investment   income]  may  be  retired,  for                                                               
REPRESENTATIVE  GRUENBERG  asked  whether it  was  Representative                                                               
Wilson's  specific  intent  not  to include  those  people  [with                                                               
investment income], no  matter how much money they  make.  [There                                                               
was no audible response.]                                                                                                       
Number 2102                                                                                                                     
REPRESENTATIVE  WEYHRAUCH  asked  whether   there  had  been  any                                                               
brainstorming  about whether  the tax  could be  deducted from  a                                                               
permanent fund dividend (PFD) check.                                                                                            
REPRESENTATIVE  WILSON said  it had  come up.   Reiterating  that                                                               
this is a work in progress, she said she is open to suggestions.                                                                
Number 2139                                                                                                                     
REPRESENTATIVE GRUENBERG  surmised that  this would  "catch" some                                                               
people who  earn money in the  state but aren't eligible  for the                                                               
PFD.  He asked whether that was the intent as well.                                                                             
REPRESENTATIVE WILSON answered in the  affirmative.  She said she                                                               
wanted to  be able to collect  from people who come  to Alaska to                                                               
work and  make a  good income,  perhaps during  summer or  on the                                                               
North Slope,  and then leave;  these people wouldn't  be included                                                               
if this were  just connected to PFD checks.   She said 25 percent                                                               
of the people who work in Alaska aren't residents.                                                                              
Number 2231                                                                                                                     
MR. PERSILY brought attention to  a problem with withholding $100                                                               
from the PFD.   If it is assumed that someone  will receive a PFD                                                               
and there  is no withholding  of wages,  the person may  later be                                                               
deemed ineligible for  a PDF because of  residency, child support                                                               
[owed],  or prison  time.   Meanwhile, the  opportunity may  have                                                               
been lost to withhold wages  during the summer, for example, when                                                               
people often  are able to  find jobs.   Mr. Persily  told members                                                               
that  the  department has  tried  to  keep  the fiscal  note  for                                                               
operations as small as possible.   He suggested it makes sense to                                                               
use  payroll  withholding  as  a mechanism  or,  for  people  who                                                               
receive  compensation but  not wages,  to have  them "self-report                                                               
and self-pay."                                                                                                                  
Number 2341                                                                                                                     
CO-CHAIR  WHITAKER assigned  a subcommittee  to  meet and  report                                                               
back the next week with a  proposed CS.  He named Representatives                                                               
Weyhrauch, Gruenberg, and Hawker  as members, with Representative                                                               
Hawker   chairing;   he    asked   that   Representative   Wilson                                                               
[HB 236 was held over.]                                                                                                         

Document Name Date/Time Subjects