Legislature(2003 - 2004)

03/03/2004 07:05 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 493-LONG TERM FISCAL PLAN                                                                                                  
Number 0109                                                                                                                     
CHAIR HAWKER announced  that the only order of  business would be                                                               
HOUSE BILL NO. 493, "An Act  relating to adoption and revision of                                                               
a long-term fiscal plan for the State of Alaska."                                                                               
CHAIR HAWKER reviewed past discussions  of HB 493 and stated that                                                               
today's meeting  is for the  purpose of discussing  corporate tax                                                               
structures  and the  corporate revenue  component of  the state's                                                               
general revenue system.                                                                                                         
Number 0339                                                                                                                     
CHUCK   HARLAMERT,  Juneau   Section  Chief,   Tax  Division   of                                                               
Administrative Services, Department  of Revenue (DOR), introduced                                                               
CHAIR HAWKER thanked Mr. Harlamert  for preparing information for                                                               
today's session.  He asked Mr.  Harlamert to address the issue of                                                               
corporate tax  structures and how  it ties into  how corporations                                                               
are currently contributing to the state's treasury.                                                                             
MR. HARLAMERT presented general  outlines of the corporate income                                                               
structure  in  Alaska   and  the  effects  of   changes  to  that                                                               
structure.   [He  referred  to the  Alaska  Corporate Income  Tax                                                               
Primer,  a  handout in  the  committee's  packet, throughout  his                                                               
presentation.]    He  began  by  explaining  the  basic  two-part                                                               
incidence for corporate income tax, as follows:                                                                                 
     You have  to be  a corporation,  and by  that I  mean a                                                                    
     corporation  for  federal  tax  purposes,  essentially,                                                                    
     which means you can be  a traditional C-corp or you can                                                                    
     be another entity treated as  a corporation for federal                                                                    
     tax purposes.   The second  incidence - or  component -                                                                    
     of being subject to the  Alaska corporate income tax is                                                                    
     that you do business in the state.                                                                                         
Number 0548                                                                                                                     
CHAIR  HAWKER  asked  Mr.  Harlamert   if  he  would  explain  C-                                                               
corporations and S-corporations.                                                                                                
MR. HARLARMERT explained that any  incorporated entity is a legal                                                               
corporation,   but   for    federal   tax   purposes,   qualified                                                               
corporations, those  with less  than 75  individual shareholders,                                                               
may  elect  to,   under  Subchapter  S,  be  treated   as  an  S-                                                               
corporation.    Subchapter  S  is  Internal  Revenue  Code  (IRC)                                                               
Section 1362, he added.  A  corporation that makes a Subchapter S                                                               
election  is  treated  like  a   partnership,  unlike  a  regular                                                               
corporation that  is itself  a taxpayer.   It passes  through its                                                               
earnings to shareholders who, as  individuals, pay taxes on those                                                               
Number 0721                                                                                                                     
CHAIR HAWKER pointed  out that a C-corp is a  corporation that is                                                               
organized under Subchapter  C of the IRC, and is  a separate tax-                                                               
paying  entity.   If it  gives dividends,  the shareholders  have                                                               
their own tax  consequences, he explained.  However,  some of the                                                               
IRC codes  allow some corporate  structures to elect to  be taxed                                                               
in another manner  that avoids taxation at the  entity level, but                                                               
passes  all  of   the  potential  tax  consequences   on  to  the                                                               
individual   shareholders.     Those   are   S-corps  and   other                                                               
contemporary corporate structures.                                                                                              
MR. HARLAMERT responded that S-corps  have been around for a long                                                               
time,  and  the new  vehicle  for  tax  planning is  the  limited                                                               
liability company (LLC).                                                                                                        
MR.  HARLAMERT referred  to the  matrix  on page  2, which  shows                                                               
various business  entities: C-corps, S-corps,  partnerships, LLCs                                                               
with  multiple  members,  LLCs  with  single  members,  and  sole                                                               
proprietorships.   He  pointed  out that  for  tax purposes,  the                                                               
single member LLC is completely ignored.                                                                                        
Number 0936                                                                                                                     
CHAIR  HAWKER asked  for further  clarification of  LLCs and  how                                                               
they differ from C-corps.                                                                                                       
MR. HARLAMERT  explained that LLCs  are another form  of business                                                               
entity allowed under  state law, which have  members with related                                                               
interests in the equity and profits  of the enterprise.  They are                                                               
flexible and  don't fall  under the  traditional definition  of a                                                               
corporation  or   partnership  because  they  have   the  limited                                                               
liability  of  a corporation,  but  not  the same  organizational                                                               
CHAIR  HAWKER  added  that  LLC   stands  for  limited  liability                                                               
company, not corporation, because the  entity has a liability and                                                               
the  individual  shareholders  can  be  isolated  from  corporate                                                               
liability.  The  advantage of a LLC, as opposed  to a corporation                                                               
where there are  individual shares of stock that  can be classed,                                                               
but  have equal  rights and  equal claims  on the  assets of  the                                                               
corporation,  is that  it  can  be used  very  flexibly to  allow                                                               
disproportionate  allocations  and   distributions  to  different                                                               
classes  of  "members", not  shareholders.    He called  LLCs  "a                                                               
creature of  contemporary tax law."   He said it is  important to                                                               
keep an eye on LLCs because of the tax choice available to it.                                                                  
Number 1212                                                                                                                     
MR.  HARLAMERT  reviewed  the  status  of  the  various  business                                                               
entities and their federal income tax status.  He said that C-                                                                  
corps are  themselves a taxpayer  and are responsible for  tax on                                                               
their earnings directly.  An  S-corps passes its earnings through                                                               
to  its shareholders  who  pay the  tax  directly.   Partnerships                                                               
follow  the same  pass-through treatment  whereby  the income  is                                                               
passed through proportionally to its  partners.  An LLC can elect                                                               
any of those  treatments so it is  hard to tell by  looking at it                                                               
what its tax  status is, he remarked, and whatever  an LLC elects                                                               
would control state taxation.                                                                                                   
REPRESENTATIVE WEYHRAUCH  inquired if  the S-corp is  required to                                                               
pass all  of its earnings  on to the shareholders,  under federal                                                               
MR. HARLAMERT replied both S-corps  and partnerships are required                                                               
to pass 100  percent of their taxable earnings  each year through                                                               
their shareholders.                                                                                                             
REPRESENTATIVE WEYHRAUCH  asked if a  C-corp could also  pass its                                                               
earnings out to either its employees or its shareholders.                                                                       
MR. HARLAMERT remarked that that  it could, but the difference is                                                               
that earnings of  a C-corp get distributed  in taxable dividends.                                                               
Dividends to individuals are taxable  100 percent; [dividends to]                                                               
corporate shareholders  may not be  taxable at all.   The biggest                                                               
difference is that [dividends] are  not taxed to the owners until                                                               
distributed, and then they are double taxed.                                                                                    
REPRESENTATIVE  WEYHRAUCH wondered  at  what point  the State  of                                                               
Alaska could  obtain any of  those funds from  a C-corp or  an S-                                                               
corp for its treasury.                                                                                                          
Number 1503                                                                                                                     
MR. HARLAMERT  responded that the  state would  collect corporate                                                               
income taxes  from the C-corporation  every year when it  makes a                                                               
profit,  and it  is indifferent  as  to when  it distributes  the                                                               
profits  to  shareholders.   The  S-corporation  would never  pay                                                               
state tax, and neither do their shareholders.                                                                                   
REPRESENTATIVE WEYHRAUCH said,  "So we've got a  C-corp that does                                                               
pay some tax  to the state, we've got an  S-corporation that does                                                               
not pay tax to the state -- now an LLC?"                                                                                        
MR. HARLAMERT  responded, "An  LLC may or  may not,  depending on                                                               
how they  elected it.   If they made  the federal election  to be                                                               
treated as a C-corp ...."                                                                                                       
Number 1612                                                                                                                     
REPRESENTATIVE WEYHRAUCH said,  "We may be looking  at whether to                                                               
increase the tax  on the C-corp, if  at all, to impose  tax on an                                                               
S-corporation,  if at  all, because  it's not  taxed at  all, and                                                               
whether to impose a tax on an  LLC because it's not taxed at all.                                                               
Are those the three policy decisions?"                                                                                          
MR. HARLAMERT replied that,  in essence, Representative Weyhrauch                                                               
is right, but  the way to state  it would be to  say, "The policy                                                               
decisions, if they're  being entertained, are to  tax S-corps and                                                               
partnerships,  and  by  virtue   of  taxing  those  two  business                                                               
entities, you will indirectly reach every LLC."                                                                                 
REPRESENTATIVE WEYHRAUCH  asked if  LLCs are  being looked  at in                                                               
two ways, as an S-corp and as a single-owner LLC.                                                                               
MR.  HARLAMERT  replied,  "Yes,  you   could  just  tax  all  the                                                               
Number 1725                                                                                                                     
REPRESENTATIVE GRUENBERG  asked if  any states or  localities tax                                                               
S-corps or LLCs that elect to be treated as S-corps?                                                                            
MR.  HARLAMERT answered  that most  states  tax business  profits                                                               
through  a  corporate  income  tax  and,  mirroring  the  federal                                                               
government,  have  an income  tax  that  picks up  anything  that                                                               
doesn't flow through the corporate income tax.                                                                                  
REPRESENTATIVE GRUENBERG said that was not his question.                                                                        
MR.  HARLAMERT  said  there  are   some  states  that  don't  tax                                                               
individuals, but do tax business entities directly.                                                                             
REPRESENTATIVE GRUENBERG  indicated that when he  has traveled to                                                               
conferences on  business taxation,  the main  issue seemed  to be                                                               
nexus.  He asked if that is the main issue today.                                                                               
MR. HARLAMERT said that is a significant issue nationwide.                                                                      
REPRESENTATIVE  GRUENBERG asked  Mr. Harlamert  if he  intends to                                                               
spend any time on that issue today.                                                                                             
CHAIR HAWKER replied, "We certainly do."                                                                                        
Number 1858                                                                                                                     
REPRESENTATIVE  WILSON said  when she  looks at  this issue,  she                                                               
realizes  that many  corporations in  Alaska are  set up  so that                                                               
they can get away from taxes.   She asked what effect a tax would                                                               
have on those businesses, the town they're in, and the state.                                                                   
CHAIR  HAWKER clarified  that corporations  are taxed  in Alaska;                                                               
it's individuals that are not taxed.                                                                                            
REPRESENTATIVE  WILSON wondered  what  the  ramifications to  the                                                               
state would  be if the  businesses that are currently  not paying                                                               
taxes  were to  begin  paying them.   She  wondered  how big  the                                                               
ramification would be.                                                                                                          
CHAIR  HAWKER asked  for Representative  Wilson's indulgence  and                                                               
replied that the question would be answered shortly.                                                                            
Number 2045                                                                                                                     
REPRESENTATIVE SAMUELS  asked if,  under federal income  tax, the                                                               
C-corps are the only ones that  paid tax on the same money twice;                                                               
they  pay  the  corporate  income   tax,  and  then  there  is  a                                                               
distribution to the  shareholders who pay an income  tax on those                                                               
earnings.  He asked if that is a fair statement.                                                                                
MR. HARLAMERT replied that it is a fair statement.                                                                              
REPRESENTATIVE SAMUELS then asked,  "Other than the oil industry,                                                               
how  does someone  like Wal-Mart  pay a  corporate income  tax in                                                               
Alaska?  Do  they have to show  costs and sales in  Alaska, or do                                                               
you take a percentage of their sales nationwide?"                                                                               
CHAIR  HAWKER said  he believes  Representative Samuels  is about                                                               
one page ahead of [the  testimony].  Chair Hawker recognized that                                                               
Representative Rokeberg had  arrived.  He asked  Mr. Harlamert to                                                               
address the topic of sole proprietors and how they are taxed.                                                                   
MR.    HARLAMERT   explained    that    sole   proprietors    are                                                               
unincorporated,   or   unorganized,    businesses   operated   by                                                               
individuals who pay tax on their profits.                                                                                       
Number 2235                                                                                                                     
CHAIR HAWKER referred back to the  chart on Alaska tax status and                                                               
asked  Mr.  Harlamert whether  sole  proprietors  are subject  to                                                               
Alaska corporate income tax (CIT) and the owners subject to CIT.                                                                
MR. HARLAMERT  pointed out  that the second  row [on  the chart],                                                               
the entities' Alaska tax status,  really doesn't need to be there                                                               
because the  IRS code is adopted  [for them] and the  federal tax                                                               
status controls [them] under Alaska law.                                                                                        
MR. HARLAMERT  continued to  explain that  in row  three, C-corps                                                               
are  the  primary  taxpayer  subject  to  CIT.    S-corporations,                                                               
technically are taxpayers, but because  the incomes pass through,                                                               
they don't pay  tax, except in rare cases.   A partnership is not                                                               
a corporation  and the entity itself  is not subject to  CIT.  An                                                               
LLC  can be  any  one of  the prior  three  [categories] for  tax                                                               
purposes, subject  to Alaska CIT,  or not, depending on  what the                                                               
company  elected to  do.   Few  of those  elect to  be taxed,  he                                                               
Number 2427                                                                                                                     
MR. HARLAMERT,  to answer the  question if owners are  subject to                                                               
Alaska CIT  due to an entity's  income or activity in  the state,                                                               
looked  at the  fourth row  of the  chart.   In general  terms, a                                                               
corporation  is  responsible  for  itself, and  not  its  owners,                                                               
unless it is  owned by another corporation and  is taxed directly                                                               
for its  business in  the state,  he explained.   S-corporations'                                                               
owners  do not  have a  state  tax consequence  because they  are                                                               
CHAIR HAWKER added  that individual owners of  a corporation that                                                               
elects taxation under  the Subchapter S rules are  not subject to                                                               
earnings realized because  they own a corporation  that elects to                                                               
be taxed.                                                                                                                       
MR. HARLAMERT  explained that  in corporations  with partnerships                                                               
both the income  and the business activity are  attributed to the                                                               
corporate owner.                                                                                                                
REPRESENTATIVE GRUENBERG  asked if a  joint venture would  be the                                                               
same as a partnership for the purposes of the chart.                                                                            
Number 2630                                                                                                                     
MR. HARLAMERT  replied that  it would.   He continued  to explain                                                               
that LLCs  that elect to  be treated as corporations  are subject                                                               
to be  taxed.  If  they elect an S-corp,  tax is irrelevant.   If                                                               
they elect a  partnership and they have a  corporate member, they                                                               
can be subject to tax.                                                                                                          
REPRESENTATIVE WILSON  asked what  most LLCs  in Alaska  elect to                                                               
MR. HARLAMERT answered  that he didn't know  exactly, but guessed                                                               
that most would  elect S-corps or partnerships so  they would not                                                               
subject  themselves  to state  tax.    Those  that are  owned  by                                                               
corporations are "indifferent" and vary a lot, he added.                                                                        
CHAIR HAWKER  asked Mr. Harlamert  to discuss rows five  and six,                                                               
when an entity  makes a distribution to its owners  and how it is                                                               
treated under federal and state statutes.                                                                                       
Number 2830                                                                                                                     
MR.  HARLAMERT began  his explanation  by addressing  C-corps, S-                                                               
corps, and partnerships.  A C-corp  pays its taxes as a taxpayer,                                                               
and  when  it   pays  a  dividend  out  of   earnings,  that  is,                                                               
essentially,  a  separate  taxable  transaction, he  said.    The                                                               
shareholder will  pay tax  on his or  her earnings.   If it  is a                                                               
corporation there are  elements of the law  that allow deductions                                                               
of all -  or a significant portion - of  those dividends in order                                                               
to  eliminate  double  or  triple  taxation.    For  S-corps,  in                                                               
general, distributions are tax free  under the theory that tax on                                                               
that  income  has   been  paid  as  it  has  been   earned.    In                                                               
partnerships, distributions  can be  taken out  to the  extent of                                                               
what has been put into the  partnership and taxed already.  There                                                               
is  no  double  taxation  at  the  federal  level  of  S-corp  or                                                               
partnership  distribution, he  summarized.   For  LLCs, again  it                                                               
depends on what the LLC has elected to be, he said.                                                                             
REPRESENTATIVE ROKEBERG inquired if it  is possible for the state                                                               
to statutorily mandate the election of an LLC into a C-corp.                                                                    
MR. HARLAMERT said he  does not believe so.  He  said he does not                                                               
think  the state  has  the authority  to  mandate any  taxpayer's                                                               
federal tax elections.   He suggested state law would  have to be                                                               
changed to do so.                                                                                                               
REPRESENTATIVE ROKEBERG  replied that Mr. Harlamert's  answer is,                                                               
"Yes, and no."                                                                                                                  
MR.  HARLAMERT  responded,  "We  would   do  it  in  an  entirely                                                               
different way."                                                                                                                 
Number 3052                                                                                                                     
CHAIR HAWKER asked  Mr. Harlamert to continue  the discussion and                                                               
to look  at some  of the  industries in the  state and  what they                                                               
have  contributed, as  well as  to look  at industries  that have                                                               
activities in more than one state.                                                                                              
MR. HARLAMERT drew the committee's  attention to the next page of                                                               
the  packet and  described it  as  a summary  of tax  liabilities                                                               
reported on tax returns received  over the last six fiscal years.                                                               
He noted  the biggest point  was that  oil and gas  are averaging                                                               
roughly 80 percent of the total.                                                                                                
CHAIR  HAWKER asked  Mr. Harlamert  to clarify  the title  of the                                                               
heading "Non-Petroleum Corporation".                                                                                            
MR. HARLAMERT  responded that that  is a misprint because  he had                                                               
the title adjusted at the last  minute to include oil and gas and                                                               
that change didn't get picked up.                                                                                               
CHAIR  HAWKER indicated  that "Non-Petroleum  Corporation" should                                                               
be deleted and it should be called "Tax Liability by Sector".                                                                   
MR. HARLAMERT replied, "Right."                                                                                                 
CHAIR  HAWKER  said,  "It  would  appear  that  we  are  somewhat                                                               
dependant on oil and gas in this state."                                                                                        
MR. HARLAMERT agreed.                                                                                                           
CHAIR  HAWKER  pointed out  that  the  first line  regarding  the                                                               
airline industry  shows a decline  [in tax liability].   He asked                                                               
Mr. Harlamert to say more about that.                                                                                           
MR. HARLAMERT said  that the bulk of that line  is actually cargo                                                               
transportation  airlines, and  the  passenger  element is  small,                                                               
spotty, and not stable in terms of profits.                                                                                     
REPRESENTATIVE GRUENBERG said what catches  his eye is the amount                                                               
of variation, by  year, in the oil and gas  industry just because                                                               
it is  such a large  number.  He  said the other  industries vary                                                               
terrifically, as well.  He wondered why they vary so much.                                                                      
MR. HARLAMERT answered that the  non-oil and gas corporate income                                                               
tax  sector does  not vary  as much  as the  oil and  gas section                                                               
does, in part, because it's made  up of 3,000 corporations out of                                                               
the  12,000 taxpayers  that pay  income tax  on a  regular basis.                                                               
The oil  and gas sector  is made up of  a much smaller  group, he                                                               
said, so  part of the difference  is due to diversification.   He                                                               
pointed  out  that  in  this  period [FY  1998  to  FY  2003]  it                                                               
fluctuated between  $41 million  and a  little over  $50 million,                                                               
which is a 20 percent change.                                                                                                   
REPRESENTATIVE GRUENBERG  remarked that  the bottom  line [Total]                                                               
in year 2001 is remarkably different from that of 2002.                                                                         
MR. HARLAMERT attributed  most of that difference to  oil and gas                                                               
corporations which are much more volatile.                                                                                      
Number 3525                                                                                                                     
DAN  DICKINSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR), in response  to the discussion [of page 3  of the handout,                                                               
Tax Liabilities by Sector], pointed out:                                                                                        
     These [figures] are the cash  payments that we received                                                                    
     from corporations  during the fiscal year.   They don't                                                                    
     represent  that year's  taxability on  a filed  return.                                                                    
     As  such, when  you  have huge  fluctuations in  prices                                                                    
     such  as we  had in  1999, what  you have  is taxpayers                                                                    
     underestimating   and  then   overestimating.     Every                                                                    
     quarter they have  to file an estimated  amount so that                                                                    
     at the  end of the  year they've made up  their correct                                                                    
     liability.   Essentially,  what  you see  is very  wide                                                                    
     swings as price swings  occur and they overestimate and                                                                    
     then underestimate, or visa versa.                                                                                         
MR. DICKINSON said  the next step would be to  look at the actual                                                               
quarterly filings.                                                                                                              
MR. HARLAMERT pointed out that  the schedule consists of reported                                                               
liabilities and does reflect the  tax liability report on the tax                                                               
return, which  does not match up  with collections.  He  said the                                                               
point that  Mr. Dickinson  is making  is absolutely  correct; the                                                               
revenues  don't match  up with  what is  reported on  tax returns                                                               
because  of the  time difference  between estimated  tax payments                                                               
and their  compounding effect when  taxes go down.   He explained                                                               
that the  chart had been  developed off of  reported liabilities.                                                               
He said, over time,  it all works out.  Revenues  tend to be more                                                               
stable, but in periods like  the last couple years of significant                                                               
decline in  corporate liabilities, the prepayments  that exist on                                                               
the books get applied to the  next year.  The decline and overall                                                               
liability is amplified by large  relative prepayments, and so the                                                               
cash  receipts can  fluctuate a  lot more  than liabilities.   He                                                               
noted that is the point Mr. Dickinson was trying to make.                                                                       
CHAIR HAWKER pointed out that footnote 1 highlights that point.                                                                 
REPRESENTATIVE WILSON asked what was actually collected.                                                                        
MR. HARLAMERT replied:                                                                                                          
     In the  non-oil and gas  for FY 03,  FY 02, and  FY 01,                                                                    
     respectively,  we collected  $48 million,  $53 million,                                                                    
     and  $59 million.   In  oil and  gas we  collected $151                                                                    
     million, $178  million, and $338  million, so if  I add                                                                    
     that  up,  I  get   $199  million,  $231  million,  and                                                                    
     approximately $390 million.   So in FY  03 we collected                                                                    
     $199  million  and  liabilities were  $258  million,  a                                                                    
     substantial difference.                                                                                                    
CHAIR HAWKER  indicated that it equals  out over time.   It has a                                                               
beginning period and  an ending period, and payments  are made at                                                               
the end  of a quarter, he  said.  He described  it as fiscal-year                                                               
accounting versus  cash-basis accounting.   He  said he  does not                                                               
want to  give the impression that  "we look at numbers  here, and                                                               
these are not being paid."                                                                                                      
Number 3931                                                                                                                     
REPRESENTATIVE WILSON wondered  why it doesn't just  say what was                                                               
MR. HARLAMERT  responded that  would be just  as valid  a number,                                                               
but  what  was collected  could  not  be  separated in  terms  of                                                               
industry.   He said it  is collected  and posted to  a taxpayer's                                                               
account after a  return is received, and  those collections don't                                                               
necessarily land in  a specific year.  There is  money on account                                                               
from  taxpayers  and  it  gets assigned  to  liabilities  as  the                                                               
returns roll in.   There is not an opportunity  to broadly assign                                                               
those  revenues,  and  it  is not  possible  to  assign  specific                                                               
receipts to industries.                                                                                                         
REPRESENTATIVE WILSON asked  if there is a benefit  for a company                                                               
to overstate or understate their liabilities.                                                                                   
Number 4055                                                                                                                     
CHAIR HAWKER asked Mr. Harlamert to discuss fraud and penalties.                                                                
MR. HARLAMERT  suggested what Representative Wilson  is referring                                                               
to is accelerating or deferring  payment, as opposed to "misstate                                                               
your liability," and said there  are requirements in the statutes                                                               
that  require taxpayers  to  pay their  estimated  tax or  suffer                                                               
penalties if they underpay it.   Typically, corporations slightly                                                               
overpay to avoid penalties.                                                                                                     
CHAIR  HAWKER requested  that Mr.  Harlamert move  on to  page 4,                                                               
which deals  with Representative  Samuel's question  about multi-                                                               
state apportionment.                                                                                                            
MR. HARLAMERT described page 4  as a very over-simplified version                                                               
of how multi-state taxation works.   Each taxpayer falls into one                                                               
of two categories;  their business is either wholly  in the state                                                               
or  it is  a  multi-state business.   He  explained:   "For  your                                                               
typical  ma-and-pop  operation, just  in  Alaska,  it's a  simple                                                               
matter  of  taking your  federal  taxable  income, making  a  few                                                               
adjustments,  applying  the  tax   rates,  and  that's  your  tax                                                               
CHAIR  HAWKER  requested a  quick  synopsis  of Alaska  corporate                                                               
income tax (CIT) structure.                                                                                                     
Number 4307                                                                                                                     
MR.  HARLAMERT explained  that  it is  based  on federal  taxable                                                               
income or what is reported on  the federal tax return.  "A series                                                               
of  adjustments  are  made  for  non-oil  and  gas  corporations,                                                               
federal interest  is removed from taxable  income, deductions for                                                               
state income tax  is added back, and that is  the Alaska tax base                                                               
on which variable  rates from 1 percent to 9.4  percent of income                                                               
over $90,000 are applied," he said.                                                                                             
MR.  HARLAMERT  pointed  out  that   a  multi-state  business  is                                                               
complicated because  the portion of  income to be  properly taxed                                                               
in Alaska has  to be determined.  A  method called apportionment,                                                               
or combined reporting,  is used, which takes the  total income of                                                               
the  business and  multiplies it  times the  Alaska apportionment                                                               
factor to come up with income subject  to tax in Alaska.  At that                                                               
point  the  tax  rates  are  applied to  calculate  the  tax,  he                                                               
Number 4437                                                                                                                     
CHAIR HAWKER  commented that determining  the "slice of  the pie"                                                               
becomes very interesting.                                                                                                       
MR.  HARLAMERT  said  the standard  method  is  the  three-factor                                                               
apportionment formula:  the ratio of  sales in Alaska  to [sales]                                                               
everywhere,  and  the ratio  of  payroll  of Alaska  compared  to                                                               
payroll everywhere, and the ratio  of Alaska property to property                                                               
everywhere.    The   average  of  those  three   factors  is  the                                                               
apportionment  factor.   He  noted a  simple  explanation on  the                                                               
bottom of page 4.                                                                                                               
CHAIR HAWKER  emphasized that  under Alaska  apportionment, equal                                                               
weighting is given to each of the factors.                                                                                      
MR. HARLAMERT said that  isn't the way it has to  be done, but is                                                               
the way it has been done in Alaska.   He pointed out that oil and                                                               
gas companies,  those who  have production or  a pipeline  in the                                                               
state, have used a modified  apportionment, which substitutes for                                                               
a payroll factor and an extraction factor.                                                                                      
Number 4624                                                                                                                     
REPRESENTATIVE SAMUELS asked if a  major corporation shows a loss                                                               
nationwide, do  they recoup in  Alaska.  He gave  an hypothetical                                                               
example; if IBM made money  in Alaska, but lost money nationwide,                                                               
Alaska would not get money from taxes.                                                                                          
MR. HARLAMERT replied that is exactly right.                                                                                    
TAPE 04-11, SIDE B                                                                                                            
Number 4640                                                                                                                     
MR. HARLAMERT continued, "The reasoning  was based on the premise                                                               
that   you  cannot   legitimately  segregate,   through  separate                                                               
accounting, the  actual earnings  or value  derived from  a given                                                               
state."    He  said  it   is  very  difficult,  acrimonious,  and                                                               
REPRESENTATIVE SAMUELS  speculated that, except for  oil and gas,                                                               
there are  no sales for  other resources.  Fishing  companies buy                                                               
the fish  here and  don't sell  any of it  elsewhere.   In timber                                                               
companies nothing gets  sold here, he said.  He  asked if that is                                                               
MR.  HARLAMERT  said  that  is  generally  correct.    Sales  are                                                               
attributed to  states based  on a  destination sales  basis where                                                               
the product is delivered to the customer.                                                                                       
CHAIR HAWKER said,  "With the sales, the transference  of risk of                                                               
ownership transfers to the buyer."                                                                                              
MR. HARLAMERT replied,  "Not necessarily.  It  can transfer here,                                                               
but be destined for another  location.  The destination principal                                                               
CHAIR  HAWKER  explained that  this  [discussion]  is leading  to                                                               
taxation  of net  income of  a  corporation or  operation.   "The                                                               
sales  factor  for  -  let's   use  the  oil  and  gas  industry,                                                               
particularly  those  people  producing   and  selling  oil  -  is                                                               
arguable  much less  than what,  in  fact, they  are selling  the                                                               
product  for  because  the  sale  occurs  outside  the  State  of                                                               
MR. HARLAMERT replied that the  sales factor is virtually nil for                                                               
most extraction  industries because  the destination of  sales is                                                               
out  of  state or,  if  there  is a  sale  in  the state,  it  is                                                               
typically an  intracompany transaction,  which is  not recognized                                                               
in the sales factor.                                                                                                            
Number 4353                                                                                                                     
MIKE  WILLIAMS,  Revenue  Auditor, Tax  Division,  Department  of                                                               
Revenue, made  an observation related to  Representative Samuel's                                                               
point about  the corporation with  the nationwide loss,  but with                                                               
income  from Alaska.   He  said, "While  it's true  we don't  get                                                               
anything in  that scenario, the reverse  is equally true.   If an                                                               
Alaska  operation loses  money, but  the corporation  makes money                                                               
nationwide, Alaska is getting revenue off of that."                                                                             
REPRESENTATIVE  SAMUELS  made  the  comment  that  [the  company]                                                               
wouldn't  do that  very  long.   He asked  about  payroll in  the                                                               
fishing  industry.   He  gave  an  example  if  he were  to  hire                                                               
everybody  [from] out-of-state,  - virtually  100 percent  of the                                                               
people that work in Representative  Moses' district come from the                                                               
Lower  48 -  he wondered  if the  payroll is  where the  check is                                                               
delivered, where the money is  earned, or where the person lives.                                                               
He also wondered  how much audit function the state  has [in that                                                               
MR. HARLAMERT replied  that the payroll factor  is assigned based                                                               
on where the wages are earned.                                                                                                  
CHAIR  HAWKER summed  up the  discussion so  far.   He asked  Mr.                                                               
Harlamert  to explain  how income  tax is  only one  component of                                                               
taxation levied on extraction industries.                                                                                       
Number 4151                                                                                                                     
MR. DICKINSON  explained that, overall,  taxes other than  in oil                                                               
and  gas  represent  under  $30  million a  year  for  all  other                                                               
extraction  industries.   He  said the  single  biggest share  of                                                               
government  "take" from  the gas  and oil  industry is  royalties                                                               
because  of the  state's  owning  the lands,  which  is about  40                                                               
percent of the  revenues.  The other 60 percent  comes from three                                                               
types  of  taxes:    a  production tax  -  a  charge  per  barrel                                                               
produced,  an income  tax,  and a  property tax  on  oil and  gas                                                               
assets.    Roughly speaking,  the  numbers  are 48  percent  from                                                               
royalties,  42 percent  from production  tax,  and the  remainder                                                               
from income and  property taxes, he said.  He  mentioned that the                                                               
production tax has  been declining rapidly over  the past several                                                               
years.   There  have been  times  that changes  in the  corporate                                                               
income  tax  were  made  to  try  to  recoup  the  loses  in  the                                                               
production tax.                                                                                                                 
CHAIR  HAWKER  pointed out  to  the  committee  that there  is  a                                                               
document in the  packet called "Alaska's Petroleum  Revenues - An                                                               
Overview", which is very informative about the previous topics.                                                                 
REPRESENTATIVE  ROKEBERG  returned  to the  destination  taxation                                                               
issue  and   asked  Mr.  Harlamert  about   timber  manufacturing                                                               
MR.  HARLAMERT said  there  would  be no  tax  paid on  exporting                                                               
timber, assuming  the company  is a  corporate taxpayer,  but, in                                                               
general,  when  exporting products  or  services,  the sales  are                                                               
attributed to the destination state,  assuming nexus is in place.                                                               
He continued:                                                                                                                   
     There  is a  special rule  if  you are  selling into  a                                                                    
     jurisdiction where  you do not  have nexus - are  not a                                                                    
     taxpayer  - that  you  throw those  sales  back to  the                                                                    
     origination  state.   In a  case of  an Alaska  company                                                                    
     that makes sales outside of  the state, tax would still                                                                    
     be collected  on 100  percent of  their income  if they                                                                    
     did not have a business  presence outside of the state,                                                                    
     but merely  made export sales.   For a company  that is                                                                    
     worldwide  and has  a presence  in  every state,  those                                                                    
     sales  are  attributed  to the  other  states  for  tax                                                                    
     purposes and dilute Alaska income.                                                                                         
Number 3620                                                                                                                     
REPRESENTATIVE ROKEBERG asked  if there is a way  to avoid paying                                                               
taxes  on those  intrastate sales,  and  if that  would create  a                                                               
barrier to  encouraging value-added  manufacturing.   He wondered                                                               
if a  major producer would  be reluctant to  sell oil or  gas for                                                               
processing in  Alaska if  they would have  a higher  incidence of                                                               
sales  in terms  of the  corporate  income tax  calculation.   He                                                               
asked  if it  would  be a  barrier and  a  disincentive to  local                                                               
MR. HARLAMERT said,  arguably, yes.  When an  oil manufacturer in                                                               
the state  makes a sale  to an unrelated  party in the  state, it                                                               
indirectly  increases their  Alaska CIT.   He  opined that  there                                                               
would  not   be  enough  sales   activity  to  make   a  material                                                               
REPRESENTATIVE ROKEBERG responded that  perhaps Mr. Harlamert was                                                               
right  when speaking  about a  large multi-national  corporation,                                                               
but it  might affect  a medium-sized  or small  company's overall                                                               
MR. HARLAMERT  said the impacts  do differ depending on  the size                                                               
of the company.   He turned to the next page as  a segue into the                                                               
choices of apportionment  factors between states.   He said there                                                               
has been  a substantial  shift away  from the  traditional three-                                                               
factor apportionment scheme  of property sales and  payroll, to a                                                               
tendency  to overweight  the sales  factor.   "The theory  behind                                                               
that is you  shift the tax away from your  in-state producers who                                                               
are  selling  out-of-state,  and  to  out-of-state  manufacturers                                                               
selling in-state."                                                                                                              
Number 3344                                                                                                                     
REPRESENTATIVE ROKEBERG  said that  works "if you're  primarily a                                                               
consumption state.   If you're  primarily a production  state, it                                                               
doesn't work."  He asked if Mr. Harlamert agrees.                                                                               
MR.  HARLAMERT said  it  is a  very good  observation  and it  is                                                               
primarily  for a  state  that  has a  significant  market and  is                                                               
trying  to  be  more  competitive relative  to  other  states  in                                                               
manufacturing.  He  referred to the next page,  Impact of Factors                                                               
Based on  Average Revenue for FY  98-FY 03, to point  out that it                                                               
doesn't work for extraction companies.                                                                                          
REPRESENTATIVE GRUENBERG  asked how to  solve the problem  of the                                                               
consumption state versus the production state.                                                                                  
Number 3226                                                                                                                     
MR. HARLAMERT explained that [Alaska]  can't compete on the basis                                                               
of overweighting  the sales factor and  benefiting manufacturers,                                                               
at  the expense  of  out-of-state manufacturers,  and coming  out                                                               
ahead.   What  [Alaska] has  done in  the modified  apportionment                                                               
scheme for  oil and  gas companies  is substitute  the extraction                                                               
factor  for the  payroll factor.   He  said he  thought it  was a                                                               
matter  of negotiation  that sales  were left  in.   He said  the                                                               
focus  is on  oil and  gas  companies because  they represent  80                                                               
percent  of  [Alaska's] revenue  and  the  exact implications  of                                                               
MR.  HARLAMERT  said the  analysis  [of  page  6] goes  over  the                                                               
impacts  of changing  the  apportionment factors.    He said  the                                                               
first column is  current law, which shows the  average factors of                                                               
the industry, with some weighting,  to get to revenues.  "They're                                                               
not the  nominal average," he  added.   The total is  the average                                                               
revenue  over the  last six  years of  $209 million  in corporate                                                               
income tax receipts.                                                                                                            
MR. HARLAMERT explained  that in column two  where the extraction                                                               
factor  is doubled  weighted,  similar to  the  way other  states                                                               
double  weight  the sales  tax  factor,  and the  average  factor                                                               
increases to  9.5 percent.  There  would be a $20  million change                                                               
in revenues, or just under 10 percent, he said.                                                                                 
MR.  HARLAMERT continued  to say  column three  shows what  would                                                               
happen if the sales factor is  eliminated.  It is the opposite of                                                               
what  most  states  are  doing,  he  said.    There  would  be  a                                                               
significant increase in  revenues.  Of the  other three examples,                                                               
single  factor   extraction  is  the  most   dramatic  change  to                                                               
industry.   The main point  is that  the sales factor  is diluted                                                               
because of the nature of the industry, he concluded.                                                                            
CHAIR  HAWKER  asked  if  that   concept  applies  to  extractive                                                               
industries in general.                                                                                                          
MR. HARLAMERT replied that he thinks so.                                                                                        
REPRESENTATIVE  ROKEBERG  returned  to his  former  question  and                                                               
asked, by eliminating  the sales factor, would  it neutralized or                                                               
enhance local sales.                                                                                                            
MR.  HARLAMERT answered  that  it would  neutralize,  or have  no                                                               
effect,  to remove  the sales  from the  calculation of  the tax.                                                               
For the  large companies it  is probably not a  consideration and                                                               
for   small  companies   it's  just   "doing  business."     "Tax                                                               
consequences  don't  control business  decisions  as  much as  we                                                               
might worry [that they do]," he added.                                                                                          
Number 2754                                                                                                                     
REPRESENTATIVE ROKEBERG  suggested that  looking further  at this                                                               
issue might be a way to create a public policy incentive.                                                                       
CHAIR HAWKER agreed  that it is a way  that apportionment factors                                                               
could be applied.                                                                                                               
MR. DICKINSON  said even medium-sized corporations  have billions                                                               
of dollars  in sales, and  there never  will be local  sales that                                                               
will approximate those larger sales.                                                                                            
CHAIR  HAWKER asked  Mr. Harlamert  to  speak about  alternatives                                                               
other states have looked at.                                                                                                    
MR.  HARLAMERT discussed  page 7,  general alternatives  that are                                                               
available to change the corporate  income tax structure.  He said                                                               
the first  one is an  estimate of the impact  on oil and  gas, as                                                               
well  as   on  other  corporate  taxpayers,   when  changing  the                                                               
corporate tax  rate by  1 percent.   The  second line  item shows                                                               
what would happen  with the elimination of  federal credits which                                                               
are apportioned  to Alaska.   Enhanced  oil recovery  credits are                                                               
awarded for activities in California,  for example, he said.  The                                                               
vast majority fall strictly on oil companies.                                                                                   
REPRESENTATIVE  GRUENBERG asked  if carbon  sequestration entered                                                               
into this as one of the credits.                                                                                                
MR. HARLAMERT  said he doesn't know.   He said the  theory behind                                                               
eliminating  federal  credits  is  that it  is  not  specific  to                                                               
activity in Alaska, although it could  be.  The natural next step                                                               
would  be  to   replace  credits  for  activity   in  Alaska,  he                                                               
predicted.  He talked about  allowing enhanced oil recovery (EOR)                                                               
credit for Alaska projects and said  it would cost the state $6.2                                                               
Number 2230                                                                                                                     
MR. HARLAMERT moved on to the  subject of taxing net capital gain                                                               
at ordinary rates  and explained that years ago,  the federal tax                                                               
code  taxed capital  gain at  favorable  rates, and  when it  was                                                               
changed, Alaska  laws did  not change with  it, but  retained the                                                               
favorable rate  that caps capital gain  at 4.5 percent.   If that                                                               
were to be changed to fall  in line with the federal treatment of                                                               
capital gain,  it would benefit the  state by about $2  million a                                                               
REPRESENTATIVE WILSON asked if most  states had adjusted [capital                                                               
gain rates] to match the federal rates.                                                                                         
MR. HARLAMERT  said he couldn't  answer that question  because so                                                               
many  states have  an independent  tax  structure, whereas  other                                                               
states adopt the federal tax law in full.                                                                                       
MR.  WILLIAMS said  there  are only  two  states which  currently                                                               
allow  an alternative  rate or  a reduced  rate on  capital gain,                                                               
Alaska and Hawaii.                                                                                                              
MR. HARLAMERT said existing law  allows restricting net operating                                                               
loss (NOL) usage to carryforwards.   It is used for a corporation                                                               
that  has incurred  a  loss, to  carrying it  back  and apply  it                                                               
against tax  on income for  three years  back, and then  carry it                                                               
forward.  Many states don't allow that, he said.                                                                                
CHAIR HAWKER asked Mr. Williams if he has statistics on that.                                                                   
MR. WILLIAMS  said he  does not have  that information  with him,                                                               
but  said he  thinks that  about  20 states  have restricted  NOL                                                               
Number 1947                                                                                                                     
MR.  HARLAMERT  pointed out  that  this  issue would  generate  a                                                               
short-term cash inflow.                                                                                                         
MR. HARLARMERT noted that a  bigger issue is taxing S-corps under                                                               
Alaska CIT which  would generate just over $29 million  a year, a                                                               
conservative estimate, he  opined.  He explained  that the status                                                               
of  corporations  could  easily  change,  so  the  estimates  are                                                               
MR.  WILLIAMS  reported  that  22   states  have  restricted  NOL                                                               
CHAIR  HAWKER  asked Mr.  Williams  about  research on  the  nine                                                               
states that  do not  have individual income  taxation.   He asked                                                               
how those  states deal  with the  entity level  tax on  the flow-                                                               
through organizations.                                                                                                          
Number 1722                                                                                                                     
MR. WILLIAMS  replied that  a couple of  states have  an outright                                                               
income tax  on those entities,  and then  there are a  few states                                                               
that have  a franchise  tax on those  entities.   Washington does                                                               
not care what type of entity  is owned, and it taxes the business                                                               
with the  Washington Business and  Occupation Tax.  Of  the other                                                               
43 states  that do have  personal income  taxes, 18 of  them also                                                               
tax  the entity  or  have some  form  of tax  on  the entity,  in                                                               
addition to the shareholders having to pay personal income tax.                                                                 
MR.  DICKINSON  referred to  a  memo  he sent  to  Representative                                                               
CHAIR  HAWKER  said  he  has  not distributed  the  memo  to  the                                                               
REPRESENTATIVE  ROKEBERG asked  about the  potential shifting  of                                                               
one business  to another  that had  been mentioned.   He  said he                                                               
believes there is  a large migration from S-corp to  LLCs at this                                                               
time.  He wondered if the  LLC was part of the S-corp calculation                                                               
[on  page 7]  versus the  partnerships and  sole proprietorships,                                                               
and  if there  were  statistics about  migration  to a  different                                                               
business formation.                                                                                                             
MR. WILLIAMS said that LLCs  are in the calculations for S-corps,                                                               
partnerships, and  sole proprietors  because they  have indicated                                                               
their  election for  federal tax  purposes.   He said  he doesn't                                                               
have data to say how many of each there are.                                                                                    
MR. HARLAMERT  said LLCs don't  have a tax status  by themselves,                                                               
but are covered under another status.   He said the tax on cruise                                                               
ship income  is the last  category [on  the chart].   He reviewed                                                               
the history of  when the DOR won a court  case against interstate                                                               
shipping  companies  that  affirmed  the right  to  tax  entities                                                               
despite  a  federal  exemption  that  exists.    The  legislature                                                               
modified the statutes to exempt  those companies from taxation by                                                               
adopting federal treatment  for them.  That  removed cruise lines                                                               
from  the corporate  tax  systems.   He said  there  are no  good                                                               
estimates for  how much this  kind of a  tax would generate.   He                                                               
said his best estimation is $6.8 million.                                                                                       
Number 1159                                                                                                                     
REPRESENTATIVE ROKEBERG  asked if  the $6.8  million is  based on                                                               
the head tax rather than a corporate tax estimate.                                                                              
MR. HARLAMERT said it is a rough  estimate of a head tax as noted                                                               
in the footnotes.                                                                                                               
REPRESENTATIVE  ROKEBERG spoke  about a  United States  Office of                                                               
Special Council  (OSG) case which  ruled that Alaska  has special                                                               
exemptions and could  abrogate federal tax code  in treaties with                                                               
over  175 countries.   Foreign  vessels, including  cruise ships,                                                               
and exporting, could not  be taxed by Alaska.  It  has had a huge                                                               
impact  on the  air cargo  industry in  Anchorage, he  said.   He                                                               
remarked  that  this  looks  like   a  handy  target  to  add  an                                                               
additional  tax burden  to,  but  said Alaska  runs  the risk  of                                                               
annulling  many  treaties  and  drawing  the  ire  of  the  State                                                               
Department, Congress, and  the United Nations.  He  said it seems                                                               
like an  easy thing  to do,  but that  it is  extremely difficult                                                               
because  of   the  international  impacts.     He  cautioned  the                                                               
committee to be careful as they look at this issue.                                                                             
CHAIR HAWKER asked  Mr. Dickinson for alternatives  to taxing the                                                               
cruise ship industry.                                                                                                           
MR.  DICKINSON replied  that DOR  has  looked at  that issue  and                                                               
worked  with the  Department of  Law  to meet  the concerns  that                                                               
Representative  Rokeberg  expressed.    He said  there  were  two                                                               
mechanisms considered.   One is  a sales tax on  certain tourist-                                                               
related classes of activity, which  two other states have already                                                               
implemented.  A  sales and use tax could be  placed on the amount                                                               
a tourist paid for the trip  to Alaska, for example, he said, and                                                               
would fully  meet legal requirements.   The second area  would be                                                               
the use of  a head tax or disembarkation tax,  which other states                                                               
currently have.                                                                                                                 
REPRESENTATIVE ROKEBERG said [those  issues] need to be discussed                                                               
further so  everyone can  "step up  to the plate  and pay  a fair                                                               
CHAIR HAWKER thanked  Mr. Harlamert for his  contributions to the                                                               
discussion of Alaska corporate income tax.                                                                                      
REPRESENTATIVE  GRUENBERG said  taxation of  the cruise  industry                                                               
has been talked  about, and asked if any states  taxed the air or                                                               
shipping cargo industry.                                                                                                        
MR. DICKINSON answered that he is not aware of any.                                                                             
REPRESENTATIVE  GRUENBERG requested  that Mr.  Dickinson research                                                               
that possibility.                                                                                                               
Number 0507                                                                                                                     
CHAIR HAWKER turned the committee's  attention to the Legislative                                                               
Finance graph ["Alaska's Growing Fiscal  Gap"] which has had some                                                               
of the known  financial issues added to it.   He pointed that the                                                               
top half  of the graph above  the zero line is  the state general                                                               
fund revenue forecast,  and below the zero line  is the projected                                                               
deficit showing what  would happen if nothing is done.   "The do-                                                               
nothing picture,"  he added.   He said one component  factored in                                                               
is a 10  percent annual increase in Medicaid, noting  that in the                                                               
past  six years  the annual  growth has  been between  17 and  18                                                               
percent.   Another  component is  the under  funding of  both the                                                               
Public  Employees' Retirement  System  (PERS)  and the  Teachers'                                                               
Retirement  System (TRS).    A  third component  is  a 2  percent                                                               
inflation  factor.   He  explained  that the  yellow  bar is  the                                                               
fiscal gap today with a $2.3  million general fund budget, and he                                                               
pointed out how the gap  grows as revenue declines without adding                                                               
the other factors in.  The  bottom four colors are the components                                                               
added in, he said.                                                                                                              
REPRESENTATIVE WILSON  responded that [the state]  would not even                                                               
be able to take care of the mandated services.                                                                                  
REPRESENTATIVE ROKEBERG said he  appreciates seeing the graph and                                                               
said it  is very  helpful.   He explained that  the FY  05 budget                                                               
numbers are  omitted on purpose so  that a graph would  not begin                                                               
to drive public  policy because the legislature is  in the middle                                                               
of negotiations.                                                                                                                
CHAIR  HAWKER said  in this  graph  the FY  05 budget  is as  the                                                               
administration has submitted it.                                                                                                
Number 0032                                                                                                                     
REPRESENTATIVE  ROKEBERG related  that the  amount of  the fiscal                                                               
gap, $476  million, makes some  assumptions as to whether  or not                                                               
some of those things  will be done.  The graph  is meant to avoid                                                               
controversy, he added.   He suggested a total column  be added, a                                                               
line item that would total the  fiscal gap and the other elements                                                               
together, titled "adjusted real projected."                                                                                     
TAPE 04-12, SIDE A                                                                                                            
Number 0001                                                                                                                     
CHAIR HAWKER offered, "The real problem."                                                                                       
REPRESENTATIVE  GRUENBERG  asked  if Representative  Rokeberg  is                                                               
talking about totaling  the factors and the fiscal  gap, and then                                                               
subtracting that sum from the general fund revenue.                                                                             
REPRESENTATIVE  ROKEBERG answered,  "So  that there  is one  line                                                               
item that would show what the total gap would be."                                                                              
CHAIR  HAWKER clarified  that Representative  Rokeberg is  asking                                                               
for a total that  is the plot point at the bottom  of each of the                                                               
vertical bars.   He emphasized  that one  of the reasons  a total                                                               
was not  done is because  the numbers are approximations,  and he                                                               
noted that  the whole  point of  the graph is  to show  the macro                                                               
perspective; this  is a large  and growing  problem.  He  said he                                                               
worries about  creating a false  precision because  these factors                                                               
are not  the only "time  bombs" in the  budget.  There  are other                                                               
issues, and other alternatives available  for the "green section"                                                               
or money available for appropriation, he emphasized.                                                                            
REPRESENTATIVE GRUENBERG suggested a horizontal total, also.                                                                    
CHAIR  HAWKER said  he  would refer  those  ideas to  Legislative                                                               
REPRESENTATIVE ROKEBERG  said that in  FY 07 there is,  above the                                                               
fiscal  gap, $305  million accumulative  added to  the structural                                                               
fiscal gap  of $265 million,  which is  $1.17 million.   The main                                                               
point [of  a total line] would  be to show the  public the higher                                                               
number.   He  said he  takes slight  exception to  Representative                                                               
Gruenberg's idea of  a horizontal total because it  would not fit                                                               
on the page,  and the cumulative effect of TRS  and PERS does not                                                               
have any meaning unless you look at the real numbers.                                                                           
CHAIR HAWKER  made the point that  the state does not  come to an                                                               
end in year FY 14.                                                                                                              
REPRESENTATIVE  OGG said  the meeting  has been  very informative                                                               
about  tax  rates.    He  pointed  out  that,  according  to  the                                                               
constitution, the earnings out of  the permanent fund go into the                                                               
general  fund.   He said  he  would like  to see  the graph  with                                                               
projected  earnings  of  the permanent  fund  under  the  present                                                               
mechanism added on.  It opined  it would be a truer reflection of                                                               
what the state's revenues actually are.                                                                                         
CHAIR HAWKER said that is a good suggestion.                                                                                    
REPRESENTATIVE  OGG  said he  is  trying  to  figure out  how  to                                                               
project  something like  that because  it is  market driven.   He                                                               
noted that  the graph is about  a ten-year spread.   He suggested                                                               
using the  last 10 years'  earnings as an example,  although past                                                               
performance is not future assurance.                                                                                            
Number 0702                                                                                                                     
CHAIR  HAWKER   said  that  is   a  number  the   permanent  fund                                                               
corporation has spent  a great deal of  time identifying; 10-year                                                               
average returns.   He noted it has  been at about 8  percent.  He                                                               
suggestion caution  because of  the question  of whether  to show                                                               
the earnings available as if they were never touched.                                                                           
REPRESENTATIVE OGG  suggested it could  be broken out as  to what                                                               
portion  has  been  used for  dividends,  state  government,  and                                                               
unrestricted earnings.   He said  it would be interesting  to see                                                               
how it would change the yellow line [on the graph].                                                                             
CHAIR HAWKER  agreed it would  be a fascinating  presentation and                                                               
said he would get Legislative Finance to help out.                                                                              
MR.  DICKINSON suggested  that if  the 8  percent permanent  fund                                                               
number is  used, it has an  inflation component built into  it of                                                               
about  3  percent, so  care  has  to be  taken  not  to built  in                                                               
inflation inconsistently.                                                                                                       
REPRESENTATIVE OGG said  the 8 percent number  would be reflected                                                               
if the  percent of  market value  (POMV) method  is adopted.   He                                                               
explained that  what he  is suggesting is  to take  what actually                                                               
happened, market-wise, over the last 10  years, and set it at the                                                               
top of  the graph for the  next 10 years.   He said it  is really                                                               
hard to  predict how the  market would affect the  permanent fund                                                               
because, under the present mechanism,  all realized earnings come                                                               
out of it.                                                                                                                      
REPRESENTATIVE  ROKEBERG   suggested  that  the   permanent  fund                                                               
corporation's  future projections  at about  7.89 percent,  which                                                               
are  more accurate,  should be  used, whereas,  in the  past, the                                                               
return on investment [ROI] was at 10 percent.                                                                                   
REPRESENTATIVE  OGG  said   he  understands  what  Representative                                                               
Rokeberg is  saying about future  projections, but  explained the                                                               
way  it  works  with  the  actual market  is  that  all  realized                                                               
earnings come out  and are put into the  earnings reserve general                                                               
fund  account.   When the  actual  market is  followed, not  many                                                               
realized earnings  came out when  the market went down,  he said.                                                               
He added that what comes out is not being averaged right now.                                                                   
Number 1108                                                                                                                     
REPRESENTATIVE  ROKEBERG replied  that he  is unclear  about what                                                               
Representative Ogg is saying.                                                                                                   
CHAIR HAWKER  pointed out that  in the committee packet  there is                                                               
also  a nexus  discussion,  which is  the "Commissioner  Briefing                                                               
Corporate   Income   Tax   Outline,  February   2003"   and   has                                                               
apportionment  details.   He  asked Mr.  Dickinson  to talk  more                                                               
about the  graph that  the committee  has been  discussing, which                                                               
was taken  from the  "Executive Summary" out  of the  [Fall 2003,                                                             
Revenue  Sources  Book,  Tax  Division,   DOR].    He  asked  Mr.                                                             
Dickinson  to  explain  the  strengths   and  weaknesses  of  the                                                               
projected fund revenue.                                                                                                         
MR. DICKINSON said, "If you look  at the non-oil and gas revenues                                                               
over  this 10-year  period, they  average $308.7  million.   They                                                               
swing from  a high  of $313  million to a  low of  $305 million."                                                               
These revenues  include corporate  income taxes, sin  taxes, tire                                                               
tax, and  car-rental tax.   The remainder  goes from FY  05, $1.4                                                               
billion, down to  FY 14, $800 million, for oil  and gas revenues.                                                               
The production tax and royalties  make up most of those revenues,                                                               
which  are driven  by the  amount  of production  and the  market                                                               
price.   A  decline curve  driven mostly  by a  yearly 8  percent                                                               
decline  in  Prudhoe  Bay  is  built into  the  graph  which  has                                                               
historically been too optimistic, he noted.                                                                                     
MR. DICKINSON spoke of the  more volatile issue, oil price, which                                                               
is of  particular concern right now.   The price of  $22 a barrel                                                               
is  significantly above  the long-term  average for  the last  15                                                               
years.  The  highest price per barrel so far  is this fiscal year                                                               
where the average  market price has been over $30.   In 1999, the                                                               
price was $12  per barrel.  He emphasized that  there was a great                                                               
deal  of volatility  in oil  price and  the departments  do their                                                               
best  to forecast  what  might happen.    "Unlike the  production                                                               
forecast, in our price analysis we  tend to be way too optimistic                                                               
when prices  are high,  and way too  pessimistic when  prices are                                                               
low," he said.                                                                                                                  
MR. DICKINSON continued  to say that on March  9 another forecast                                                               
will be  made, and he  predicts that prices will  be considerably                                                               
higher than what has  been forecast.  Even with a  price of $30 a                                                               
barrel  for  FY  04,  it  will be  necessary  to  draw  from  the                                                               
constitutional reserve fund, he concluded.                                                                                      
Number 2010                                                                                                                     
CHAIR HAWKER added that the expense  curve is not a linear curve.                                                               
He summarized  today's discussion  of HB  493 and  mentioned that                                                               
the bill needed further "wordsmithing" before it is brought back                                                                
before the committee.                                                                                                           
[HB 493 was held over.]                                                                                                         

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