Legislature(2005 - 2006)

04/15/2005 08:36 AM W&M

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 263-EMPLOYMENT TAX                                                                                                         
9:24:31 AM                                                                                                                    
CHAIR WEYHRAUCH announced that the  final order of business would                                                               
be HOUSE BILL NO. 263, "An  Act imposing a tax on employment; and                                                               
providing for an effective date."                                                                                               
CHAIR WEYHRAUCH  explained that  this legislation  reinstates the                                                               
1980 education tax  which deducted $10 annually  from the payroll                                                               
of employees 19  years old or older.  The  monies would be placed                                                               
into a  fund that  would be  held separately  for education.   He                                                               
opined  that $10  per  person is  a small  amount  of money,  and                                                               
furthermore   it  illustrates   that   people  value   education.                                                               
Essentially,  this  is  an  income  tax for  the  employed.    He                                                               
highlighted that currently  a $40 payment is imposed  on those in                                                               
rural  education attendance  areas (REAAs)  and this  legislation                                                               
exempts  them  from  paying  the  additional  $10  education  tax                                                               
proposed in HB 263.                                                                                                             
9:27:42 AM                                                                                                                    
CHUCK HARLAMERT,  Juneau Section Chief, Tax  Division, Department                                                               
of Revenue, agreed that the  proposed tax is relatively small and                                                               
broad-based and  thus it's a  relatively inefficient tax  in that                                                               
the  state  will spend  a  lot  to collect  a  little.   From  an                                                               
enforcement  point  of  view,  there   is  the  need  to  prevent                                                               
fraudulent  refund claims.   He  acknowledged that  employees are                                                               
likely to  have more than  one job during  the year and  thus may                                                               
have  this withheld  twice, which  necessitates  having a  refund                                                               
program.    Therefore,  the  choice   becomes  whether  to  track                                                               
payments  by  individuals on  an  individual  basis in  order  to                                                               
ensure a refund  claim is true.  The division  has evaluated this                                                               
before and  determined that at  the $100 level, such  tracking is                                                               
economically justified, although  it may not be  justified at the                                                               
$10 level.   Mr. Harlamert also commented that  it's difficult to                                                               
justify what would  be normal decisions regarding  the quality of                                                               
the program with a tax at this level.                                                                                           
CHAIR  WEYHRAUCH asked  if the  $750,000 in  capital expenditures                                                               
listed on the fiscal note is a one-time capital expenditure.                                                                    
MR.   HARLAMERT   answered   that  the   aforementioned   capital                                                               
expenditure would be  over the first two-three years  of the tax.                                                               
The operating expenditures usually  include maintenance costs for                                                               
systems.   The  $750,000 is  intended to  generate a  system that                                                               
efficiently captures  employee data  that allows the  division to                                                               
validate refunds.   In further  response to Chair  Weyhrauch, Mr.                                                               
Harlamert  confirmed that  after the  $750,000 is  paid out,  the                                                               
program  would require  $1.1 million  in annual  operating costs.                                                               
He also confirmed that the  estimated revenue generated from this                                                               
tax in the second year would be $3.8 million.                                                                                   
9:31:44 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  asked  if the  permanent  fund  dividend                                                               
(PFD) is included in the definition of "compensation."                                                                          
9:31:56 AM                                                                                                                    
MICHAEL WILLIAMS,  Auditor, Tax Division, Department  of Revenue,                                                               
clarified that  the PFD wouldn't  be considered income  under the                                                               
provisions of HB  263.  The forms of compensation  that are being                                                               
reviewed  typically include  wages, salaries,  bonuses, tips,  or                                                               
income  from  self-employment.     With  regard  to  the  overall                                                               
program,  the fiscal  note views  this program  as a  stand-alone                                                               
program.    He explained  that  if  HB  263  were passed  at  the                                                               
proposed  lower level  in conjunction  with a  broad-based income                                                               
tax, the additional costs wouldn't  likely be incurred because it                                                               
could be  included in  the overall  administration of  the broad-                                                               
based income  tax.  He agreed  with Mr. Harlamert that  the lower                                                               
the tax, the less efficient the  tax becomes in terms of revenues                                                               
and  costs.   Generally,  an  efficient tax  is  one  in which  a                                                               
program  operates at  under  5  percent of  the  cost of  revenue                                                               
generated.   At the $10  tax level,  the program is  operating at                                                               
roughly 33 percent cost to revenue level.                                                                                       
9:34:13 AM                                                                                                                    
CHAIR WEYHRAUCH inquired  as to the amount the tax  would have to                                                               
be in order to be minimally efficient.                                                                                          
MR. WILLIAMS  answered that  when the  tax is  $100 it  brings in                                                               
about $38  million a year, which  results in a cost  of roughly 3                                                               
percent of  the total  revenue.   He submitted  that at  the $100                                                               
level it would be a more efficient tax system.                                                                                  
9:35:27 AM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  the  division  would  envision                                                               
sending back to  the employer a card specifying  that an employee                                                               
with multiple employers could [prove]  that he or she has already                                                               
paid the tax.                                                                                                                   
MR.  HARLAMERT answered  that ideally  the division  would desire                                                               
collecting as  much of the tax  as can be withheld  and condensed                                                               
at the employer level with as  few refunds as possible.  In order                                                               
to  strike  that  balance,  the   division  would  want  to  hold                                                               
employers  responsible for  withholding,  as  far as  practically                                                               
possible.  However, the division would  provide a way in which to                                                               
administer the program  on [the state's] behalf.   Therefore, the                                                               
division would envision that the  employee would need to show the                                                               
employer a pay  stub that evidences the withholding  from a prior                                                               
REPRESENTATIVE  SEATON  surmised then  that  the  pay stub  would                                                               
include a line  item denoting the education  tax deduction rather                                                               
than utilizing  a web-based  system by  which the  employer could                                                               
access, by  using the employee's social  security number, whether                                                               
the employee has paid the tax that year.                                                                                        
MR. HARLAMERT  acknowledged that one  choice could be  to capture                                                               
and  manage  such  detailed  information  on  an  employee  every                                                               
withholding period.   The other  choice could be to  do something                                                               
similar to what  the Internal Revenue Service (IRS)  does with W-                                                               
2s  and  wage  withholding  such   that  summary  information  is                                                               
collected  at  the  end  of  the  year  for  all  the  employer's                                                               
withholding by individuals  for the year.   The aforementioned is                                                               
cheaper, but  doesn't allow real-time information  on-line during                                                               
the year.   Therefore, Mr. Harlamert  said that it's a  matter of                                                               
how much the state wants to  pay for the service because once the                                                               
data is obtained it's not expensive [to manage it].                                                                             
9:39:20 AM                                                                                                                    
LARRY  MESHKIN  stated  his  opposition  to  the  employment  tax                                                               
because in principle  it's just like an income tax.   Mr. Meshkin                                                               
related the  following quote from  Robert Nosik (ph):   "Taxation                                                               
of earnings from labor  is on a par with forced  labor."  He also                                                               
offered  quotes along  the same  sentiment  from Walter  Williams                                                               
(ph) and  Allen  Keys (ph).  Mr. Meshkin then  opined that a flat                                                               
sales  tax,  when  it's  necessary,  is the  way  to  go  because                                                               
everyone would share in paying  for state services.  Furthermore,                                                               
when  everyone's involved,  he  opined that  there  will be  more                                                               
efficiency with the use of state services.                                                                                      
9:41:27 AM                                                                                                                    
ART  CURTIS,  Co-Chair,    Alaskans for  Fair  Taxes,  said  that                                                               
taxation is  the price  everyone pays for  living in  a civilized                                                               
society.    However, he  expressed  concern  with regard  to  the                                                               
employment  tax     because  if  it's  too   small,  it's  hardly                                                               
profitable    to  collect  it,  but  if  it's  large,  it's  very                                                               
9:43:11 AM                                                                                                                    
REPRESENTATIVE  SEATON commented  that the  employment tax  would                                                               
make more sense  if it was a minimum within  a generalized income                                                               
tax.    He  recalled  that  Representative  Wilson's  income  tax                                                               
proposal  last year  incorporated  a minimum  amount  of the  tax                                                               
going into the  education trust, which seemed to make  sense.  As                                                               
a stand-alone  tax, Representative Seaton expressed  concern with                                                               
regard to its [lack] of efficiency.                                                                                             
9:44:50 AM                                                                                                                    
REPRESENTATIVE  WILSON clarified  that  her proposed  legislation                                                               
last year  incorporated a  $100 [education  tax].   She indicated                                                               
that her  proposal took  into account the  fact that  many people                                                               
don't pay anything, although they  receive a lot of services from                                                               
the  state.     Therefore,  under  her   proposal  everyone  paid                                                               
something and  the thought was  that everyone received a  PFD and                                                               
thus could afford to [pay] $100.                                                                                                
9:45:35 AM                                                                                                                    
REPRESENTATIVE  SEATON pointed  out that  Representative Wilson's                                                               
legislation included the  PFD as income, and  therefore one could                                                               
check  a  box on  the  PFD  for the  tax  to  be taken  from  it.                                                               
However, this legislation doesn't include the PFD as income.                                                                    
9:46:02 AM                                                                                                                    
REPRESENTATIVE GRUENBERG asked  if the PFD was in  place when the                                                               
proposal encompassed in HB 263 was originally instituted.                                                                       
CHAIR WEYHRAUCH replied no, and added that the income tax of the                                                                
time was repealed at about the same time [as the education tax].                                                                
REPRESENTATIVE GRUENBERG pointed out that the only folks who                                                                    
would pay this proposed tax would be employed individuals while                                                                 
those with passive income escape.                                                                                               

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