Legislature(1999 - 2000)
05/03/1999 09:10 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 67
"An Act relating to taxation, including taxation of
income of individuals, estates, and trusts; and
providing for an effective date."
The Senate Rules Committee at the request of the Governor
introduced the bill.
WILSON CONDON, Commissioner, Department of Revenue
testified. This bill was part of a package of bills that
the Governor had requested with respect to his proposal to
address the long-range financial plan the Legislature and
Governor had been focused on this session.
The Governor included a broad-based tax in his proposed
financial plan because he believed it was needed to fulfill
one of the five key principles that he urged should apply
to any long-range financial plan. That principal was to
maintain and protect a healthy permanent fund dividend.
Both Alaska families and Alaska businesses were in some
way, dependent on the continuation of a healthy permanent
fund dividend program.
Wilson Condon restated the four main elements of the
Governor's plan. One was to transfer $4 billion from the
permanent fund earnings account into the Constitutional
Budget Reserve (CBR) and use earnings from the CBR to pay
for public services. The second key was to invest the CBR
more aggressively. Third was a broad-based tax that would
raise approximately $300-350 million. Finally, for the plan
to continue, another transfer to the CBR would be needed
around 2010.
In the plan presented following the State of the Budget
address, the permanent fund dividend would average slightly
under $1500 a year over the next fifteen years. The
Governor had made it clear that he would be flexible on a
financial plan with respect to the fund in which the money
would be transferred. He was open to more aggressive
investment of the earnings and he was flexible a different
tax than what was proposed in SB 67. However, he believed
that without any additional revenue, the maximum
sustainable permanent fund dividend would be about $800-900
per year no matter how the plan was structured. To use of
the permanent fund to pay for public services and to
continue to pay dividends over $1000, there would need to
be a broad-based tax.
He did the addition to find that $60 million in additional
revenue had the effect of raising the per capita by about
$100 per person a year.
With respect to a broad-based tax, there was one other
general public policy reason that should be considered. The
Commonwealth North committee that looked at the management
of the state's financial resources, pointed out that there
was an "Alaska disconnect". That was defined as economic
development in areas other than the oil and gas industries;
such as mining, timber or investments in transportation,
were activities that made the private sector of the economy
more prosperous, but did not bring more public revenues
that paid for public services. People who moved to the
state and participated in those public service activities
required these.
Wilson Condon repeated the comment that the Governor was
willing to consider any form of broad-base tax. This could
include an income tax, sales tax, motor fuel tax, etc. The
reason Governor Knowles specifically proposed an income tax
were that it would reach out-of-state workers. Also, state
income tax was deductible on federal income tax where sales
tax was not. Finally, the income tax was progressive. It
required more from those who had the ability to pay more
and as some believed, benefited more from the public
services.
The Alaska Credit featured in the tax added to the
progressivity of the tax by making the tax rate a
percentage of the federal tax. In terms of the public
reaction to that, Wilson Condon thought it added to much
progressivity. The public reaction had been that the way
the tax was structured, too few people would pay the tax.
Therefore, the Governor was open to proposals to change the
structure of that tax so that it would address those
perceived difficulties.
A number of the people Wilson Condon talked to
misunderstood the thirty-one percent rate. They thought it
was a thirty-one percent tax rate, when it really was
thirty-one percent of one's federal income tax. His own tax
rate was twenty-eight percent on his taxable income.
Thirty-one percent of that twenty-eight equaled a rate of
taxation of 8.6 percent of his taxable income. If the
Alaska Credit feature were removed, which removed the size
of the tax base and introduced the elevated progressivity,
the tax would be lowered to 5.9 percent.
He returned to his main point that a broad-based tax of
some type was necessary if a health dividend was to be
preserved. It was a balance. It was possible to cover the
budget deficit entirely from the permanent fund earnings.
However, that would eliminate the dividend. On the other
hand, it was probably not possible to cover the entire
budget deficit with taxes. It was too large.
It was a matter of fairness and was a political judgement
that balanced the question of who paid to close the budget
gap, according to Wilson Condon. The Governor believed the
fairest way to do that was to preserve a dividend in the
range that went with his proposal and to put in place a
broad-based tax. This was a fair way of distributing the
burden of balancing the budget.
He again stressed that the Governor was flexible.
Co-Chair John Torgerson asked how long this tax plan would
protect the dividend and the state's savings account.
Wilson Condon used the oil production figures set forth by
the Department of Revenue's Spring forecast for the next
five years and the Fall revenue forecast for the period
thereafter. The projections for a flat-line budget over the
next fifteen years, without taking some other action,
showed the CBR depleted by 2014.
Senator Loren Leman had questions on the Governor's tax
proposal. He remembered the rate on the previous personal
income tax was sixteen percent. Wilson Condon didn't
believe that was correct. He thought it was fourteen
percent.
Senator Loren Leman said that he had paid the income tax
and he certainly was not in the higher income categories at
the time.
DEBORAH VOGT, Deputy Commissioner, Department of Revenue
said the rates had been graduated starting at three-percent
and went up to 14.5 percent. The highest rate applied to a
taxpayer who was single and with an income over $150,000
annually. She clarified that that was a percentage of the
federal tax.
Senator Loren Leman then voiced concern with the creation
of another bureaucracy to collect and audit the tax. There
was also a similar administration to distribute the
permanent fund dividend. This did not make sense to him.
He noted that some felt there was a social benefit of
taking from producers of income and redistributing to those
who did not produce incomes.
One goal of the Legislature was to have as lean and
efficient a government as possible.
He asked for response to the dual mechanism.
Wilson Condon said the answer was both very simple and very
complex. It was a policy choice whether to have both
programs. If there were both, there would need to be
administration for both. It was a question of what people
felt was fair.
Senator Pete Kelly had a question on comments made about
the fairness issue. The argument the witness gave was that
a tax on higher income was justified because it was
believed those people were the ones who most benefited from
government services. Senator Pete Kelly didn't think those
people were the ones who mostly used the programs of the
Department of Health and Social Services, the Department of
Public Safety or the Power Cost Equalization program.
Wilson Condon said there was not a true answer to who
benefited. He felt he had as much or more of a stake in
government services. He did not pay as much for what he got
from roads, airports, etc. He had a big stake in the
economy having a well-educated workforce. It was important
to have a state park system where he could go camping. He
saw himself as having a tremendous stake in Alaska's future
than people of lesser means. More possibilities were made
available to him as a consequence of his having a higher
income. Others would evaluate that differently and he
didn't think there was a right answer.
When talking about fairness in the tax system, there were
four considerations. One was whether taxes should be
collected on an ability to pay basis. There was the matter
of collecting taxes on the use of services. He noted there
were many services he received that he did not pay for. The
third consideration was that of horizontal equality. This
was the determination of whether individuals in the same
situation paid comparable amounts. The final consideration
addressed whether those who could pay more should pay more.
There were no true answers to any of those debates but they
were value choices that the Legislature had to make when
deciding how to pay for public services.
Senator Pete Kelly noted that most of the services the
witness mentioned were paid by federal funds: roads,
airports, public education and parks. When talking about
fairness, it was a different debate in paying for use of
services. He detailed his argument on fairness. He believed
people should not be taxed for the reason that they
benefited more from general fund dollars if in fact they
didn't.
Senator Gary Wilken asked if S-Corps were treated as
individual incomes in this proposal. He wanted to know
that if a S-Corp had before-tax earnings of $1 million and
if thirty-one percent of the thirty-nine percent federal
tax rate was taken the S-Corp would then pick up an
$120,000 obligation. Wilson Condon said if it was a solely
owned S-Corp, it would. Senator Gary Wilken was afraid
that would be the answer. Wilson Condon qualified that the
affect of the Alaska Credit feature would have the affect
of raising the rate by about 40-50 percent on the remaining
tax base. This was because the S-Corp itself would not be
receiving a permanent fund dividend.
Deborah Vogt clarified that the S-Corp would not pay this
tax, the individual to whom the income was distributed
would. That person would probably be eligible for the
credit.
Senator Gary Wilken noted discrepancies on the additional
positions requested in the handouts. The Governor's Tax
Plan on page 13 showed an increase of 56.7 positions while
page 12 appeared to be 87 positions. Wilson Condon was
unsure about that. Co-Chair John Torgerson asked for the
correct information to be provided.
Senator Sean Parnell wanted to know how many people would
be paying the tax on an annual basis for the first five
years. Deborah Vogt did not have the exact figures. She
estimated it would not be less than 75,000.
Senator Sean Parnell wanted to know how much of that
revenue would come from out-of state workers. The
department did not have that information prepared. Wilson
Condon only had a table that broke down the tax revenue by
income. Senator Sean Parnell asked what the department was
attempting to estimate. Wilson Condon answered they wanted
to determine both the number of taxpayers and the
proportion of the tax that would be raised by the various
brackets of federal taxable income.
Senator Sean Parnell wanted to know how much of the $350
revenue would be paid by out-of-state residents. Wilson
Condon said it would be between $35 and $50 million.
Senator Sean Parnell calculated that Alaskan residents
would then pay about $300 million.
Senator Sean Parnell returned to the term "broad-based
tax." No matter how he looked at it, less than one-sixth
of the population and less than one-third of the wage
earners would pay the tax. This estimation was based on all
the information provided not just today's testimony. Wilson
Condon answered that the Alaska Feature narrowed the base
considerably. As he testified, if the Legislature were to
impose a tax, it would need to have a broader base.
Senator Sean Parnell wanted to know the economic impact.
Wilson Condon said the tax imposed would have the effect of
taking money out of the economy the same as reductions in
PFD dividends.
Senator Sean Parnell asked if it would result in higher
paying jobs going elsewhere and a decrease in higher paying
jobs. Wilson Condon did not know. Senator Sean Parnell
asked if that was because research had not been done or the
research was unable to determine. Wilson Condon said it
was because it was not yet done. He did not know of a
reason why there would be a greater loss of jobs at the
high end of the income spectrum. Senator Sean Parnell
thought there was intent to create higher income jobs. He
wondered if this tax was counter to that goal.
Senator Lyda Green said it appeared that this plan would
allow broad-scale use of personal information from one
agency to another. This would be intermingled with the
permanent fund. She wanted to know if when the permanent
fund was created, was there any implication that the
information gathered would be protected.
Deborah Vogt answered that there was a list of agencies
that had access to PFC information to some extent. Some
restrictions on the data were statutory and some were
regulatory. Some came about only at the advice of the
Attorney General. All the names and addresses were public
information. Social security number and other information
was fairly limited. The permanent fund program was in Title
43, the tax program, and was subject to the same
confidentiality as the tax information. She therefore
concluded that the two agencies were close enough that
there could be a sharing of information.
Senator Lyda Green asked if the same held true for child
support programs. Deborah Vogt responded that the Child
Support Enforcement Division had access to almost all of
the information on the dividend application.
Senator Lyda Green referred to cross-match employer
quarterly report filings to the Department of Labor and
wanted to know if that to obtain information of the number
of people a corporation was hiring. Deborah Vogt answered
that it was not. She explained that the employer
withholding funds would go through the Department of Labor.
The employee paycheck would have funds withheld for state
tax just as it did for federal tax.
Tape: SFC - 99 #118, Side A 10:44AM
Co-Chair John Torgerson pointed out that the savings,
except for the corpus of the permanent fund would run out
in the year 2014. He wanted to know what was the plan for
after the year 2014. Wilson Condon disagreed with the
assumption. He predicted the CBR would be empty by 2014.
However, if that were true, and there was no other
additional revenue, other steps would be necessary. More
transfers to the CBR would be required based on the
projections the department was currently doing.
Senator Sean Parnell offered a motion to move SB 67 from
committee with individual recommendations. He noted this
proposal reflected a very different view of financing
government than he had. Senator Dave Donley commented he
disagreed with the bill and did not think it should move
from committee without a statement of "no recommendation."
Senator Pete Kelly felt a statement in opposition should be
made on the Senate floor.
Senator Pete Kelly wanted to vote to move the bill from
committee because he wanted to make a statement on the
Senate floor in opposition to it. There were a lot of
discussions across the state about different sources of
revenue. The Governor had proposed an income tax and he was
willing to let it go to the whole Senate to get the
reaction of all the Senators.
Senator Loren Leman had not heard a compelling argument for
income tax. He would not oppose moving from committee but
would cast a no vote on in Senate Chambers.
Senator Al Adams would vote against moving the bill from
committee. His reasons were because he believed the long-
range plan was still being worked on and should be drafted
before the income tax options were eliminated.
AT EASE 10:48 AM / 10:50 AM
Senator Sean Parnell amended the motion to move SB 67 from
committee with a committee recommendation of "do not pass."
Senator Al Adams noted this was the last committee of
referral and the uniform rules requiring at least one "do
pass" from a committee must be followed. Co-Chair John
Torgerson suggested the uniform rules could be suspended on
the Senate floor.
There was no objection and the bill moved from committee
with a "do not pass" recommendation.
ADJOURNED
Senator Torgerson adjourned the meeting at 10:52 AM.
SFC-99 (1) 5/3/99
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