Legislature(1995 - 1996)
04/10/1995 09:10 AM Senate HES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 103 TAX CREDIT FOR PROVIDING CHILD CARE
Number 494
CHAIRMAN GREEN called the Senate Health, Education & Social
Services meeting to order and announced SB 103 as the only order of
business before the committee.
SENATOR SALO pointed out that the committee had a CS to SB 103.
She explained that the Department of Revenue's analysis had
discovered the problem with double dipping which lead to the
changes in the CS. The major change in the CS is the allowance of
50 percent of the costs up to $100,000 for start up costs on a
child care facility. She pointed out the possible problem with
giving a tax credit to a facility that is totally open to the
public; that lead to the change in the CS which specifies that the
majority of the children in the facility must be of the employer or
taxpayer. The CS also clarifies the start up costs which pose a
major barrier.
SENATOR SALO moved the 4/8/95 CS be adopted in lieu of the original
bill. Hearing no objection, it was so ordered. She also noted the
presence of the sponsor statement and pointed out that the first
paragraph is not entirely accurate with regards to the CS.
SENATOR MILLER asked if the credit referred to in the bill would
only be for the first year the operation in which the facility is
built; does it include the construction of the facility, the
facilities maintenance? How long does the credit last for any
given taxpayer? SENATOR SALO directed Senator Miller to page 2,
lines 3-5 in which "start" is defined by what it does not mean.
The credit would be given to the taxpayer during the tax year a new
child care facility is started.
SENATOR LEMAN indicated agreement with the changes in the CS. He
noted that he had worked to create uniformity in tax credits. He
recognized that a 50 percent credit, which is a large credit, does
provide incentive. What is the credit offered in the other 17
states referenced in the backup? SENATOR SALO said she did have a
state by state comparison and could have that information for him.
SENATOR LEMAN felt that the 50 percent credit seemed consistent
with other credits.
Number 554
CHAIRMAN GREEN informed the committee of the Mat-Su Campus which
has a wonderful child care facility and within a three or four mile
radius from that are three wonderful child care centers. The
concern arises regarding the subsidy which would compete with
privately run child care centers. Where would this bill fall in
the realm of unfair or subsidized competition?
SENATOR SALO acknowledged that question as central to corporate
sponsored or corporate subsidized child care. Alaska is lacking in
good quality child care which would support the encouragement of
more quality child care. In addition, corporate sponsored or
subsidized child care seems to be a higher degree of quality; such
a child care center's operation would probably mesh with the
demands of the employer which sponsors it. Furthermore, the
commitment from the employer to the importance of raising children.
Senator Salo said that she did not want to negatively effect good
privately owned child care. Privately owned child care centers
could enter into a corporate sponsorship agreement. In conclusion,
Senator Salo hoped that this bill would not pose barriers to
private child care centers, however the benefit of corporate
sponsored child care is worth the effort.
SENATOR MILLER clarified that a corporately sponsored child care
facility would be a private entity because the corporate sponsor is
a private business.
TAPE 95-29, SIDE B
Number 582
SENATOR MILLER recognized that the corporately sponsored child care
facility may be in competition with a child care facility in the
area, but the corporately sponsored child care is a privately run
business also.
CHAIRMAN GREEN questioned if by giving a tax credit to the
corporately sponsored child care facility, the small child care
business was disadvantaged because it did not receive a comparable
tax credit.
SENATOR MILLER understood the concern of Chairman Green, however he
agreed with Senator Salo regarding the shortage of child care in
Alaska. Often only large businesses can achieve such measures;
small businesses often do not have the resources. He pointed out
that studies have shown that corporately sponsored child care
facilities create more productive employees of the corporate
sponsor as well as a better work environment.
SENATOR LEMAN expressed interest in discovering how a little
company could be given some advantage. In regards to the
definition of "start", he asked what would be the problem with
allowing "start" to apply to the substantial expansion of an
existing facility. Would an expansion of a facility be that
different from the construction of a new facility? He understood
that the intent was probably to avoid claims for credit for new
toys or other things that are not intended. Perhaps, there is a
manner in which to clarify a substantial remodel.
SENATOR SALO explained that the CS attempts to eliminate the tax
credit for operational costs; the incentive is only intended for
the development of the center. Although she did not intend for the
bill to include expansion or remodeling, she felt that it would be
acceptable. That could be addressed with a small change in
wording.
SENATOR LEMAN suggested using the language "capital expenditures
that increased its capacity" which would allow for the enhancement
of the facility in its capacity to receive more children. Perhaps,
the bill drafters could address that issue.
SENATOR SALO indicated that a better definition of "start" could be
determined and she would be available to work on that.
SENATOR LEMAN requested the information regarding the tax credit in
other states in order to determine if Alaska is being reasonably
consistent.
Number 541
BOB BARTHOLOMEW, Deputy Director for the Income and Excise Tax
Division at the Department of Revenue, informed the committee that
tax credits shrink the state's revenue base at a time when revenue
short fall should be reversed. Therefore, there is hesitancy in
backing tax credit bills. With regard to SB 103, the initial
fiscal note did not anticipate any increased costs to the
department. However, the fiscal note does not necessarily reflect
a zero fiscal note. The asterisks in the fiscal note indicated
that the department could not anticipate or calculate the loss to
revenue; there would be a fiscal impact, but it is unknown at this
time.
Mr. Bartholomew pointed out that the change in the tax credit to 50
percent of the expenditures would decrease the impact to the
treasury. He reiterated Senator Leman's concern regarding keeping
tax credits similar, or as the department calls it "double
dipping". The CS does not specifically address that problem. The
corporation can deduct the entire expenditure from their income.
If the corporation spends $100,000 to construct a child care
facility, the entire $100,000 would be deducted from income to
calculate taxable income which would determine the tax liability.
Then 50 percent of the same $100,000 that the corporation deducted
would also reduce their taxes by $50,000.
SENATOR SALO asked if the corporation deducts the $100,000 from
their income in order to determine their taxable income; dependent
on their tax rate, what does that mean in money terms? BOB
BARTHOLOMEW explained that with the highest state corporate income
tax rate, 9.4 percent, a $100,000 deduction would reduce their tax
liability by 10 percent.
SENATOR SALO thought she had solved that issue by changing to the
50 percent tax credit.
SENATOR LEMAN said that there is still a problem with double
dipping. In this case, $50,000 plus $9,400 which totals $59,400.
There is a way to only get the $50,000 which is 50 percent of...
BOB BARTHOLOMEW clarified that, as with other credits, if the
corporation has an expenditure that is eligible for a tax credit
that expenditure would not be deductible from gross income in
calculating the corporation's tax liability. A credit is
calculated and deducted from the tax liability. He explained that
any expenditure eligible for a credit comes out of the equation of
the calculation of taxable income and the credit returns after the
tax liability has been determined.
SENATOR MILLER pointed out that this construction would depreciate
over the years. The corporation would not write off the entire
amount all at once in one year. BOB BARTHOLOMEW said that would be
correct with capital expenditures under the rules of the Internal
Revenue Service which would determine the write off over a
specified number of years. Mr. Bartholomew recommended that if a
capital expenditure is made eligible for a tax credit, then do not
place that expenditure into your fixed asset records to be
depreciated; that expenditure would not depreciate. This bill
would allow the corporation to receive the full benefit of those
expenditures up to the percentage in the first year.
Number 469
SENATOR MILLER said that would be tough on the taxpayer. The
taxpayer would have to pay federal taxes which should be
depreciated. This would add more bookkeeping requirements because
it could not be done at the state level while it would be allowed
at the federal level. Senator Miller did not believe this issue to
be as great a problem as Mr. Bartholomew has described.
BOB BARTHOLOMEW stated that he merely wanted to point out that
there is double dipping. If the intention is to allow a $59,400
tax credit, then leave the bill and there would be a difference
between how some credits are applied versus this credit. He stated
that the same dollar comes away twice. SENATOR MILLER specified
that the $9,400 would be spread over 27 and a half years due to the
federal rules.
BOB BARTHOLOMEW predicted that the corporations would take on the
double bookkeeping themselves and take the entire credit in the
first year. The corporations would take a credit for their
expenditures against the Alaska tax in the first year to the
maximum. SENATOR MILLER pointed out that the corporations could
not do the double bookkeeping because the other $9,400 would be
depreciated out; that tax would come off their taxes in the next 27
and a half years. BOB BARTHOLOMEW clarified that the double
dipping would occur over the life of the asset if the corporation
capitalized the building of the new facility. The intent of the
bill is to focus on capital construction. SENATOR SALO said yes.
CHAIRMAN GREEN stated that the tax credit would be immediate versus
being spread. BOB BARTHOLOMEW noted that this bill would give the
corporations the immediate credit for a major portion.
SENATOR SALO disagreed with the term double dipping. If the 100
percent tax credit had been allowed and the corporation could also
deduct that amount, then double dipping would be the appropriate
term. The CS only allows a tax credit for half of what was spent
and only up to $100,000, therefore, the additional tax credit would
fall in the other half of the costs which may be a benefit and a
half not double dipping.
BOB BARTHOLOMEW explained that if a corporation spent $250,000 on
a new facility, then they would receive $109,000. The method that
the credit is worked on allows double dipping. SENATOR LEMAN said
that the corporation would get 9.4 percent of the excess which is
more than the $9,400 if $250,000 is spent.
BOB BARTHOLOMEW emphasized that the original break is intended. If
a corporation spends $250,000, the corporation would still receive
a tax deduction for expenditures incurred to run their business.
Those same expenditures would be applied to a credit.
SENATOR LEMAN asked if the same phenomena occurred with other
credits. BOB BARTHOLOMEW explained that the Department of Revenue
and the IRS attempts to utilize the investment tax credit.
Property expenditures are not placed in a schedule for depreciation
if an investment tax credit is used. Alaska has a mixed bag. Mr.
Bartholomew noted that the department has proposed amendments to
other legislation such as Public Broadcasting. The department
would propose an amendment to this bill that would limit the total
benefit to the set percentage.
SENATOR MILLER pointed out that the amendment would be easier to
accomplish with Public Broadcasting than with this bill which would
involve depreciation schedules. As someone who owns a business,
the more forms added the worse it becomes.
Number 395
BOB BARTHOLOMEW informed the committee that there was a resolution
that was sent to Congress which had requested a flat tax in order
to simplify matters on the other hand, there are lots of tax credit
legislation. He agreed with Senator Miller that it would
complicate matters. The investment tax credit is already being
utilized at the federal level; the distinction is already being
made, assets are not included.
SENATOR MILLER emphasized the need to develop a fiscal note before
the bill reaches the floor. BOB BARTHOLOMEW indicated that he
could talk with the sponsor.
CHAIRMAN GREEN asked if the corporation is given a tax credit when
they provide a health plan, an insurance plan, a vacation leave
plan or other items that are perceived as perks. BOB BARTHOLOMEW
explained that if the corporation incurs a dollar of expense to
provide a benefit to its employees, that becomes a business expense
deduction from their sales which would be similar to salaries.
That would not be considered a credit or a special benefit. There
are no specific tax credits for Alaska.
CHAIRMAN GREEN inquired as to what would prevent a small
corporation from setting up a child care facility. SENATOR SALO
said money. SENATOR MILLER specified that the bill would not
prevent a small business from providing a child care facility.
CHAIRMAN GREEN asked if an office of seven people of which three
have children and they decide to allow child care... SENATOR SALO
replied that they could.
SENATOR MILLER reiterated that nothing would prevent small
businesses from doing this, but large taxpayers would probably take
advantage of this option because small taxpayers usually cannot
afford to provide such services.
Number 347
BOB BARTHOLOMEW restated Senator Salo's earlier clarification that
a majority of those in child care must be from the employer in
order to receive this benefit. That would seem to allow smaller
employers the ability to take advantage of this. He indicated the
need to review the CS more closely in order to ensure that the
legislation is very specific which would avoid the need for
regulations. In other words, the need for the majority of those in
child care to be from the employer made need to specified in the
bill as 51 percent. Mr. Bartholomew explained that such a
clarification would alleviate the problem in differences in
regulation and legislative intent.
CHAIRMAN GREEN asked if a fee for the service, if the employees
paid for their children to be in the employer's child care, would
impact any aspect of this. SENATOR SALO replied no, that has
nothing to do with the revenue. A corporate sponsored child care
center would cost the parents about the same as if their children
were in a private child care setting. Senator Salo stated that the
quality of the child care in a corporate sponsorship situation is
probably higher which results from the money the sponsor puts into
the child care. Corporate sponsored child care usually has better
equipment, less children per caregiver than in private child care.
Senator Salo clarified that any extra money given to the child care
facility is left to the corporation's discretion and would not
impact this tax credit.
Number 315
CHAIRMAN GREEN stated that the bill could be held until Monday in
order to receive the requested information.
SENATOR SALO expressed her desire to make this bill workable. She
agreed that holding the bill to clarify some of the remaining
questions would be for the best.
SENATOR LEMAN asked Mr. Bartholomew if state regulations require
that the expenditure be reasonable and necessary, as the tax code
specifies. Is there a provision for a test of reasonableness? BOB
BARTHOLOMEW explained that the test for taxes which should apply to
credits specifies that one is eligible if they meet the expenditure
definition for tax deduction. The definition for tax deduction is
ordinary and reasonable business expenditure. Mr. Bartholomew said
that he would check to make sure that a corporation could be
eligible for credit which could not be used as an ordinary and
reasonable everyday business expense. It would seem that the two
are tied together and the test would have to be meet.
CHAIRMAN GREEN asked if there was anyone else present who wanted to
testify on this bill. No one came forth.
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