03/18/1994 01:35 PM Senate JUD

 SENATOR TAYLOR announced  SB 161  (INTEREST RATES:                            
 JUDGMENTS/TAXES/ROYALTIES) to be up for consideration.                        
                                                                               
 DEBORAH VOGT, Department of Law, supported SB 161 which addresses             
 two distinct areas relating to interest in the state, judgements in           
 all civil litigation, not just litigation involving the state of              
 Alaska, and interest on back taxes and royalties.                             
                                                                               
 The 10.5% statutory interest rate is totally out of wack with                 
 current reality, she said.  The legislation would simply adopt a              
 market rate that would float with the market for both prejudgement            
 and postjudgement interest.                                                   
                                                                               
  TAPE 94-20, SIDE A                                                           
 Number 001                                                                    
                                                                               
  SENATOR TAYLOR said that is not 10.5% more than you would have had           
 to have paid.  If we take this legislation and apply a sliding                
 scale or a market test, the state would have to pay 7% or 8%                  
 interest.  So we are talking about a 3% penalty.  MS. VOGT said               
 that interest under this legislation would be 3.49%, an amount that           
 would apply to postjudgement interest were the litigation concluded           
 this year.  The prejudgement interest would flow under the                    
 legislation from the rate in effect in the year in which the                  
 litigation began.  That might be significantly higher if it was               
 several years ago.                                                            
                                                                               
 SENATOR DONLEY said he liked interest rates to be a little high as            
 incentive for people to settle.  He thought her proposal took away            
 a lot of that incentive.                                                      
                                                                               
 MS. VOGT explained that in the examples she brought for the                   
 Committee the state makes an original deposit, an additional                  
 deposit, and a master's award.  The state deposits into an escrow             
 account the amount it believes the property is worth so interest is           
 just paid on the net.                                                         
                                                                               
 There was some discussion regarding the examples of condemnation              
 cases she brought for the Committee because they involved such                
 large amounts of money owed by the state.                                     
                                                                               
 MS. VOGT explained that a very small percentage of condemnation               
 cases ever are contested.  Most of them are agreed upon.  A small             
 percentage goes into hearing and these are some of the ones they              
 have paid most of the interest in.                                            
                                                                               
 SENATOR DONLEY suggested having a fixed addition to the sliding               
 scale.                                                                        
                                                                               
 MS. VOGT emphasized that the state's position is that the interest            
 should be a floating market rate.  It shouldn't be an incentive to            
 either party to either drag out the litigation or to settle.                  
                                                                               
 Number 219                                                                    
                                                                               
 LARRY MEYERS, Department of Revenue, said under current law the               
 interest rates for over and under payment are determined by the               
 federal discount rate compounded quarterly at a percentage of the             
 greater of 5% or 11% above that rate.  Currently, that discount               
 rate has been at 3% which means we have an 11% interest rate.                 
                                                                               
 MR. MEYERS said what the state is seeing now is that we are                   
 currently earning between 3 1/2% and 4% on our own money that is              
 being invested.  We are seeing example of taxpayers who are                   
 actually parking their money with the state to earn a higher rate             
 than they could under short term earnings elsewhere.                          
                                                                               
 SENATOR HALFORD asked if there is any effort to accelerate in                 
 getting the refunds out?  MR. MEYERS answered by law if they issue            
 a refund within 90 days there is no interest due.  The bulk of the            
 refunds we are paying have to do with taxpayers who are filing an             
 amended return. These are people who are voluntarily coming forward           
 saying they have made mistakes.                                               
                                                                               
 Number 284                                                                    
                                                                               
 SENATOR HALFORD asked if there was a way to separate by                       
 classification those voluntary actions from the acts of conflicts.            
 MR. MEYERS said there is.  If the state has, in an assessment mode,           
 collected and then had to make a refund.                                      
                                                                               
 SENATOR HALFORD said for the ones where the state was precipitating           
 the conflict, it would seem that the interest rate ought to be 25%            
 in both directions so everyone is betting a whole lot higher and              
 would come to an agreement a whole lot quicker.                               
                                                                               
 MR. MEYERS said there are penalty provisions that they do apply               
 routinely for negligent preparation.                                          
                                                                               
 Number 334                                                                    
                                                                               
 MR. MEYERS suggested they change language that reads, "However, if            
 the overpayment is a result of the correction of an assessment, a             
 return made by the Department, the amount overpaid bears interest             
 rate in the manner provided in AS 43.05.225.                                  
                                                                               
 GRANT HUNTER, Anchorage, suggested that there be an alternative               
 interest rate which would be greater than 10.5%.  He didn't think             
 interest should be paid on overpayments of taxes and royalty                  
 payments to the state of Alaska.  It's the obligation of every                
 citizen or royalty payer to determine on their returns what is the            
 current rate, he said.                                                        
                                                                               
 SENATOR TAYLOR said he intended to have this bill again after an              
 informal work session.