Legislature(2015 - 2016)BELTZ 105 (TSBldg)

05/25/2016 01:30 PM LABOR & COMMERCE

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01:30:03 PM Start
01:30:41 PM SB4001
03:10:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Testimony <Invitation Only> --
*+ SB4001 OMNIBUS TAXES & CREDITS; MINING LICENSES TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB4001-OMNIBUS TAXES & CREDITS; MINING LICENSES                                                                    
                                                                                                                                
1:30:41 PM                                                                                                                    
CHAIR COSTELLO announced the consideration of SB 4001.                                                                          
                                                                                                                                
1:31:22 PM                                                                                                                    
RANDALL  HOFFBECK,  Commissioner,  Department  of  Revenue  (DOR),                                                              
introduced himself.                                                                                                             
                                                                                                                                
1:31:30 PM                                                                                                                    
KEN ALPER,  Director, Tax Division,  Department of  Revenue (DOR),                                                              
introduced himself.                                                                                                             
                                                                                                                                
COMMISSIONER  HOFFBECK reminded  the committee  that the  governor                                                              
initially  introduced a  package of  bills that  were designed  to                                                              
bring  in  new  revenue,  reduce expenses,  and  use  the  state's                                                              
financial  assets  in order  to  close  the  fiscal gap.  The  new                                                              
revenues were introduced  as individual bills and  for the special                                                              
session they  were bundled as  an omnibus tax  bill. It is  one of                                                              
the components  that the governor  has identified as  essential to                                                              
close the  fiscal gap by 2019.  The bill incorporates:  income tax                                                              
(HB 250/SB 134),  the motor fuel tax (HB 249/SB  132), tobacco tax                                                              
(HB  304/SB 133),  alcohol tax  (HB  248/SB 131),  mining tax  (HB
253/SB  137),  fish  tax  (HB  251/SB   135),  and  marijuana  tax                                                              
enforcement (provisions of HB 337).                                                                                             
                                                                                                                                
SB 4001 incorporates  much of the committee work that  was done on                                                              
these bills  during the regular  session, but not  necessarily the                                                              
provisions  in   opposition  to  the  governor's   position.  This                                                              
committee already  heard the income tax, tobacco  tax, and alcohol                                                              
tax  bills,  although  the  tobacco  tax is  based  on  the  House                                                              
version. Together,  these bill  will raise  about $350  million in                                                              
revenue.                                                                                                                        
                                                                                                                                
COMMISSIONER  HOFFBECK reviewed  the format  of the  presentation.                                                              
There will  be two slides  for each of  the taxes. The  first will                                                              
talk about  what the bill  does and how  it differs from  what was                                                              
heard during the  regular session. The second slide  will show how                                                              
much money  it raises and how  it impacts Alaskans. He  noted that                                                              
the  electronic filing  provisions  are not  included  due to  the                                                              
passage of HB 375.                                                                                                              
                                                                                                                                
1:35:00 PM                                                                                                                    
MR.  ALPER  discussed  the  proposed income  tax  (AS  43.22).  It                                                            
creates an individual  income tax at 6 percent of  the federal tax                                                              
liability. This  is similar to  Alaska's historic income  tax that                                                              
was  repealed in  1980. The  former tax  peaked at  16 percent  of                                                              
federal  liability.  It  contains   language  for  withholding  by                                                              
employers,  and  taxes  income  earned  in  Alaska  regardless  of                                                              
residence  state,  as well  as  income  from partnerships  and  S-                                                              
corporations.                                                                                                                   
                                                                                                                                
The  current bill  removes  language related  to  the taxation  of                                                              
trusts  and  delays  the  effective  date  to  January  2018.  The                                                              
intention was to  remove fishery crew shares from  withholding tax                                                              
requirements,  because they  are contract  employees that  receive                                                              
1099s.  He noted  that this  provision  was inadvertently  omitted                                                              
from the  current draft  and should  the bill  progress they  hope                                                              
the  committee would  support removing  the fisheries  withholding                                                              
language.                                                                                                                       
                                                                                                                                
1:37:05 PM                                                                                                                    
CHAIR  COSTELLO  noted  that  Senator   Micciche  had  joined  the                                                              
committee.                                                                                                                      
                                                                                                                                
MR.  ALPER continued  to  explain  that the  new  income tax  will                                                              
raise about  $100 million in FY2018  and the full $205  million in                                                              
FY2019.  After 2019,  the revenue  will be tied  to inflation  and                                                              
income growth.  About 20  percent to 30  percent of Alaskans  will                                                              
have no tax  liability, which is less than  initially anticipated.                                                              
The permanent fund  dividend also helps push people  into at least                                                              
a minimal  tax bracket.  There will  be a very  low tax  burden on                                                              
households that  earn less than  $50,000 and most  households will                                                              
pay  substantially less  than 1  percent of  income. By  absorbing                                                              
the federal tax  code, this becomes a progressive tax  at the same                                                              
rate as the federal  code. He highlighted that  state income taxes                                                              
are  deductible from  federal income  tax for  those Alaskans  who                                                              
itemize.  Currently, 43  states have  an income  tax, but only  41                                                              
tax  all  income. The  other  2  states  just tax  capital  gains.                                                              
Should the  bill pass, Alaska  would have  the lowest tax  rate in                                                              
the country.                                                                                                                    
                                                                                                                                
1:41:20 PM                                                                                                                    
MR. ALPER  discussed the  proposed motor fuel  tax (AS  43.40). It                                                            
increases  the   current  tax  rates  as  follows:   highway  fuel                                                              
increases  from  8 cents  to  16  cents  per gallon;  marine  fuel                                                              
increases  from 5  cents  to 10  cents  per gallon;  aviation  gas                                                              
increases  from  4.7  cents  to  7  cents  per  gallon;  jet  fuel                                                              
increases  from 3.2  cents to 6.5  cents per  gallon; and  doubles                                                              
the credit for highway fuel used off road.                                                                                      
                                                                                                                                
The key  difference  from the regular  session  bills is that  the                                                              
aviation  and  jet fuel  numbers  conform  to CSHB  249(FIN).  The                                                              
current draft does  not incorporate the 2-year  sunset proposed in                                                              
the  Senate Transportation  Committee substitute;  the motor  fuel                                                              
tax would be a permanent change.                                                                                                
                                                                                                                                
1:43:09 PM                                                                                                                    
CHAIR  COSTELLO  welcomed  Representative  Hughes,  Representative                                                              
Wilson, and Senator Hoffman.                                                                                                    
                                                                                                                                
MR.  ALPER continued  to  explain  that the  motor  fuel tax  will                                                              
raise about  $43 million  per year,  which is  roughly double  the                                                              
current  collections.   About  $200,000   would  be   shared  with                                                              
municipal airports.                                                                                                             
                                                                                                                                
The  highway tax  was increased  to 8  cents per  gallon in  1970.                                                              
Alaska would  still have the lowest  tax rate in the  nation after                                                              
the  tax  is doubled.  He  calculated  that  a person  who  drives                                                              
12,000  miles per  year in  a vehicle  that gets  20 miles to  the                                                              
gallon will pay an additional $48 in fuel taxes.                                                                                
                                                                                                                                
1:44:28 PM                                                                                                                    
MR.  ALPER  discussed the  proposed  tobacco  tax (AS  43.50).  It                                                            
increases  the existing tax  rates. Cigarettes  increase from  100                                                              
mills to  150 mills.  The tax  on a standard  pack increases  from                                                              
$2.00 to $3.00.  The tax rate on other tobacco  products increases                                                              
from  75 percent  of wholesale  value to  100 percent.  Electronic                                                              
smoking products,  which currently are  untaxed, will be  taxed at                                                              
75 percent of  wholesale value. The bill adds  new definitions for                                                              
these  products  and  cleans  up   the  definition  of  "wholesale                                                              
price."                                                                                                                         
                                                                                                                                
This differs  from the regular session  bills in that it  uses the                                                              
House bill as the  starting point. The other major  change is that                                                              
e-smoking  products are  carved  out into  a  separate tax  rather                                                              
than with  "other tobacco  products." This  applies only  to those                                                              
containing nicotine  so there is an added labeling  requirement to                                                              
identify those products.                                                                                                        
                                                                                                                                
1:47:10 PM                                                                                                                    
The  tobacco tax  is  estimated to  raise  about  $29 million  per                                                              
year, which is  roughly 50 percent above the  current collections.                                                              
The revenue from  e-cigarettes is indeterminate.  About $2 million                                                              
will go to the Tobacco Use Education and Cessation Fund.                                                                        
                                                                                                                                
CHAIR COSTELLO welcomed Representative Olson to the meeting.                                                                    
                                                                                                                                
MR. ALPER said the  tobacco tax will impact Alaskans  by making it                                                              
                                                      th                                                                        
more expensive to  smoke. Alaska would go from the  11  to the 5th                                                              
highest  cigarette tax  rate in  the U.S.  The additional  revenue                                                              
will  help offset  tobacco related  health costs  incurred by  the                                                              
state. The bill also taxes the new e-smoking industry.                                                                          
                                                                                                                                
1:48:30 PM                                                                                                                    
MR.  ALPER  discussed the  proposed  alcohol  tax (AS  43.60).  It                                                            
doubles the  current tax  rates. Distilled  spirits increase  from                                                              
$12.80/gallon to  $25.60/gallon; wine increases  from $2.50/gallon                                                              
to $5.00/gallon;  beer and  cider increases  from $1.07/gallon  to                                                              
$2.14/gallon; and  craft brewery taxes increase  from $0.35/gallon                                                              
to $0.70/gallon.  The increases corresponded  to the dime  a drink                                                              
portion, raising  the rates from 10  cents to 20 cents.  The fixed                                                              
$25,000  bonding  requirement  becomes  variable,  which  is  less                                                              
onerous  for small  taxpayers. These  provisions are  the same  as                                                              
the bill heard during the regular session.                                                                                      
                                                                                                                                
1:50:33 PM                                                                                                                    
The  alcohol tax  is estimated  to raise  about $40  million/year,                                                              
roughly double  the current  collections.  About $20 million  goes                                                              
to  the Alcohol  and  Other Drug  Abuse Treatment  and  Prevention                                                              
Fund. This  is a mental  health budget  fund that is  supplemented                                                              
with substantial  general  fund money  that can  be backed  out if                                                              
desired.                                                                                                                        
                                                                                                                                
This will  affect Alaskans by making  it more expensive  to drink.                                                              
Alaska already  has the first or  second highest alcohol  tax rate                                                              
in the  nation and  this would  push Alaska  to the  highest  by a                                                              
substantial  margin.  The  caveat  is  that  only  33  states  tax                                                              
alcoholic beverages.  The other 17 have state-owned  liquor stores                                                              
so the tax rate is built into the retail prices.                                                                                
                                                                                                                                
1:52:45 PM                                                                                                                    
MR. ALPER  discussed the proposed  marijuana tax (AS  43.61). This                                                            
piece has  not been seen  in the Senate. It  is from a  House bill                                                              
introduced  by  Representative  LeDoux.  It does  not  change  the                                                              
$50/ounce  excise   tax  established   by  the  2014   initiative,                                                              
although certain  of the non-smokable  portions of the  plant will                                                              
have a  lower tax rate.  It requires a  surety bond of  $5,000 for                                                              
taxpayers  and  empowers   DOR  to  enforce  the   tax  against  a                                                              
marijuana retailer who  is selling product that did  not come from                                                              
a  licensed,  taxpaying  cultivator.   It  also  empowers  DOR  to                                                              
enforce the  tax penalty on illegal  grow operations in  excess of                                                              
the personal use limit.                                                                                                         
                                                                                                                                
The bill incorporates all the provisions in CSHB 377(L&C).                                                                      
                                                                                                                                
The  marijuana tax  will raise  an indeterminate  amount and  will                                                              
generate  an indeterminate  amount from  enforcement actions.  The                                                              
intent  is  to  make  it advantageous  to  be  taxed,  legal,  and                                                              
regulated  and disadvantageous  to  operate in  the black  market.                                                              
This  will indirectly  increase revenue  to the  state from  legal                                                              
marijuana sales.                                                                                                                
                                                                                                                                
1:56:59 PM                                                                                                                    
MR. ALPER  discussed the proposed  mining license tax  (AS 43.65).                                                            
It increases the current  top tax rate on net profits greater than                                                              
$100,000/year  from 7 percent  to 9  percent. The tax holiday  for                                                              
new  mines  is  reduced  from  3.5 years  to  2  years.  The  bill                                                              
prevents  the  mining exploration  incentive  credits  from  being                                                              
used to  reduce royalties.  The credits may  only be  used against                                                              
the tax. A $50 annual license fee is also added for miners.                                                                     
                                                                                                                                
The  regular session  bill  sought to  eliminate  the tax  holiday                                                              
entirely.  This bill reduces  it from  3.5 years  to 2  years. The                                                              
exploration  incentive  credit was  an  amendment  from the  House                                                              
Resources Committee  and is incorporated in the  current bill. The                                                              
estimated  revenue  is about  $7  million/year, $25,000  of  which                                                              
will come from the license fees.                                                                                                
                                                                                                                                
This tax  will impact a small  number of taxpayers. In  2014, only                                                              
14 taxpayers  had over $100,000  in taxable profits,  meaning they                                                              
paid at  the top bracket.  The 5 large  mines in Alaska  would pay                                                              
about  99  percent of  this  tax  increase.  The rest  are  either                                                              
placer  miners who  had a  good year,  or  landowners who  collect                                                              
taxable mining  royalties. The tax  increase does not  impact "mom                                                              
and pop" miners, other than the $50 annual license fee.                                                                         
                                                                                                                                
2:01:15 PM                                                                                                                    
MR.  ALPER  discussed  the proposed  fisheries  business  tax  (AS                                                            
43.75) and fisheries  landing tax (AS 43.77). It  increases by one                                                            
percentage  point  the  current  tax  rates  that  are  between  3                                                              
percent  and 5  percent.  The key  is that  the  entire 1  percent                                                              
increment  is  state  general  funds.   There  is  robust  revenue                                                              
sharing  language in  the  existing fish  statutes  that say  half                                                              
goes to the municipality  where the fish is landed  and processed.                                                              
The first  1 percent  of tax goes  entirely to  the state  and the                                                              
remaining  amount continues  to  be shared  50/50.  The bill  also                                                              
removes  the  $3,000  "cap" on  the  annual  Commercial  Fisheries                                                              
Entry  Commission (CFEC)  entry permit  fees.  That increases  the                                                              
fees for  certain large  and valuable  fisheries. There  are about                                                              
200   taxpayers,  mostly   nonresident,   who   would  be   paying                                                              
additional entry  fees under this provision.  Developing fisheries                                                              
are exempted from the increase.                                                                                                 
                                                                                                                                
The regular  session bills increased  the rate for  one developing                                                              
fishery  category  and the  current  bill exempts  all  developing                                                              
fisheries.  The current  bill  also adopts  the  entry permit  fee                                                              
change that was added in the House Finance Committee.                                                                           
                                                                                                                                
This portion of  the bill is estimated to raise  $20 million/year;                                                              
$18  million/year  comes from  the  change  in  the raw  fish  and                                                              
landing tax rates  and about $2 million/year is from  the CFEC fee                                                              
change.                                                                                                                         
                                                                                                                                
The price  of fish  is generally  set by  the commodity  market so                                                              
there  is no  way  for  the market  to  absorb the  fisheries  tax                                                              
increase. That means  that the processors will pay the  tax and to                                                              
the extent possible,  they will pass it on to  the fisherman whose                                                              
fish  they  purchase.  The  fisherman  indirectly  pays  the  tax,                                                              
whereas  the  Tax   Division  identifies  the  processor   as  the                                                              
taxpayer.                                                                                                                       
                                                                                                                                
2:04:49 PM                                                                                                                    
MR. ALPER reviewed  the following sectional analysis  for SB 4001:                                                              
[Original punctuation provided.]                                                                                                
                                                                                                                                
     Sec. 1. Removes CFEC fee cap; part of fish tax                                                                           
     Sec.  2.  Requires  bond  as   condition  of  issuing  a                                                                 
     marijuana cultivation license                                                                                              
     Sec.   3-6   Conforming   language    so   that   mining                                                                 
     exploration  incentive credits  cannot  be used  against                                                                   
     mining royalties                                                                                                           
     Sec.  7.  Adds  a  new  chapter  22  in  AS  43  for  an                                                                 
     individual income tax                                                                                                      
                                                                                                                                
     nonresident  individuals. The  tax is  six percent of  a                                                                   
     resident's  federal   tax  liability.  The  tax   for  a                                                                   
     nonresident  is six  percent of the  portion of  federal                                                                   
     tax liability that is from a source in the state.                                                                          
                                                                                                                                
     paid to  another state  based on  income earned in  that                                                                   
     other state.                                                                                                               
     43.22.030   Provides   for   annual   returns   to   the                                                                   
     Department  of Revenue with  taxes due  on the date  the                                                                   
     federal tax return  is due. The taxpayer must  provide a                                                                   
     copy of their  IRS return. The department  is authorized                                                                   
     to pay refunds of overpaid taxes.                                                                                          
     43.22.040 Defines  sources of income within  Alaska that                                                                   
     are subject to the tax.                                                                                                    
     43.22.050  Provides  for  withholding   from  wages  and                                                                   
     salaries  by   employers,  with  those   withheld  taxes                                                                   
     periodically remitted to the state.                                                                                        
     42.22.060 Authorizes DOR to administer the tax.                                                                            
     42.22.190  Adds definitions for  specific terms  used in                                                                   
     this section.                                                                                                              
     Sec. 8-9.  Increases motor fuel  tax rates for  the four                                                                 
     fuel types                                                                                                                 
     Sec. 10.  Increases the motor  fuel tax credit  for off-                                                                 
     road use                                                                                                                   
     Sec. 11.  Conforming language to add  electronic smoking                                                                 
     products   to   the   current   statute   allowing   the                                                                   
     department  to  share  information  with  municipalities                                                                   
     (tobacco).                                                                                                                 
     Sec.  12.  Conforming  language  to  reference  the  new                                                                 
     definition  of "electronic smoking  product" in  Section                                                                   
     23(tobacco).                                                                                                               
     Sec.  13. Increases  the "additional  tax levy" on  each                                                                 
     cigarette from 62 mills to 112 mills (tobacco).                                                                            
     Sec.  14. Increases  the tax on  tobacco products  other                                                                 
     than  cigarettes  from 75%  of  the wholesale  price  to                                                                   
     100% of the wholesale price.                                                                                               
     Sec. 15.  Adds a tax  on electronic smoking  products at                                                                 
     75% of the wholesale price (tobacco).                                                                                      
     Sec. 16.  Conforming language to add  electronic smoking                                                                 
     products  to  an existing  statute  referencing  federal                                                                   
     tax exemptions (tobacco).                                                                                                  
     Sec. 17.  Conforming language to add  electronic smoking                                                                 
     products to the license requirement (tobacco).                                                                             
     Sec. 18.  Conforming language to add  electronic smoking                                                                 
     products to the monthly tax return (tobacco).                                                                              
     Sec. 19.  Conforming language to add  electronic smoking                                                                 
     products to the  procedures for issuing tax  credits and                                                                   
     refunds (tobacco).                                                                                                         
     Sec. 20.  Conforming language to add  electronic smoking                                                                 
     products  to  the  requirement   to  keep  complete  and                                                                   
     accurate records to support the tax return (tobacco).                                                                      
     Sec.  21. Adds  language  to  clarify that  a  cessation                                                                 
     product,  tobacco dependence  product  or modified  risk                                                                   
     tobacco product  are excluded  from the definition  of a                                                                   
     tobacco product for purposes of taxation.                                                                                  
     Sec. 22.  Clarifies the definition of  "wholesale price"                                                                 
     of a  tobacco product or  electronic smoking  product as                                                                   
     the  gross invoice  price including  all federal  excise                                                                   
     taxes, less any trade discounts or other reductions.                                                                       
     Sec.  23. Adds  the  definition of  "electronic  smoking                                                                 
     product" (tobacco).                                                                                                        
     Sec.  24.  Changes  the per-gallon  tax  rates  for  the                                                                 
     three  major  categories of  alcoholic  beverages:  malt                                                                   
     beverages  and  ciders from  $1.07  to $2.14;  wine  and                                                                   
     other  beverages  with  less than  21%  alcohol  content                                                                   
     from  $2.50 to $5.00;  and beverages  with greater  than                                                                   
     21% alcohol  content (generally distilled  spirits) from                                                                   
     $12.80 to $25.60.                                                                                                          
     Sec. 25. Changes  the per-gallon tax rate  for the first                                                                 
     60,000  barrels  sold  in the  state  from  small  craft                                                                   
     breweries that  meet the federal  definition of  a small                                                                   
     brewer, from $0.35 to $0.70 (alcohol).                                                                                     
     Sec.  26.  Changes  the  surety  bond  requirement  from                                                                 
     $25,000  to  an  amount  determined  by  the  department                                                                   
     (alcohol).                                                                                                                 
     Sec. 27.  Clarifies requirements  for monthly filing  of                                                                 
     marijuana taxes.                                                                                                           
     Sec.  28.   Adds  $50/oz.  tax  penalty   for  marijuana                                                                 
     possession  in excess  of the amount  of plants  legally                                                                   
     authorized.  Establishes   a  bonding  requirement   for                                                                   
     marijuana  cultivators.  Establishes   liability  for  a                                                                   
     marijuana  retailer or manufacturer  to pay the  $50/oz.                                                                   
     excise  tax if  they have  product for  which the  taxes                                                                   
     have not been paid.                                                                                                        
     Sec.  29. Reduces  the 3 ½  year tax  exemption for  new                                                                 
     mining operations after production begins to 2 years.                                                                      
     Sec. 30.  Increases the highest  tax rate from 7%  to 9%                                                                 
     for  net mining taxable  income in  excess of  $100,000.                                                                   
     The  other tax  rates remain  the same.  For net  income                                                                   
     over $100,000  the tax is $4,000  plus 9% of  the amount                                                                   
     in excess of $100,000.                                                                                                     
     Sec. 31.  Establishes a  mining license  fee of $50  per                                                                 
     year,  a  license  renewal  fee of  $50  per  year,  and                                                                   
     changes  the  due  date for  applications  and  renewals                                                                   
     from May 1 to January 1.                                                                                                   
     Sec.  32. Increases  three  different  tax rates  within                                                                 
     the Fisheries  Business Tax by one percent.  The current                                                                   
     rates range from three to five percent.                                                                                    
     Sec.  33.  Increases  tax  rate   within  the  Fisheries                                                                 
     Business Tax  for direct marketers from 3  to 4 percent.                                                                   
     Rate remains  at 1 percent  for developing fish  species                                                                   
     sold by direct marketers.                                                                                                  
     Sec. 34.  Conforms with  electronic filing. Deletes  the                                                                 
     requirement  for  fisheries  taxpayers to  submit  their                                                                   
     returns to the department in Juneau.                                                                                       
     Sec.  35. Establishes  that  the  revenue from  the  one                                                                 
     percent  fisheries  tax  increase is  deposited  in  the                                                                   
     general  fund. The  remaining  revenue  shall be  shared                                                                   
     with   municipalities   per   the   currently   existing                                                                   
     formula.                                                                                                                   
     Sec.  36.  Increases  tax  rate   within  the  Fisheries                                                                 
     Landing  Tax  for  fish species  other  than  developing                                                                   
     fish  species from  3 to 4  percent. Rate  remains at  1                                                                   
     percent for developing fish species.                                                                                       
     Sec. 37-38.  Establishes that  the revenue from  the one                                                                 
     percent  fisheries  tax  increase is  deposited  in  the                                                                   
     general  fund. The  remaining  revenue  shall be  shared                                                                   
     with municipalities per the current formula.                                                                               
     Sec.  39.  Amends  uncodified language  to  include  the                                                                 
     increase  to  the  mill  rate  increase  for  cigarettes                                                                   
     (tobacco).                                                                                                                 
     Sec.  40.  Repeals  statutes  related to  a  former  tax                                                                 
     credit  for political contributions  that existed  under                                                                   
     Alaska's   prior  individual   income   tax  which   was                                                                   
     repealed in 1980.                                                                                                          
     Sec.   41.  Applicability   language   related  to   the                                                                 
     effective dates of multiple tax changes in the bill.                                                                       
     Sec. 42.  Applicability language related to  the bonding                                                                 
     requirement   before    the   issuance    of   marijuana                                                                   
     cultivation licenses                                                                                                       
     Sec.  43. Transition  language  related  to the  use  of                                                                 
     mining exploration credits against mining royalties.                                                                       
     Sec.   44.   Transition   language    related   to   the                                                                 
     authorization   to  write  regulations.   The  authority                                                                   
     extends  to  DOR,  DNR,  Fish  &  Game,  CFEC,  and  the                                                                   
     Marijuana Control Board (multiple).                                                                                        
     Sec.   45.   Allows   marijuana    regulations   to   be                                                                 
     retroactive  to the  day  marijuana became  legal  under                                                                   
     the initiative, February 24, 2015.                                                                                         
     Sec.    46-47.   Makes    marijuana   statute    changes                                                                 
     retroactive to 2/24/15.                                                                                                    
     Sec. 48. Delayed  effective date of January  1, 2018 for                                                                 
     income tax.                                                                                                                
     Sec.  49.   Immediate  effective  date   for  regulatory                                                                 
     sections (multiple).                                                                                                       
     Sec. 50.  Effective Date  of July 1,  2016 for the  rest                                                                 
     of the bill sections (multiple).                                                                                           
                                                                                                                                
2:16:45 PM                                                                                                                    
CHAIR  COSTELLO commented  that despite  the comprehensive  nature                                                              
of this tax  bill, it only addresses  5 percent of the  $4 billion                                                              
deficit. "Why bother?" she asked.                                                                                               
                                                                                                                                
COMMISSIONER  HOFFBECK replied the  governor's plan  has a  lot of                                                              
small  pieces that  add up  to a  substantial amount  in the  end.                                                              
This piece  would address about $350  million in revenue  and fits                                                              
with  the  notion  of  spreading   the  burden  as  many  ways  as                                                              
possible.  He relayed  that  the largest  piece  is the  Permanent                                                              
Fund Protection Act.                                                                                                            
                                                                                                                                
CHAIR COSTELLO  asked if  Alaskans can  expect taxes to  skyrocket                                                              
if  SB 4001  passes and  the Permanent  Fund  Protection Act  does                                                              
not.                                                                                                                            
                                                                                                                                
COMMISSIONER HOFFBECK  replied the  governor's plan does  not rely                                                              
on taxes  alone to  balance the  budget. But  Alaska does  have to                                                              
devise a systematic  way of using its substantial  savings and the                                                              
income it generates  to fund government services.  The historic 85                                                              
percent  to 90  percent of  revenue  from oil  and gas  is now  25                                                              
percent to  30 percent, so the  Permanent Fund Protection  Act and                                                              
the earnings are needed as a substantial piece moving forward.                                                                  
                                                                                                                                
CHAIR COSTELLO  asked if  the governor  can guarantee that  income                                                              
taxes won't go up if his tax plan passes.                                                                                       
                                                                                                                                
COMMISSIONER HOFFBECK  explained that the income tax  was the last                                                              
piece in the governor's  overall plan; the 6 percent  tax rate was                                                              
established  to  generate the  $200  million  that was  needed  to                                                              
bring  the plan  into balance.  There  is no  plan to  immediately                                                              
start ratcheting  up the rate but  there can be no  guarantee that                                                              
the tax  won't change  in 5,  10, or  15 years. Every  legislative                                                              
session  is  different  and  every   legislature  faces  different                                                              
fiscal situations.                                                                                                              
                                                                                                                                
CHAIR  COSTELLO said  what the  likelihood  is that  SB 4001  will                                                              
pass with each of the proposed tax pieces intact.                                                                               
                                                                                                                                
2:21:51 PM                                                                                                                    
COMMISSIONER  HOFFBECK said the  idea of an  omnibus tax  bill was                                                              
thoroughly   debated  before   the  individual   tax  bills   were                                                              
introduced during  the regular session. The consensus  was that it                                                              
would be  easier for people to  work with the  pieces individually                                                              
so that's  what they  did. But  what happened  was that  the taxes                                                              
got scattered  as they were  referred to different  committees and                                                              
moved at  different rates.  That made  some legislators  reluctant                                                              
to support a bill  when they weren't sure about the  status of the                                                              
others. For the  Special Session, the decision was  to bundle them                                                              
in a  single package so  people could deal  with them as  a whole,                                                              
or break them out if they choose to do so.                                                                                      
                                                                                                                                
CHAIR  COSTELLO  asked if  he's  found  one legislator  who  would                                                              
support the bill as currently written.                                                                                          
                                                                                                                                
COMMISSIONER  HOFFBECK replied  nobody is  committing to  anything                                                              
at  this point,  but he  believes  they'll eventually  see that  a                                                              
revenue package has to be part of the long-term solution.                                                                       
                                                                                                                                
CHAIR  COSTELLO asked  if he  could identify  a few  of the  taxes                                                              
that have support.                                                                                                              
                                                                                                                                
COMMISSIONER  HOFFBECK replied  there  was mixed  response to  the                                                              
taxes.  The motor  fuel tax  seemed to  have more  support in  the                                                              
Regular Session, there  seemed to be some support  for the tobacco                                                              
tax, and  the marijuana  tax also  moved forward.  The taxes  that                                                              
didn't move  very fast were  the income  tax and the  alcohol tax.                                                              
Both  the  mining  tax  and  fish  tax  moved  out  of  the  first                                                              
committee of referral, but with a lot of debate.                                                                                
                                                                                                                                
2:24:42 PM                                                                                                                    
SENATOR  GIESSEL observed  that  the income  tax  is projected  to                                                              
raise $100  million in FY2018  and $205  in FY2019 and  the fiscal                                                              
note asks  for $500 thousand to  implement the tax the  first year                                                              
and more the next  year. She asked what he anticipates  the actual                                                              
income will be.                                                                                                                 
                                                                                                                                
MR. ALPER clarified  that $500 thousand is half of  one percent of                                                              
                               th                                                                                               
$100  million,  which is  1/200   of  the  money coming  in.  That                                                              
request is  for the  FY2017 capital budget  and they  wouldn't see                                                              
the $100  million income  until FY2018.  The $500  thousand  is an                                                              
estimate for  a contractor to  develop an implementation  plan for                                                              
an income tax  because there isn't in-house expertise.  He related                                                              
that an  earlier version  of the  fiscal note  for the  income tax                                                              
bill asked for  a $14 million capital appropriation.  The staffing                                                              
plan  at  its full  implementation  was  for  about 60  new  state                                                              
employees  with  an annual  cost  of  $7-8  million per  year.  He                                                              
explained  that   those  figures  were  based  on   a  preliminary                                                              
analysis of other states and discussions with the existing tax-                                                                 
handling  software   vender.  The  delayed  effective   date  will                                                              
provide an opportunity  to find what the actual costs  will be and                                                              
based  on those  findings they'll  make another  request in  2017.                                                              
The current  fiscal  note asks for  a one-time  $500 thousand  and                                                              
one employee, which is just 4 percent of the initial estimate.                                                                  
                                                                                                                                
SENATOR GIESSEL  commented it's an  indeterminate fiscal  note for                                                              
an income  tax and it will  take an indeterminate number  of state                                                              
employees to implement the tax.                                                                                                 
                                                                                                                                
MR. ALPER agreed that's a fair statement.                                                                                       
                                                                                                                                
2:28:05 PM                                                                                                                    
SENATOR  MEYER  expressed the  desire  to  see some  modeling  and                                                              
questioned what the  bill would do to individuals  and the fragile                                                              
economies in communities across the state.                                                                                      
                                                                                                                                
COMMISSIONER  HOFFBECK said DOR  doesn't have  a lot of  that type                                                              
of modeling, but ISER  did do a study on the impact  of the broad-                                                              
based taxes  such as the  income tax and  sales tax.  He committed                                                              
in  a  future  hearing  to  provide what  they  have  and  make  a                                                              
statement about what  they think the outcome will be.  He said the                                                              
motor fuel  tax increase  probably  won't have  a large impact  on                                                              
the  individual  taxpayer,  but  it  will be  more  an  issue  for                                                              
airlines  or  the   trucking  industry.  Both  the   airlines  and                                                              
trucking  industry  sent  letters  of  support  but  trucking  has                                                              
pulled back  recently, probably  because the  other taxes  weren't                                                              
moving. He  believes a  lot of  groups recognize  that there  is a                                                              
need for  stability, but  DOR doesn't  have the  data to  say what                                                              
the direct economic impact will be on an individual business.                                                                   
                                                                                                                                
SENATOR MEYER  said that's the problem  with the omnibus  bill. He                                                              
recalled that  the presentation  Dr. Knapp  gave indicated  that a                                                              
sales tax  was preferable  to an income  tax, assuming  there were                                                              
certain exemptions.  He also  recalled that  Dr. Knapp  said doing                                                              
nothing  would hurt  the  economy but  doing  everything would  be                                                              
even more damaging.                                                                                                             
                                                                                                                                
CHAIR COSTELLO  recalled Dr. Knapp  said doing nothing  is equally                                                              
as bad as doing everything at the same time.                                                                                    
                                                                                                                                
SENATOR  MEYER  asked  if the  administration  had  considered  an                                                              
omnibus tax  credit bill that would  include oil and  gas, mining,                                                              
and fish.                                                                                                                       
                                                                                                                                
COMMISSIONER   HOFFBECK  acknowledged   they  didn't  discuss   an                                                              
omnibus tax  credit bill.  The governor  did seriously  consider a                                                              
sales  tax, but  the  income tax  seemed to  be  a better  balance                                                              
against the reduction  in the size of the permanent  fund dividend                                                              
because of  the progressive/regressive  nature  of the two  taxes.                                                              
The  income  tax  also captures  income  from  S-corporations  and                                                              
outside income.                                                                                                                 
                                                                                                                                
He agreed  that Dr. Knapp said  that doing everything in  one year                                                              
might be  more than  the economy  could handle,  but he  also said                                                              
people  need to  know what  the plan is  to finish  the job.  That                                                              
takes  the  uncertainty  out  of  the  equation  and  that's  what                                                              
business  owners  want  and need  to  make  investment  decisions.                                                              
"Even if  all of  this wasn't  put into  play immediately,  people                                                              
need to  know what  the ultimate  solution is  so they  can adjust                                                              
accordingly," he said.                                                                                                          
                                                                                                                                
2:36:56 PM                                                                                                                    
MR. ALPER  added that  all the  taxes, with  the exception  of the                                                              
income tax,  are changes  to an  existing process  so there  is no                                                              
need for  additional staff.  He said  that implementing  an income                                                              
tax is a large  new process and implementing a sales  tax would be                                                              
as  well.  He  advised  that  the  least  efficient  would  be  to                                                              
implement both a  small sales tax and a small  income tax, because                                                              
it would require two new bureaucracies instead of one.                                                                          
                                                                                                                                
SENATOR  MEYER asked  why fishing  crew shares  aren't subject  to                                                              
the withholding tax requirements.                                                                                               
                                                                                                                                
MR.  ALPER  explained that  fishing  crew  captains don't  do  the                                                              
other forms  of withholding  and therefore  shouldn't be  required                                                              
to do the  Alaska income tax  withholding. The crew  members would                                                              
still have to pay the tax, just not in advance.                                                                                 
                                                                                                                                
COMMISSIONER  HOFFBECK  added  that  the reason  is  that  fishing                                                              
crews   are   essentially   contract   employees,   not   salaried                                                              
employees.                                                                                                                      
                                                                                                                                
2:40:35 PM                                                                                                                    
SENATOR  MEYER asked  if  the consumer  would  ultimately pay  the                                                              
fish tax.                                                                                                                       
                                                                                                                                
MR.  ALPER  said  fish  is a  commodity  so  the  processor  can't                                                              
necessarily  get  that  markup,  but  will  recoup  the  money  by                                                              
reducing the price paid to the fisherman.                                                                                       
                                                                                                                                
CHAIR  COSTELLO pointed  out that  changing  the tax  rate from  4                                                              
percent to  5 percent is actually  a 25 percent increase,  not a 1                                                              
percent increase.                                                                                                               
                                                                                                                                
MR.  ALPER relayed  that the  governor made  the same  observation                                                              
and slide  16 of  the PowerPoint  describes a  1 percentage  point                                                              
increase.                                                                                                                       
                                                                                                                                
SENATOR STEVENS questioned  why the old rational  to share landing                                                              
tax revenues  with communities  to offset  their costs  to support                                                              
the fisheries industry doesn't still apply.                                                                                     
                                                                                                                                
MR. ALPER  explained that  the goal  of this  part of the  package                                                              
was to  raise an  additional $15-$20  million from the  commercial                                                              
fishing  industry  to  make  it neutral  to  the  state.  If  that                                                              
revenue  were  to   be  split  50/50  with  municipalities,   a  2                                                              
percentage increase in the tax rate would be needed.                                                                            
                                                                                                                                
SENATOR STEVENS  said he  didn't like  the answer but  understands                                                              
the explanation.                                                                                                                
                                                                                                                                
2:46:14 PM                                                                                                                    
SENATOR  GIESSEL noted  that the  Senate  Resources Committee  did                                                              
not receive  the modeling it requested  during the hearing  on the                                                              
mining  tax bill.  She asked  what the  effect would  be on  a new                                                              
mine to  move from the  current 3.5 year tax  holiday to a  2 year                                                              
tax holiday.                                                                                                                    
                                                                                                                                
MR. ALPER  replied DOR doesn't have  modeling but the  tax holiday                                                              
isn't  the big  piece  of the  benefit.  The larger  component  of                                                              
recouping  costs  is through  the  depletion allowance,  which  is                                                              
similar  to  depreciation.  Through  this  mechanism,  development                                                              
costs  are  capitalized  and  applied   against  the  profit  over                                                              
multiple  years.  He added  that  DOR  couldn't find  any  history                                                              
showing where  the 3.5 year tax  holiday came from and  they heard                                                              
that not much gets paid in the early years anyway.                                                                              
                                                                                                                                
He noted  that the mining bill  did move from the  House Resources                                                              
Committee with a  3 year tax holiday. The current  bill splits the                                                              
difference.                                                                                                                     
                                                                                                                                
SENATOR  GIESSEL  talked about  the  14  taxpayers in  the  mining                                                              
industry that  had over  $100,000 in taxable  profits in  2014 and                                                              
questioned what  effect the changes  in the mining tax  would have                                                              
on a producing mine like Fort Knox.                                                                                             
                                                                                                                                
MR. ALPER  replied he can't speak  to an individual  taxpayer, but                                                              
the  largest  5  mines  in  the state  each  made  far  more  than                                                              
$100,000 in  taxable profit  in 2014. The  total profit  for those                                                              
14 taxpayers was  more than $200 million. Realistically,  he said,                                                              
a company's profits  will move up and down much  faster related to                                                              
the price  of gold than the  2 percentage point tax  increase from                                                              
7 percent to 9 percent.                                                                                                         
                                                                                                                                
SENATOR  GIESSEL  surmised that  DOR  hadn't calculated  how  this                                                              
might impact the Donlin Mine that hasn't started up yet.                                                                        
                                                                                                                                
MR. ALPER  replied Donlin isn't in  the pipeline so it's  not part                                                              
of the  fiscal note. He opined  that Alaska's mining  tax statutes                                                              
need an overhaul.                                                                                                               
                                                                                                                                
2:52:17 PM                                                                                                                    
SENATOR GIESSEL  offered to  share the  research paper  on mining,                                                              
tourism, and commercial  fishing that demonstrates  that the state                                                              
generates  far  more revenue  from  the  mining industry  than  it                                                              
spends to  regulate it.  She also pointed  out that the  increases                                                              
in  hunting, fishing,  and trapping  licenses will  bring in  more                                                              
than the  proposed mining  tax. Those increases  will bring  in an                                                              
additional $9  million and leverage  about $25 million  of federal                                                              
money.                                                                                                                          
                                                                                                                                
SENATOR  STEVENS asked  how much  revenue will  be generated  from                                                              
people who  work in Alaska  and live out  of state. He  also asked                                                              
if Alaska receives money from offshore fisheries.                                                                               
                                                                                                                                
MR. ALPER  replied the  state shares  with municipalities  several                                                              
million dollars  in landing taxes and  Dutch Harbor is by  far the                                                              
largest  line item.  That indicates  that  a lot  of the  offshore                                                              
fishery  is passing  through  that port.  Addressing  out-of-state                                                              
income, he  estimated that about 10  percent to 15 percent  of the                                                              
high  income  employees   in  fisheries  and  oil   companies  are                                                              
nonresidents.  There are also  Alaskans that  earn income  both in                                                              
Alaska  and   elsewhere  so   a  lot  of   the  work   related  to                                                              
administering  the income  tax will  be  about the  fine point  of                                                              
differentiating instate from out-of-state income.                                                                               
                                                                                                                                
COMMISSIONER  HOFFBECK  added that  fish  that are  caught  within                                                              
Alaska's economic  zone will be taxed,  even if they're  landed in                                                              
Seattle.                                                                                                                        
                                                                                                                                
SENATOR STEVENS asked  if Alaska income tax would be  due when the                                                              
fish is caught in this economic zone and landed in Seattle.                                                                     
                                                                                                                                
COMMISSIONER   HOFFBECK  replied  that   would  be  addressed   in                                                              
regulations, but  he suspects that  income earned  within Alaska's                                                              
economic zone would be taxed.                                                                                                   
                                                                                                                                
SENATOR STEVENS asked about partnerships and S-corporations.                                                                    
                                                                                                                                
MR. ALPER  explained that  a nonresident  that owns a  partnership                                                              
that earns  income in  Alaska would  owe an  increment to  Alaska,                                                              
based  on   their  federal   tax  liability.  S-corporations   are                                                              
exempted from the  Alaska corporate income tax  because the profit                                                              
is passed  through in a Schedule  K distribution to the  owner and                                                              
the owner pays  the tax on their  personal income tax.  The key is                                                              
the nexus of the income.                                                                                                        
                                                                                                                                
2:59:49 PM                                                                                                                    
COMMISSIONER    HOFFBECK   clarified    that    Exxon,   BP    and                                                              
ConocoPhillips  are  publicly  traded   C  corporations  that  pay                                                              
Alaska  income tax;  companies that  are not  publicly traded  are                                                              
exempt from Alaska corporate income tax.                                                                                        
                                                                                                                                
SENATOR STEVENS calculated  that 10 percent to 15  percent of $100                                                              
million in  FY2018 and  $205 million in  FY2019 amounts  to $10-30                                                              
million.                                                                                                                        
                                                                                                                                
MR. ALPER agreed with the calculation.                                                                                          
                                                                                                                                
CHAIR COSTELLO  asked if he is  aware that the  federal government                                                              
is considering  not allowing state  income tax to be  written off.                                                              
If that  is the case  and SB  4001 were to  pass, Alaska  would be                                                              
the only  state with  an income tax  that is  a percentage  of the                                                              
federal tax liability, she said.                                                                                                
                                                                                                                                
MR.  ALPER replied  he  isn't aware  of that  consideration.  Most                                                              
states tax use a  percentage of gross income, which  for this bill                                                              
would   be   about   1   percent   of   adjusted   gross   income.                                                              
Implementation  would be  different, however.  The decision  to go                                                              
with  a  percentage   of  federal  tax  liability   considered  1)                                                              
existing  law, even  though it  needs  modernizing, and  2) it  is                                                              
less  complicated.   He  acknowledged   that  it  would   be  more                                                              
comparable  to other  states  to go  to a  tax  based on  adjusted                                                              
gross income.                                                                                                                   
                                                                                                                                
CHAIR COSTELLO  asked him  to comment on  the concern  about tying                                                              
the tax  to the  federal rate, and  the increase  if that  were to                                                              
occur.                                                                                                                          
                                                                                                                                
MR. ALPER agreed  it's a valid concern and added  that he wouldn't                                                              
be surprised  to see  it structured  differently should  this fail                                                              
to pass.                                                                                                                        
                                                                                                                                
CHAIR COSTELLO  asked if  the administration  would be  willing to                                                              
look  at  capturing  the  foregone  revenue  from  tax  exemptions                                                              
before looking at a new revenue sources.                                                                                        
                                                                                                                                
MR.  ALPER said  absolutely; the  administration  would like  very                                                              
much  to  clean up  the  tax  code, especially  on  the  corporate                                                              
income tax side.                                                                                                                
                                                                                                                                
3:06:55 PM                                                                                                                    
SENATOR MEYER asked  if he said that 15 percent of  the income tax                                                              
that would be collected is from out-of-state workers.                                                                           
                                                                                                                                
MR.  ALPER answered  yes; the  total  wage income  of Alaskans  is                                                              
about  $22 billion  and  about $3  billion of  that  is earned  by                                                              
nonresident workers.                                                                                                            
                                                                                                                                
SENATOR MEYER  asked if he said that  about 90 percent  of work to                                                              
collect an income tax is related to out-of-state workers.                                                                       
                                                                                                                                
MR.  ALPER replied  it's those  workers and  Alaskans that  derive                                                              
income  from  out-of-state  sources  that  wouldn't  be  taxed  in                                                              
Alaska.                                                                                                                         
                                                                                                                                
SENATOR  MEYER  asked  if  the  fiscal  note  on  the  income  tax                                                              
estimated that 50 new employees would be needed.                                                                                
                                                                                                                                
MR. ALPER replied  the request was for 52 full  time employees and                                                              
16 part time.                                                                                                                   
                                                                                                                                
SENATOR MEYER  cited the feedback  that questions hiring  60 state                                                              
employees to take  money away from Alaskans when  another group of                                                              
employees is giving it back via the permanent fund dividend.                                                                    
                                                                                                                                
MR.  ALPER  replied the  only  answer  is  that it  provides  some                                                              
degree  of  balance;  reducing  everyone's   dividend  equally  is                                                              
regressive   and  the   progressive  income   tax  balances   that                                                              
somewhat.                                                                                                                       
                                                                                                                                
SENATOR MEYER  said he  appreciates that but  both the  income tax                                                              
and the dividend require a huge bureaucracy.                                                                                    
                                                                                                                                
CHAIR COSTELLO requested  any long term economic  modeling that is                                                              
available. She suggested  the public submit their  comments to her                                                              
office  and she  would distribute  them to  the committee  members                                                              
and the administration.                                                                                                         
                                                                                                                                
[SB 4001 was held in committee.]                                                                                                

Document Name Date/Time Subjects
SB 4001.pdf SL&C 5/25/2016 1:30:00 PM
SB4001
SB 4001 - Hearing Request Letter.pdf SL&C 5/25/2016 1:30:00 PM
SB4001
SB 4001 - Governor's Transmittal Letter.pdf SL&C 5/25/2016 1:30:00 PM
SB4001
SB 4001 - Fiscal Note - DOR-TAX.pdf SL&C 5/25/2016 1:30:00 PM
SB4001
SB 4001 - DOR Omnibus Tax Bill Presentation.pdf SL&C 5/25/2016 1:30:00 PM
SB4001