03/13/2012 09:00 AM Senate STATE AFFAIRS

                 SB  29-TAX EXPENDITURE REPORT                                                                              
                                                                                                                              
9:14:58 AM                                                                                                                  
CHAIR WIELECHOWSKI announced that the next bill before the                                                                      
committee would be SB 29, which calls for greater transparency                                                                  
and review of indirect state spending, resulting from the many                                                                  
tax credits, exemptions, exclusions, and waivers contained in                                                                   
state law. Alaska is one of only a handful of states in the                                                                     
country that does not provide the public and lawmakers with                                                                     
clear and comprehensive information on an annual basis about                                                                    
indirect state spending. This is despite the fact that tax                                                                      
credits, exemptions, and exclusions constitute a significant                                                                    
percentage of Alaska's annual spending. According to rough                                                                      
calculations, it is as much as 15 percent.                                                                                      
                                                                                                                                
SAM GOTTSTEIN, staff, Senator Bill Wielechowski, reviewed SB 29                                                                 
on behalf of the sponsor. The intent of SB 29 is to have basic                                                                  
information on tax expenditures, or credits, provided to the                                                                    
legislature so that everyone, including citizens, has a better                                                                  
understanding of what the money goes to, and if it achieves the                                                                 
legislature's state objectives. Alaska spends more on tax                                                                       
credits annually than the budgets of the Departments of Revenue,                                                                
Natural Resources, Environmental Conversation, Law, the Court                                                                   
System, and the Legislature combined.                                                                                           
                                                                                                                                
Since the last hearing, Senator Wielechowski's office has worked                                                                
with the Department of Revenue (DOR), Legislative Budget and                                                                    
Audit (LB&A), Legislative Research, and Legislative Finance to                                                                  
find the right balance between making this information                                                                          
transparent and not putting undue burden on agencies.                                                                           
                                                                                                                                
9:17:11 AM                                                                                                                  
SENATOR MEYER moved to adopt the CS for SB 29, labeled 27-                                                                      
LS0305\E, as the working document.                                                                                              
                                                                                                                                
CHAIR WIELECHOWSKI objected for discussion purposes.                                                                            
                                                                                                                                
MR. GOTTSTEIN addressed the changes in version D. He explained                                                                  
that the first change was on page 1, line 2; it more clearly                                                                    
defined and narrowed the definition of tax expenditures. The                                                                    
words "deductions and deferrals" were removed from the title of                                                                 
the bill, and the word "waivers" was added at DOR's request. The                                                                
same change was made on page 4, in lines 20-21. On page 4, lines                                                                
23-24, language was added to ensure that tax deductions are                                                                     
exempt from the definition.                                                                                                     
                                                                                                                                
On page 1, line 12 to page 2, 1ine 10, a new Section 3 was added                                                                
to provide for a one-time analysis of whether tax expenditures                                                                  
over $1 million have achieved their legislative purposes. The                                                                   
authority to do so was moved from DOR to Legislative Finance. A                                                                 
provision was added that DOR would only have to look back to                                                                    
2000 to determine if the tax expenditure had reached the $1                                                                     
million level.                                                                                                                  
                                                                                                                                
9:20:03 AM                                                                                                                  
MR. GOTTSTEIN addressed the change on page 4, line 12, where old                                                                
subsection (c) was removed and new section 3 was added.  On page                                                                
4, lines 15-19, new language was added which provides that DOR                                                                  
notify Legislative Finance if a tax expenditure has exceeded the                                                                
$1 million threshold, and provide the information for                                                                           
Legislative Finance to complete the analysis. He noted the final                                                                
change is on page 4, line 25; a new section is added changing                                                                   
the effective date on sections 1 and 2 to make them immediate.                                                                  
                                                                                                                                
MR. GOTTSTEIN explained the rationale behind the pros and cons                                                                  
related to the tax credit audits. The Department of Revenue does                                                                
not have the research capacity to do performance audits and                                                                     
maintains that the bill would have a large fiscal impact on the                                                                 
department. Also, DOR is a part of the Administration, which                                                                    
might have a partisan take on the bill.                                                                                         
                                                                                                                                
MR. GOTTSTEIN addressed the advantages and disadvantages of                                                                     
having Legislative Budget and Audit (LB&A) do the audits. He                                                                    
said that LB&A was thorough and non-partisan; however the                                                                       
decision was made not to go with LB&A due to a large fiscal                                                                     
impact and their need to follow national auditing standards, as                                                                 
well as the fact that it would expand their statutory authority.                                                                
He showed an example of a national tax preference performance                                                                   
audit which was way beyond what would be required for the                                                                       
purposes of SB 29.                                                                                                              
                                                                                                                                
MR. GOTTSTEIN discussed the pros and cons of a decision to go                                                                   
with Legislative Research. The final decision was to go with                                                                    
Legislative Finance for the research and analysis required for                                                                  
SB 29 because it would cost only $50,000 to hire a consultant,                                                                  
and Legislative Finance has a philosophy of transparency in                                                                     
government. One disadvantage they have is a lack of broad                                                                       
research experience.                                                                                                            
                                                                                                                                
9:27:12 AM                                                                                                                  
SENATOR MEYER asked about costs depicted in the fiscal notes and                                                                
if technology was a factor in the cost analysis. He wondered if                                                                 
technology costs would affect Legislative Finance's fiscal note.                                                                
He also requested more information about the effective date.                                                                    
                                                                                                                                
MR. GOTTSTEIN explained that the effective date has been pushed                                                                 
back to July 1, 2015, in order for the Department of Revenue to                                                                 
upgrade their system. Technology was a factor in previous fiscal                                                                
notes.                                                                                                                          
                                                                                                                                
SENATOR MEYER expressed an interest in having the audit done                                                                    
sooner than the effective date.                                                                                                 
                                                                                                                                
CHAIR WIELECHOWSKI asked if there was a way to accelerate the                                                                   
process.                                                                                                                        
                                                                                                                                
MR. GOTTSTEIN said it would cost close to a $1 million due to                                                                   
the numbers of personnel needed to do the job if the effective                                                                  
date was sooner than July 1, 2015.                                                                                              
                                                                                                                                
SENATOR MEYER agreed it was a policy call and $1 million might                                                                  
be a cheap investment. He hoped Legislative Finance might have a                                                                
method of speeding it up.                                                                                                       
                                                                                                                                
9:30:52 AM                                                                                                                    
CHAIR WIELECHOWSKI moved to adopt Amendment E.1:                                                                                
                                                                                                                                
     On page 1, line 14, change 2000 to 2012                                                                                    
     On page 2, line 16, change 2000 to 2012                                                                                    
                                                                                                                                
CHAIR WIELECHOWSKI objected.                                                                                                    
                                                                                                                                
MR. GOTTSTEIN explained that Amendment E.1 would change the date                                                                
of the one-time analysis and the $1 million threshold. The                                                                      
Department of Revenue would only have to look back three years                                                                  
when determining whether a tax expenditure had reached the $1                                                                   
million threshold.                                                                                                              
                                                                                                                                
CHAIR WIELECHOWSKI withdrew his objection. Seeing no further                                                                    
objection, Amendment E.1 was adopted.                                                                                           
                                                                                                                                
9:32:33 AM                                                                                                                    
DAVID TEAL, Director, Legislative Finance Division, answered                                                                    
questions pertaining to SB 29. He said the legislation is                                                                       
something the state needs and DOR should already be doing. The                                                                  
bill clearly spells out its intent and goal.                                                                                    
                                                                                                                                
CHAIR WIELECHOWSKI asked if Legislative Finance was comfortable                                                                 
performing the analysis.                                                                                                        
                                                                                                                                
MR. TEAL said he has no concerns about the current version of                                                                   
the bill. The earlier effective date was problematic due to                                                                     
problems with getting the data from DOR on time. He gave an                                                                     
example of the need for the bill. He maintained that it was                                                                     
impossible to get the information outside of DOR, and with the                                                                  
new technology, accessing the data will be easier.                                                                              
                                                                                                                                
He explained how Legislative Finance would accomplish the job by                                                                
analyzing how much the tax credit cost and the economic impact                                                                  
of it. He gave an example of the jet fuel tax credit, which is                                                                  
intended to attract more airlines to fly through Anchorage. The                                                                 
fact that many airlines do fly through Anchorage, shows that it                                                                 
works. Legislative Finance cannot state that if the tax credit                                                                  
is removed, airlines will quit coming to Anchorage. He termed                                                                   
Legislative Finance's work "a quick and dirty analysis." He                                                                     
added that the fiscal note is very low because the analysis                                                                     
would be fairly simple and straight-forward.                                                                                    
                                                                                                                                
CHAIR WIELECHOWSKI asked if there were any problems assigning                                                                   
the analysis to Legislative Finance.                                                                                            
                                                                                                                                
MR. TEAL said no, as long as DOR will provide the necessary                                                                     
data.                                                                                                                           
                                                                                                                                
CHAIR WIELECHOWSKI asked if the $50,000 fiscal note was                                                                         
adequate.                                                                                                                       
                                                                                                                                
MR. TEAL said it was if the requirement was for a rough analysis                                                                
of whether the tax credit is working.                                                                                           
                                                                                                                                
9:37:16 AM                                                                                                                    
SENATOR MEYER asked how much is spent on tax credits currently.                                                                 
He listed several taxes.                                                                                                        
                                                                                                                                
MR. TEAL said he thought the point of the bill was to find out.                                                                 
He pointed out that the film tax credit is allowed up to $100                                                                   
million. Most of the tax credit amounts are from oil, but the                                                                   
totals are unknown, but most of the tax credits have no                                                                         
information about how much they total.                                                                                          
                                                                                                                                
SENATOR MEYER assumed that oil tax credits would be 90 percent                                                                  
of all tax credits and suggested the focus be in that area. He                                                                  
agreed with the intent of the bill.                                                                                             
                                                                                                                                
CHAIR WIELECHOWSKI agreed that the purpose was to determine if                                                                  
the tax credits were effective and should continue.                                                                             
                                                                                                                                
9:40:14 AM                                                                                                                    
JOHANNA BALES, Deputy Director, Tax Division, Department of                                                                     
Revenue, answered questions related to SB 29.                                                                                   
                                                                                                                                
CHAIR WIELECHOWSKI asked if Ms. Bales had any concerns about                                                                    
version E.                                                                                                                      
                                                                                                                                
MS. BALES agreed with the change Amendment E.1 made to the date.                                                                
She commented on Senator Meyer's question about the amount of                                                                   
tax credits. She said the Tax Division Annual Report provides                                                                   
information about the amount of tax credits claimed in each                                                                     
program. The Revenue Sources Book shows the oil tax credits.                                                                    
                                                                                                                                
SENATOR MEYER said he does have a copy of the Fall 2010 Revenue                                                                 
Sources Book.                                                                                                                   
                                                                                                                                
MS. BALES clarified that the Tax Division Annual Report contains                                                                
information about tax credits.                                                                                                  
                                                                                                                                
SENATOR MEYER wondered if there was a place where the total                                                                     
amount of tax credits was shown.                                                                                                
                                                                                                                                
MS. BALES said the appendix in the Revenue Sources Book shows                                                                   
all credits and the amounts claimed and projected, but not the                                                                  
sum.                                                                                                                            
                                                                                                                                
SENATOR MEYER located the information.                                                                                          
                                                                                                                                
MS. BALES explained that the information does not include 24 tax                                                                
exemptions, 12 of which are over $1 million.                                                                                    
                                                                                                                                
9:45:21 AM                                                                                                                    
CHAIR WIELECHOWSKI wondered about the fiscal impact to DOR from                                                                 
version E.                                                                                                                      
                                                                                                                                
MS. BALES thought probably one new position would be needed to                                                                  
deal with tax exemption information.                                                                                            
                                                                                                                                
CHAIR WIELECHOWSKI summarized the changes in version E.                                                                         
                                                                                                                                
SENATOR MEYER asked Ms. Bales for her thoughts on Legislative                                                                   
Finance's involvement in the audit process.                                                                                     
                                                                                                                                
MS. BALES said the division is fine with working with another                                                                   
entity on the requirements of the bill. The previous issue was                                                                  
regarding the type of additional analysis required outside of                                                                   
financial audits. She said she was surprised that Legislative                                                                   
Finance could analyze all the tax credits and exemptions for                                                                    
only $50,000. She opined that taxpayers would need to be                                                                        
contacted. She summarized that there are 24 tax exemptions and                                                                  
12 tax credits to analyze.                                                                                                      
                                                                                                                                
9:49:05 AM                                                                                                                    
MR. TEAL addressed Ms. Bales' comments and said DOR would                                                                       
probably be best at doing the job because they release the tax                                                                  
information. Legislative Finance can look at Department of Labor                                                                
(DOL) for relative statistics. It is difficult to say who                                                                       
benefits by the tax credits. He did not know if a solid                                                                         
conclusion could be reached. He considered the analysis as a                                                                    
simpler task than DOR sees it. If more money is required to do                                                                  
the job, then a request for more will be forthcoming. He pointed                                                                
out that there is a 7-year cycle in which to complete the                                                                       
analysis.                                                                                                                       
                                                                                                                                
CHAIR WIELECHOWSKI thought that originally DOR was considered as                                                                
the department to do the work. He justified the choice to use                                                                   
Legislative Finance.                                                                                                            
                                                                                                                                
9:53:40 AM                                                                                                                    
SENATOR GIESSEL asked if Legislative Finance is including tax                                                                   
exemptions in the analysis.                                                                                                     
                                                                                                                                
MR. GOTTSTEIN addressed the question and said the tax exemptions                                                                
are included. He gave an example of the fuel tax, which is a tax                                                                
exemption. He referred to page 4 of the bill for the definition                                                                 
of tax exemption.                                                                                                               
                                                                                                                                
SENATOR GIESSEL questioned the accuracy of DOL data, which she                                                                  
maintained is flawed.                                                                                                           
                                                                                                                                
CHAIR WIELECHOWSKI noted the bill has a referral to the Senate                                                                  
Finance Committee.                                                                                                              
                                                                                                                                
SENATOR MEYER thought the bill could move forward with the                                                                      
understanding that the analysis is less comprehensive than in                                                                   
the original version.                                                                                                           
                                                                                                                                
CHAIR WIELECHOWSKI added that there was the option to change the                                                                
parameters and ask for further analysis. The idea is to get the                                                                 
rough information and then decide whether to proceed further.                                                                   
                                                                                                                                
9:56:44 AM                                                                                                                    
SENATOR MEYER moved to report CSSB 29, version E, as amended,                                                                   
from committee with individual recommendations and the                                                                          
accompanying fiscal note from Legislative Finance, and with a                                                                   
forthcoming DOR fiscal note. There being no objection, CSSB 29                                                                  
(STA) was reported from the Senate State Affairs Standing                                                                       
Committee.