02/12/2002 08:05 AM House STA
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ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
February 12, 2002
8:05 a.m.
MEMBERS PRESENT
Representative John Coghill, Chair
Representative Jeannette James
Representative Hugh Fate
Representative Gary Stevens
Representative Peggy Wilson
Representative Harry Crawford
Representative Joe Hayes
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 303
"An Act relating to the levy and collection of a sales tax; and
providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 331
"An Act relating to appointment of persons to positions that
require confirmation by the legislature; and providing for an
effective date."
- BILL HEARING POSTPONED TO 2/19/02
HOUSE BILL NO. 248
"An Act relating to retirement contributions and benefits under
the public employees' retirement system of certain juvenile
detention employees and juvenile correctional institution
employees."
- BILL HEARING POSTPONED TO 2/19/02
HOUSE JOINT RESOLUTION NO. 31
Relating to requesting the United States Congress to propose an
amendment to the Constitution of the United States that would
address emergency appointments to and powers of the United
States Senate.
- BILL HEARING POSTPONED TO 2/19/02
PREVIOUS ACTION
BILL: HB 303
SHORT TITLE:STATEWIDE SALES TAX
SPONSOR(S): REPRESENTATIVE(S)WHITAKER
Jrn-Date Jrn-Page Action
01/14/02 1954 (H) PREFILE RELEASED 1/4/02
01/14/02 1954 (H) READ THE FIRST TIME -
REFERRALS
01/14/02 1954 (H) STA, FIN
01/16/02 1992 (H) COSPONSOR(S): FATE
02/04/02 2152 (H) COSPONSOR(S): LANCASTER
02/12/02 (H) STA AT 8:00 AM BUTROVICH 205
WITNESS REGISTER
REPRESENTATIVE JIM WHITAKER
Alaska State Legislature
Capitol Building, Room 411
Juneau, Alaska 99801
POSITION STATEMENT: Sponsor of HB 303.
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
POSITION STATEMENT: Answered questions relating to HB 303.
ACTION NARRATIVE
TAPE 02-8, SIDE A
Number 0022
CHAIR JOHN COGHILL called the House State Affairs Standing
Committee meeting to order at 8:05 a.m. Representatives
Coghill, James, Fate, Stevens, Wilson, Crawford, and Hayes were
present at the call to order.
HB 303-STATEWIDE SALES TAX
CHAIR COGHILL announced that the committee would hear HOUSE BILL
NO. 303, "An Act relating to the levy and collection of a sales
tax; and providing for an effective date."
Number 0167
REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, sponsor
of HB 303, offered a PowerPoint presentation in order to provide
a context for the bill. He referred to the concept of mixing
two unmixable substances, in this case, economics and politics.
He said although there are inherent challenges, knowledge
available to legislators allows them to look into the future
somewhat. This "crystal ball" reveals that there is a $2.3
billion budget deficit over the next two fiscal years; that the
Constitutional Budget Reserve (CBR) no longer can sufficiently
deal with budget deficits of this magnitude; and that cutting
the full amount isn't realistic.
REPRESENTATIVE WHITAKER remarked that several years of cutting
have shown how tough it is. Every dollar cut has a life
attached to it, he said, if not in a life-threatening respect,
then with regard to lifestyle. He reminded members that the
legislature has the responsibility of balancing the budget.
Number 0315
REPRESENTATIVE WHITAKER addressed two options: do nothing or
take a "planned approach." Both have economic and political
consequences, he said, but a planned approach is "amazingly
straightforward and somewhat commonsensical." He highlighted
four components: cost control, a broad-based tax, some usage of
the earnings of the permanent fund, and economic growth.
Regarding the first, he said it is imperative that the
legislature, in striving for a long-term budget plan, provide
for a cost-control function. Second, he indicated a broad-based
tax is specifically what HB 303 addresses, but he stressed the
need to understand how it fits into a long-term plan.
REPRESENTATIVE WHITAKER discussed the third component, the need
to use the earnings of the permanent fund in some regard; he
said the legislative record leaves no room for doubt that "the
intent of the permanent fund was to deal with the situation that
we have today." As for the fourth component, he emphasized that
the basis for any long-term plan is economic growth. "It
doesn't matter how much we tax," he explained. "If our economy
cannot withstand the impact of tax, we've done ourselves and the
people we serve no favors."
Number 0433
REPRESENTATIVE WHITAKER addressed the "do nothing" approach,
including the economics and politics surrounding it. This
approach, in effect, uses the state's savings accounts: the
CBR, the Earnings Reserve Account (ERA), and the permanent fund.
He emphasized his belief that in the public mind, there is no
differentiation between the ERA and the permanent fund itself,
and that using the first appears, to the public, to be using the
second as well [because it affects the size of the permanent
fund dividend (PFD)].
REPRESENTATIVE WHITAKER brought attention to the CBR and pointed
out that in FY 03 [fiscal year 2003], which is this year's
budget cycle, there is a budget deficit of $1.2 billion; it is
projected that next year, at a minimum, the budget deficit will
be $1.1 billion. He noted that at the end of FY 04, going into
FY 05, there will be approximately $280 million available
through the CBR - not enough to balance the budget, particularly
given a billion-dollar deficit.
REPRESENTATIVE WHITAKER explained that at that point, the ERA
[would be targeted] next. He emphasized that if the plan is to
do nothing this legislative session, a significant portion of
the funds in the ERA will be utilized in FY 05. He said, "The
perception is unavoidable. At that point, we are spending the
permanent fund."
Number 0585
REPRESENTATIVE WHITAKER returned to the subject of mixing
politics and economics, saying there is a choice: face reality
now, with some political and economic discomfort, or later, with
significant political and economic discomfort. "And so we
move," he told members.
REPRESENTATIVE WHITAKER referred to the "economic reality of FY
03," the current budget cycle, and stressed its effect on
election year 2004. He drew attention to the coming elections
in 2002 and told listeners:
If we do nothing, we can say to the public, "We've
given you no taxes. We did not touch the permanent
fund. We spent $1.2 [billion] from the CBR, which it
was designed to be utilized as. We held government
spending in check. The result is that we've
essentially maintained the status quo." ...
However, that political discussion will carry over
into the economic reality of the First Session of the
Twenty-Third [Alaska State] Legislature. And that
economic reality is this: a budget deficit of $1.1
billion will still be there. The CBR balance will
have been reduced to $1.2 billion. And so, on the
table, of course, will be taxes and the permanent fund
earnings.
And that legislative session will have a choice: they
can deal with it then or they can put it off to the
next year. If they so choose, the Second Session of
the Twenty-Third [Alaska State] Legislature will have
to deal with this economic reality: a budget deficit
in excess of a billion dollars, a CBR balance now at
$280 million, and still on the table, taxes and the
permanent fund earnings.
It's important to note: it's too late, because the
action or inaction that we take this legislative
session will have determined whether or not the
earnings reserve is utilized.
Number 0723
REPRESENTATIVE WHITAKER turned attention to election year 2004.
If nothing has been done, he said, there will be a billion-
dollar deficit, no CBR, and the permanent fund will be
"degrading at a relatively accelerated rate." The question will
be asked, "Where does the money come from?" He remarked:
Political reality and economic reality become manifest
in the election of 2004. "John Incumbent" can tell
the voters, "I spent the CBR; I raided the permanent
fund; I did not develop a plan when I had the
opportunity." And Jane Candidate can say, "I told you
so." And the voters should say, "Throw the rascals
out."
Number 0799
REPRESENTATIVE WHITAKER concluded by saying the knowledge that
the "crystal ball" has provided is that politics and economics
don't mix. Therefore, the choice legislators face now is to do
the right thing or to do nothing - which is tantamount to the
wrong thing. He stated:
Our choice is to implement a fiscal policy as part of
a comprehensive plan to balance the budget, while
minimizing the negative impact on the state's savings
accounts, or to not deal with the problem and accept
the consequences of breaking the public trust, having
not fulfilled our responsibilities.
Number 0825
REPRESENTATIVE WHITAKER informed members that in the foregoing
context, HB 303 represents a statewide sales tax for
consideration, as a part of a long-term, sustainable budget
plan. He asked that the committee begin the discussion and
"honestly and publicly deal with ... this looming problem now."
Number 0867
REPRESENTATIVE WHITAKER advised the committee that he'd
originally proposed a 6 percent seasonal tax for five months a
year. As models were refined and more information was obtained,
however, it became clear that it may neither do what was
intended nor be "politically palatable."
REPRESENTATIVE WHITAKER announced that he wouldn't oppose a 2
percent year-round tax, with a 4 percent seasonal tax, which
would give an effective return equal to a 3 percent year-round
tax. Assuming a $10 billion base, which he said is a very
conservative assumption, it will generate between $250 million
and $350 million a year. The cost to do that, as shown in the
fiscal note, is approximately $4 million.
Number 0946
REPRESENTATIVE WHITAKER said the intention behind a sales tax is
to provide a tax that everybody pays. If somebody pays, he
said, everybody pays. Acknowledging that some call it
regressive [when people with lower incomes pay more tax in
proportion to their incomes], he said, "I suppose any tax is
regressive, and as we search for the perfect tax, it's probably
the one we have right now - that's the one we don't pay."
Number 0974
REPRESENTATIVE STEVENS sought clarification about how this would
work and how it would be collected. He expressed concern about
communities that already have a sales tax.
REPRESENTATIVE WHITAKER answered:
My thoughts are somewhat limited on that subject. I
think that it's fair to say that that is a challenge
that's inherent to a sales tax, and I'm confident that
if we work our way through the committee process,
we'll find a solution that is amicable. I do not have
one.
Again, to those who have a concern with this
particular type of tax, if it's not the perfect tax -
which we know it's not, that being the tax that none
of us pay - then we can make it better, and the
administration associated with it can be made better.
And so I'm looking for ideas. Rather than ... me
attempt to impose a solution on ... something that I
know is a challenge and a problem, I think it's more
appropriate that those who would have to deal with it
would come back to us and suggest manners in which we
do deal with it.
CHAIR COGHILL suggested the House State Affairs Standing
Committee is a good place to have that discussion.
Number 1046
REPRESENTATIVE WILSON agreed that some areas of the state would
be in big trouble because of local sales tax. For example, in
her community [Wrangell] the sales tax is 7 percent and property
taxes are high. She strongly suggested, therefore, that
legislators realize how devastating this [state sales tax] would
be to areas that already are in trouble or where taxes have been
instituted already in order to provide services. She cautioned
members to ensure there are some exemptions for such areas.
REPRESENTATIVE WHITAKER responded:
In search of that very difficult goal, the perfect
tax, there isn't one. And I recognize the challenges
that communities who have existing property taxes will
face. The sidebar that I give to that concern is
this: communities that currently have a property tax
will pay relatively to the rest of the state no more
than they currently do.
By way of example, your community, at 7 percent,
obviously pays 7 percent more for goods that are
applicable to the ... sales tax than do other areas.
Given the imposition of a statewide sales tax, that
relative number would not change. They would still
pay 7 percent more than other areas. And while I
understand that that is not the perfect answer, we
won't find the perfect answer, because there is no
perfect tax.
Number 1150
REPRESENTATIVE JAMES commended Representative Whitaker for the
excellent PowerPoint presentation. She then noted that for the
past ten years, she has been telling people that there will have
to be a broad-based tax, that some of the earnings of the
[permanent] fund will have to be used, and that "we will also
have to continue to find efficiencies in government." She
added, "Those sound good when you put them out there, but
defining them, it's difficult."
REPRESENTATIVE JAMES offered that personally, she is totally
opposed to a sales tax, for lots of reasons. She said her
background with accounting and preparing taxes has given her a
perspective different from that of other people. She added,
however, "I will admit that when you ask the people in the state
what we should do, they all prefer a sales tax." She offered
her belief that there is a perception with a sales tax that "the
other guy pays." Furthermore, it is paid only a few cents at a
time, is easy to pay, and doesn't require filing a return. On
the other hand, [a sales tax] is more difficult for a
businessperson.
REPRESENTATIVE JAMES said her first concern is that a person
paying a tax should be responsible for paying it, rather than
having someone else collect it. She clarified that she doesn't
disagree, however, with withholding tax for income tax purposes,
because it is an expedient way for people to pay before the
amount becomes too large.
REPRESENTATIVE JAMES said if she were to support a sales tax at
all, there must be no exemptions; she believes exemptions would
jeopardize businesspeople in an audit situation, for example,
because of the need to maintain records properly and provide
documentation regarding sales that weren't subject to tax. When
there was a sales tax in Fairbanks, she recalled, "lots of
people paid lots of money for penalties and interest because of
making errors - not intentionally, but accidentally - because of
the things that were exempt."
REPRESENTATIVE JAMES also conveyed her preference, if there is a
[sales] tax, of having it be the same all year, rather than
being seasonal. The latter appears to be a direct attempt to
collect sales tax from visitors to the state, she explained.
She suggested visitors would be willing to pay what residents
pay, but wouldn't want it raised while they are visiting.
Furthermore, [a seasonal sales tax] might forestall sales of
larger items during that time period, creating an imbalance
during the year for businesspeople because suddenly, when the
tax is lowered or eliminated, "everybody comes in to buy." She
expressed concern about [problems with] management of inventory
and accounting functions, which she suggested would be
detrimental to the state.
Number 1325
REPRESENTATIVE JAMES, noting that people in some communities
already pay a heavy percentage of tax, stated, "There's no way
that I believe we could fairly give them an exemption of any
kind for the tax they collect. And so that makes it pretty
heavy for them."
REPRESENTATIVE JAMES said she is always open to discussion,
however, regarding trying to make it work in order to avoid
these kinds of consequences. She then suggested that a small
percentage of sales tax all year long, with no exemptions, would
be easy to manage. She expressed concern about the difficulty
of forcing communities to change their laws so exemptions would
be the same statewide.
REPRESENTATIVE JAMES indicated she agreed with Representative
Whitaker's PowerPoint presentation. She cautioned about the
need to have "backbone" regarding this issue, and to address the
right course for Alaska, rather than worrying about the next
election. She expressed appreciation that Representative
Whitaker had come forward with this issue and emphasized the
need to discuss various options, regardless of whether they are
included in the final action taken by the legislature.
REPRESENTATIVE JAMES concluded by saying that when a sales tax
is added to the cost of things people buy, it immediately adds
to the cost of living in the state. If one were added now, it
certainly would be included in the Consumer Price Index (CPI),
which is [used as a basis] for wages and benefits; she offered
her belief that it would be a "huge rise in the cost ... of
doing business in the state." She added, "Even though we
supposedly get the money to cover that cost, we're not covering
the hole that we're currently in, I don't believe."
Number 1469
CHAIR COGHILL indicated it wasn't his intention to move the bill
from committee that day, but if there were suggested amendments,
there could be a proposed committee substitute (CS).
Number 1513
REPRESENTATIVE CRAWFORD told Representative Whitaker he
applauded his courage for bringing the bill forward. He
referred to mention of "nonstore retailers" and said electronic-
shopping and mail-order businesses, to his understanding, would
be exempt under HB 303. He suggested it would tend to change
markets. For example, someone may not tend to buy a motorcycle
or snow machine from an Alaskan dealer, but may buy it over the
Internet. He asked Representative Whitaker what might be done
to ameliorate that.
CHAIR COGHILL requested that Representative Whitaker explain
some of the conclusions he'd drawn in formulating the list of
exceptions.
Number 1560
REPRESENTATIVE WHITAKER first responded to Representative
Crawford's concern, offering his understanding that because it
involves interstate commerce, taxing Internet commerce is beyond
the [state legislature's] purview; it is a subject for Congress
and is being discussed currently.
REPRESENTATIVE WHITAKER noted that he'd had many discussions
with Representative James on this issue; he said he agrees with
much of what she has said. He stated that if there is a better
solution than he has presented, he would be an avid supporter of
it. He remarked that no legislator would take pride in
sponsoring a tax bill.
Number 1605
REPRESENTATIVE WHITAKER turned attention to exemptions in HB
303. Regarding accommodations and food services, he said almost
every Alaskan community has a so-called bed tax; he believes it
is difficult to put a tax on something that already has been
taxed. Regarding utilities, he explained, the concern is that
utilities are a component of the basic cost of living; taxing
them, as Representative James had mentioned, would increase the
basic cost of living. Regarding funeral and crematory services,
he simply said he didn't want a tax on those.
REPRESENTATIVE WHITAKER continued explaining exemptions.
Regarding the retail trade, he said only beer, wine, and liquor
sales are exempt; noting that there was a liquor tax [bill]
before the House, he said he didn't believe it was appropriate,
while that was under discussion, to deal with it again here.
Regarding electronic shopping, highlighted by Representative
Crawford, he said, "There's a problem with it, but it's beyond
our ability to deal with." Regarding vending-machine operators,
he expressed concern that every vending machine in the state
would have to be retooled or replaced in order to get a sales
tax on a 75-cent sale; the utility of doing that, as opposed to
the revenue from it, is probably out of balance, he suggested.
Number 1745
REPRESENTATIVE WHITAKER continued with exemptions, turning
attention to health care and social services. He said, "Look,
we're all human. And as humans, it's pretty tough to tell
someone, 'You're sick, and we're going to tax you for that.'"
Regarding education, he pointed out the difficulty of telling
people who struggle to educate themselves or their children,
"Well, that's wonderful, and we encourage you to do that by
taxing you on it." He added, "Can't do it."
REPRESENTATIVE WHITAKER noted that the only exemption regarding
arts and entertainment is for museums, historical sites, and
similar institutions. Art galleries aren't included, he pointed
out; as a retailer, he himself wouldn't be exempt. He
emphasized the importance of maintaining some cultural amenities
that aren't taxed. "Again, that old rapscallion, humanity, gets
in the way of progress," he added. Regarding construction, he
said he doesn't want every construction contract in the state to
be taxed; he expressed concern about slowing the economy and
concluded, "Basic stepping-stones to economic growth, I have a
very difficult time suggesting that we tax."
REPRESENTATIVE WHITAKER continued with exemptions, noting that
there isn't a significant manufacturing base in Alaska.
Therefore, those things that are manufactured to sell on a
wholesale basis need to maintain viability in the marketplace.
He said it is important to recognize the "delicate price
sensitivity," and a tax on that particular grouping of
industries could be detrimental to the economy.
CHAIR COGHILL requested confirmation that [manufactured
products] at the retail level would be [taxable].
REPRESENTATIVE WHITAKER affirmed that. He clarified that
"nearly the entire category of wholesale is exempted." He
cautioned, "We need to grow our economy, and if we're taxing at
the wholesale level and then taxing at the retail level, we're
not imposing a 3 percent or a 4 percent tax; we're imposing a 6
percent or an 8 percent tax."
Number 1880
REPRESENTATIVE WHITAKER continued with exemptions. Regarding
"lessors of real estate," he said those are people who pay rent.
"I have a very difficult time suggesting that we charge a tax on
folks who struggle to make the monthly rental payment," he
explained. Regarding mining, he said it's the same situation as
for manufacturing and wholesale. "Basic industries, if we tax
it, we begin to do damage to our economy," he said.
REPRESENTATIVE WHITAKER addressed whether making exemptions
opens up the possibility of being accused of protecting a
special interest. He said:
If someone wants to make that accusation, bring it on.
... My only intention is that we not inhibit economic
growth, and that we not ... be particularly burdensome
on individuals as they try to improve themselves or as
they try to educate themselves, as they try to pay
rent, as they try to live a basic life.
Number 1935
REPRESENTATIVE FATE commended Representative Whitaker and
suggested the PowerPoint presentation should be shown to the
public. He surmised that if it were shown enough times, people
would realize it is the Earnings Reserve Account, rather than
the [corpus of the] permanent fund, that would be used.
REPRESENTATIVE FATE emphasized that this bill is set in the
context of other policy discussions that the committee will
have, such as income taxes or use of the permanent fund; the
committee will need to compare proposals afterwards. Voicing
the hope that the result will be "the most fair tax that we can
levy on the people of the state of Alaska," he remarked that he
believes a sales tax could be a fair tax.
REPRESENTATIVE FATE said it is a policy issue - not taxing to do
"social engineering," but solely to fill the fiscal gap. If
future fiscal gaps "literally crash the economy in this state,"
there would be no PFD, which in itself stimulates Alaska's
economy; when that PFD disappears, he surmised, so might the
economy. He suggested looking at what these taxes will do to
the economy in the future. He added that any tax must have a
counterpoint, which is that the government must be responsible
and stop some of the spending. He said he applauds
Representative Whitaker for bringing these issues to light.
Number 2084
CHAIR COGHILL called an at-ease at 8:45 a.m. He called the
meeting back to order at 8:46 a.m.
Number 2096
REPRESENTATIVE HAYES commended Representative Whitaker for his
presentation as well. Mentioning out-of-state workers who work
in Alaska and then leave, he asked how Representative Whitaker
envisions "capturing dollars from those folks." He cited
workers on the North Slope as an example.
REPRESENTATIVE WHITAKER answered that it would be through a
sales-tax vehicle. He added:
The only manner in which revenue can be captured from
so-called out-of-state workers is through the process
of them buying a good or a service that is taxable.
If they choose not to purchase anything, then once
again they have avoided paying taxes in the state of
Alaska and have reaped the benefits of being employed
here. Again, I'm searching for that perfect tax with
all the answers and doing no harm - haven't found it
ye. I'm still looking, and looking for ideas.
Number 2146
REPRESENTATIVE JAMES responded to Representative Hayes's
question:
When I've listened to the people all over the state,
... what I hear them saying is they want more things,
but they want to pay for nothing. And if anyone pays,
they want someone else to pay. And so, they would ask
us to design it so just those people who come here and
work and don't spend any money here and go home pay,
and you know we can't do that. And, of course, that
underlines the reason that I prefer an income tax over
a sales tax.
I don't know how many of you know here that four years
ago I filed an income-tax [bill], and I didn't get it
out of [the House State Affairs Standing Committee].
So ... I've been there on this issue of filling this
gap for a long time, and I'm kind of getting "slapped
around the face" now for "now, suddenly, supporting a
tax of any kind."
REPRESENTATIVE JAMES then addressed Representative Whitaker's
exemptions. She suggested that sales tax could be put on
vending machines, which is done elsewhere. Instead of paying 75
cents, the buyer would pay 80 cents, for example. She conveyed
her personal preference, if there were to be a sales tax, of
taxing vending-machine sales as well.
REPRESENTATIVE JAMES turned attention to sales of alcohol. She
said there is a big difference between a wholesale tax and a
retail tax. Of the two, she stated her preference for a retail
tax, in order to benefit the businessperson. "We do have retail
taxes on alcohol in very many communities," she added, citing
Fairbanks as an example. She said without businesspeople in the
state, there would be no economy; taxing at the wholesale level,
to her belief, would have a negative effect. In the particular
case of alcohol, she said, that is a wholesale tax that
increases the cost of the inventory for people who are in
business.
REPRESENTATIVE JAMES brought attention to an issue not covered
in the presentation: the role of state government in economic
growth in Alaska. She explained:
In this state, ... the state owns everything. And if
people want to do resource development or other
things, you have to get a permit and you have to have
oversight by the state government to make sure that
they're following all the rules and regulations and
all of the protections for the environment and
protections of the people and so forth.
And so we need to be sure that we have enough people
working for the state to do that in a prompt and
timely manner. I don't think we do, currently, and I
think that might be contributing somewhat to the
reason that we're not having any additional offers
coming to town, bringing their money and investing
into businesses and resource development in our state.
Well, that's ... one of the issues. To say that we
can create economic growth without some state
spending, I think, is ... not totally correct.
REPRESENTATIVE JAMES turned attention to page 1, line 6, of HB
303, which read in part, "Levy of sales tax; tax rate." She
noted that [subsection (a)] goes on to say "a sales tax is
levied on the sale or other transfer for consideration of goods,
on rents, and on services performed for consideration in the
state." She inquired about saying, instead, "a retail sales
tax", which would already, then, exempt any wholesale
transactions. She mentioned her own experience of standing in
line where people are buying expensive items such as building
materials, for example, and seeing those people use their
exemptions as wholesale purchasers to buy personal items. She
remarked:
I don't know how we manage that, and I'm sure we can't
keep anyone from cheating. But ... we don't want to
present a particular type of legislation that
encourages cheating, because then ... we have this
friction out in the public. And so, what we need to
do, I believe, in any kind of a broad-based tax, is
make it as fair and equitable as we can, to the
individuals, not necessarily to the state as a whole.
REPRESENTATIVE JAMES offered final comments:
You know that if we want to be fair and equitable, the
best thing to do is tax the people who make money.
And that's an income tax. I can't find any other more
fair tax than to tax the people who make money, rather
than the people who don't make money or are buying
things that they really need, that are taxable, with
the limited funds they have from some other source.
Number 2358
REPRESENTATIVE WHITAKER responded:
With the exception of your last statement, I don't
disagree with anything you've said. And I look
forward to a friendly amendment and/or committee
substitute reflecting your concerns and that we can,
again, take an idea from its beginning to a better
place. And I certainly have no objection to that
whatsoever.
TAPE 02-8, SIDE B
REPRESENTATIVE WHITAKER reiterated his belief that the most fair
and equitable tax is a sales tax, "essentially, a consumption
tax." He added, "Obviously, those who consume more will pay
more, but everybody will pay. And in a society and a culture -
this Alaskan culture - where we all use, we should all pay. And
this is the only method that I've been able to determine that
will, indeed, achieve that end."
CHAIR COGHILL said that is probably what the committee will have
to discuss.
Number 2337
REPRESENTATIVE STEVENS remarked that as a former city mayor and
borough mayor, he knows how communities have depended on sales
tax. He added, "We've sort of left that alone in the past, as
an area where cities can find a way of taxation to pay for the
services they provide. So this is not my favorite tax." He
offered, however, that all proposals should be looked at
together.
REPRESENTATIVE STEVENS called attention to the exemption on page
2, paragraph (9), which read, "that part of the selling price of
a single item or the periodic selling price of a single service
that exceeds $2,000". He surmised that it applies to large-
ticket items; for example, with the tax at 6 percent, the most
that someone who buys a new car would pay is $120. He pointed
out that his own city [Kodiak] has a 6 percent local sales tax;
it would cost an additional $240 for a new-car purchase. He
expressed concern that the impact of a seasonal sales tax would
be that people would wait until November, when the tax goes
away, to make purchases.
REPRESENTATIVE STEVENS commented that he has never heard of a
sales tax attached to a new house. He asked whether homes are
exempt from this process.
Number 2275
REPRESENTATIVE WHITAKER answered no; they would be subject to
the same $2,000 cap. With regard to the other comments by
Representative Stevens, he said he has the same concerns, but is
searching for that "perfect tax."
Number 2260
REPRESENTATIVE COGHILL asked Representative Whitaker whether
there had been discussion, in crafting the bill, about providing
exemptions for some of the local municipalities that already
have chosen to tax; he recalled that perhaps 97 in Alaska have
chosen to do that.
REPRESENTATIVE WHITAKER answered, "Of course. It is a
significant concern, and the communities that have a sales tax
have expressed that concern. I agree with them." He said that
after a significant amount of thought, however, he believes if
"a community imposes a sales tax today that is higher than other
parts of the state, it will, relatively speaking, be no higher
after a statewide tax." He reiterated that there is no perfect
tax, but that there are consequences if no action ensues.
Number 2200
CHAIR COGHILL noted that some Alaskan retailers would report
sales tax to both the local municipality and the state. From a
bookkeeping standpoint and as a business owner, he asked
Representative Whitaker whether he feels that would be much more
burdensome. He said he was trying to envision it at the
practical level, "as far as being a tax collector for the
state."
REPRESENTATIVE WHITAKER responded that this legislation doesn't
attempt to find answers to all administrative challenges. He
said he didn't have those answers, and acknowledged that
certainly it would be more burdensome than currently. However,
he said, the aim is to deal with a larger fiscal problem, and
there isn't an easy way to go.
CHAIR COGHILL said he appreciated that and then commented, "We
will be asking many more people to do what we would, later on,
pay in administration to do if we did an income tax, for
example." He suggested those are some aspects legislators need
to compare. He noted that Larry Persily [Deputy Commissioner,
Department of Revenue] was present to answer questions regarding
how this scenario could work on the administrative side and what
sort of state revenue it could produce.
CHAIR COGHILL asked whether anyone else in the room wished to
testify; there was no response. He indicated the Alaska
Municipal League (AML) had provided written comments.
Number 2112
REPRESENTATIVE WILSON asked whether there would be a time for
the committee to discuss various options regarding the state
budget and whether it warrants adding taxes or looking at state
money given to private business, for example. She asked whether
this was the right time to discuss it.
CHAIR COGHILL answered in the affirmative, saying it will be
part of the whole discussion. Although the House State Affairs
Standing Committee is not a "budget committee" in that regard,
members must deal with all of those ramifications. Referring to
constitutional provisions regarding "what can go to ... private
individuals with state money," he said:
It's a little more restrictive sometimes than we
really think. We have gotten to grants and subsidies
to a larger degree than ... I personally think we
should, and I'm hoping to bring some of that balance
to the discussion.
It's certainly not my position, as a committee
chairman, to try to introduce competing legislation or
anything like that. But I think we do have to ask the
question - "What comes first? Or is ... this 'and'?"
- or those types of questions. I think those are
legitimate questions.
CHAIR COGHILL said at this point, he was interested in comparing
the different revenues with the different styles of taxes, as
well as the implementation and ramifications. Following that,
specific language could be addressed. He noted that questions
include at what point taxes should be implemented, the reasons
for a tax, "and what are we going to do with this government
before we tax."
CHAIR COGHILL referred to a sales tax as a broad-based,
consumption-based tax and said:
In reviewing some of the e-mails that I've gotten, a
lot of people feel very strongly that this is the way
to do it. Once again, it taxes what you consume, and
it has kind of a limiting factor in excessive
spending, if you will. It actually increases the very
thing that we want, and that is frugality, and still
allows for the free movement of commerce.
On the other hand, when we get to an income tax, it
actually taxes a thing that we want to increase, and
puts downward pressure, and that is the ability to
produce. ... Those are the two principles of operation
that we have to deal with.
Number 1975
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, came forward to testify. He complimented
Representative Whitaker on his presentation and thorough
understanding of the issues and facts.
MR. PERSILY offered background information. The only states
without a statewide sales tax are Alaska, Delaware, Montana, New
Hampshire, and Oregon, he told members. Taxes range from a low
of 2.9 percent, in Colorado, to 7 percent, in Mississippi and
Rhode Island. The cities, counties, transit districts, and
other taxing authorities in all of the states add their sales
tax onto the state tax rate; the state then handles collection,
enforcement, audits, and distribution back to the municipalities
of their shares. He said:
We have found very few locations where the
municipalities have their own sales tax collections
and sales tax laws separate from the state; obviously,
it's a more cumbersome process. It doesn't mean it
can't be done, but we've found only a few - a couple
in Louisiana where cities have their own, separate
[process].
MR. PERSILY reported that when state and municipal/county tax
rates are combined, the highest he'd found was a district in
Oklahoma, at 9.78 percent; in addition, a couple in Louisiana
were at 9.5 percent.
MR. PERSILY noted that 27 out of the 45 states with a sales tax
exempt some or all food purchases. Regarding collection of
taxes, he reported:
27 of 45 states allow the businesses to retain a
portion of their collections as reimbursement for the
administrative costs, because, as Representative James
points out, we are asking businesses to function as
our tax collector if they have to keep the books, run
the risk of enforcement or audit issues, remit the
money. ... That ranges from .5 percent to as much as 5
percent on small businesses or small tax collections.
Generally, it's a sliding scale.
REPRESENTATIVE CRAWFORD asked, "When you say .5 percent or 5
percent, are you talking about the total amount ... of tax
raised?"
MR. PERSILY responded that if a business were sending in a
$10,000 tax payment to the state, and if it were allowed a 2
percent commission, the business would keep 2 percent of that
$10,000 - 2 percent of the tax collected.
Number 1862
REPRESENTATIVE CRAWFORD offered his understanding that under HB
303, the retailer can keep 1 percent of the amount raised. He
asked, "Are you talking about actually 20 percent of the tax, or
are you talking about 1 percent of the total?"
MR. PERSILY replied, "I would believe it's 1 percent of the tax,
not 20 percent. So it's not the 1 percent on a dollar purchase,
but 1 percent of the tax that was collected, and that would fit
in with, generally, the rule of thumb on that."
Number 1811
REPRESENTATIVE STEVENS asked whether, in other states, there is
a charge for the effort that has gone into collecting a local
sales tax that is passed along to local municipalities.
MR. PERSILY answered:
It's a little different because in Alaska, for years,
... the state has allowed municipalities to treat
sales tax as their own, and they have set up sales tax
operations. I think, historically, in other states,
it started as a state function. So certainly it would
be a question.
Here, if you had a sales tax, and if you wanted to
standardize it with one set of rules for the entire
state - which is what we'd recommend - and then if you
collected the municipal share so businesses only have
to do one tax return and remitted that municipal share
back to the municipality, if the municipalities no
longer needed a sales tax office and thus were saving
money, it would seem reasonable for the state to take
a cut, just like businesses take a cut of what they
send in for the collection fee. But, of course,
that's a policy call. ... But if the cities are saving
money by not having to collect it, then you could
argue that they should share some of that expense with
the state.
CHAIR COGHILL mentioned looking at "how could we do an
alignment," and suggested in that regard, there would need to be
a study regarding the "97 different taxes."
Number 1739
REPRESENTATIVE STEVENS surmised that other states charge local
communities for collecting their portions of the sales tax.
MR. PERSILY responded:
I'm not sure there's anything similar to Alaska,
because the local municipalities did not have a sales
tax office already set up. They just piggybacked on
the state tax. So, they didn't have any ongoing
expenses.
CHAIR COGHILL remarked, "So, the principle of operation would
be, 'What do we have to do to find commonality and alignment.'"
Number 1718
REPRESENTATIVE WILSON asked Mr. Persily whether there is a
possibility, because municipalities already have something in
place, that they may choose to retain what they receive now,
send the extra amount to the state, and keep that percentage for
themselves, rather than have the state collect it all and give
[the municipal portion] back.
MR. PERSILY answered:
You could do that, but I think then you get back to
what's easiest for the business. If you have a
statewide business and some of [the] tax returns go to
cities, some of the tax returns go to the state, I
think you would find businesspeople sitting here
saying, "Gee, don't make life hard on us; it's hard
enough."
CHAIR COGHILL said that is a good point.
MR. PERSILY continued:
Certainly, every state but Alaska has broad-based
taxes. On average, [of] the states that have a sales
tax, about 32 percent of their overall general fund
revenues come from sales tax.
In other states, this historically has been a large
source of income, and that's why ... in the 1990s,
when the nation's economy was doing very well, [many]
states did very well; they had surpluses, and they
were raising spending, because they were sharing in
that economic boom or increase, depending on your
state, because of the broad-based tax, the sales tax.
Getting back to Alaska, as has been pointed out, we've
got 97 cities and boroughs that already have a sales
tax. In fiscal year 01, they collected about $125
million; that's about $600 per capita in those
communities with a sales tax. Those 97 communities
have more than 200,000 residents. It ranges from a
low of 1 percent in Tenakee and White Mountain -- as
Representative Wilson pointed out, Wrangell is the
highest in the state, at 7 percent; Kodiak, Kotzebue,
Cordova, Petersburg are all at 6 [percent]; and then
you move down to 5 [percent] after that.
MR. PERSILY reported that each Alaskan municipality has its own
list of exemptions, limits, and rules. In Wrangell, for
example, the cap on purchases $1,000; a consumer pays tax on the
first $1,000. In Juneau, he said, the cap is $7,500; last time
he looked, Juneau had 38 exemptions, some very broad and some
very specific, including an exemption for lobbyists. He
continued:
As has been pointed out, the Department of Revenue
also is concerned that if you put a state sales tax on
top of municipal taxes that are 5, 6, or 7 percent,
you begin to do what you don't want to do, and that's
affect economic activity and economic behavior in the
state; we share that concern.
Number 1581
MR. PERSILY discussed a state sales tax in relation to senior
citizens. Some communities exempt senior citizens from paying
sales tax, he noted, and there are different ways it can be
done. In Juneau, for example, a senior citizen signs up with
the city and receives a card; he or she presents that card to a
merchant, who must look at the card, keep a log, and turn the
log in to the city, if asked to show that these were exempt
purchases. He remarked:
Obviously, that's a problem for merchants; it's very
cumbersome. And since I'm not mayor of Juneau and I'm
not running for mayor of Juneau, I can say that there
have been concerns in the past of some seniors'
bending the rules, because once you have that card and
you go in to buy a washer or dryer, you don't have to
sign an affidavit saying it's for you or your
daughter. But at 5 percent, it's a significant
savings.
Wrangell does it a little differently. They have
computed what an average senior citizen would spend on
taxable purchases, and in Wrangell, seniors get $250
back. They pay sales tax, but they get a rebate back
from the city - at least I don't believe that's
changed. And so, that way the merchants are not in
the position of enforcing the senior-sales-tax
exemption, if you want to go that way.
Number 1525
MR. PERSILY turned attention to what is paid by out-of-state
visitors and said:
On a year-round sales tax, we would estimate that ...
about 10 percent of the revenue would come from
nonresidents, either nonresident workers for their
time in Alaska or visitors. ... Obviously, it would
be somewhat higher during the summer.
MR. PERSILY, regarding a seasonal sales tax, reported:
We've looked at a seasonal sales tax. ... We were a
little surprised. We used Juneau as an example, since
I can't think of a town in Alaska that is more
dependent on [a] summer tourism economy, with 670,000
cruise ship visitors and 100,000 independent visitors.
Interestingly, if you look at six months in Juneau -
April through September, those middle two quarters
versus the other two quarters - it's pretty evenly
split. In terms of taxable sales reported to the
city, it's about 50-50.
And as we thought about it some more and talk to tax
authorities, you realize that the permanent fund
dividend and Christmas sales are a significant amount.
That isn't to say that if you do a seasonal sales tax
in those middle six months, probably the nonresident
purchases are higher than the year-round average of 10
percent.
Number 1473
CHAIR COGHILL brought up the idea of having a year-round sales
tax but having a "bump-up" during the summertime. He asked Mr.
Persily whether he'd pondered that.
MR. PERSILY replied:
Ponder it - I guess, sitting around the office,
talking with economists and others. And the concern
we have with any differential is, you affect spending
decisions. Certainly, if you're making a big-ticket
... purchase and the sales tax goes up, you might, as
other people have said, put off your purchase until
October, when the tax goes off. Depending how much
you need that item, depending how much you want to buy
it at that moment, you might just decide to shop out
of state, which is what we don't want.
And there's no way of knowing for sure how much
business would be postponed, which poses problems with
inventory and staffing and management for your local
merchants. We don't know how much business would be
postponed versus how much business you would lose
during that period. What is the threshold at which
people change spending decisions?
For example, again, to take Wrangell at 7 percent, I
would maintain that if you put a 3 percent tax on top
of that - so if you told people in Wrangell you had 10
percent - that would significantly affect spending
decisions, that a great deal of that town's economy
would go out of state, because "at 10 percent, I can
afford the freight to ship it in." So where is that
pain threshold on a seasonal tax - 1 percent?
Probably not. But it's hard to know where it is.
MR. PERSILY agreed with Representative James that the
legislature doesn't want to construct anything that would be a
disincentive to businesses to locate in Alaska. He noted the
effort underway among states, the streamlined sales-tax-and-use
agreement, to standardize sales tax. He remarked that as there
are more Internet, mail-order, and 800-number [purchases],
businesses are asking, "Please, make it easier on us; have one
set of rules." He continued:
And that's why, if you went to a statewide sales tax
in Alaska, we would recommend you change Title 29 and
take over control of the sales tax, so you'd have one
set of rules for businesses to follow, to make it as
easy as possible for them to follow the law and remit
the correct amount, [and to] make it as easy as
possible for them to do business in your state,
because you want them to come to your state and set up
a shop.
On one other point, in terms of Internet, phone, [and]
mail-order sales, if Alaska had a sales tax, we would
collect it, for example, on Eddie Bauer, because they
have a physical presence in the state. Under federal
law, if the merchant has a physical presence in your
state, even if the order is placed over the Internet
or by phone to an out-of-state location, you can
collect the sales tax. So if Alaska had a sales tax,
we would collect it on Eddie Bauer Internet sales. We
would not collect it on Lands' End Internet sales,
because they don't have a physical presence, but
you're going to want them to set up business shops in
their state. You would probably want to subscribe to
the streamlined sales-tax-and-use agreement that other
states are signing up to.
Number 1320
REPRESENTATIVE JAMES recounted that when she lived in Washington
State years ago, there was a sales-and-use tax. If a person
bought a vehicle in Oregon [where there was no sales tax],
before licensing it the person had to pay the [Washington] sales
tax, and there was no exemption.
REPRESENTATIVE JAMES further recalled that the owner of a farm
equipment dealership in Washington had put the sales tax in a
different account whenever she received a payment in order to be
able to pay the thousands of dollars owed monthly.
Representative James said although large businesses wouldn't
have a real problem with that, the numerous smaller businesses
in Alaska are a concern of hers "because it's like an
entrapment, I think."
Number 1236
MR. PERSILY responded:
Both good points. ... There are obviously parts in
this bill that we really do like and are ... good.
Addressing that, this legislation calls for payments
to be made every month. There are some cities where
the payments are due from the merchants quarterly, and
you're right: that poses a problem. If you're a
small, marginal business, that money's in your
checking account; it's not due to the city for 60
days, but your rent is due, you pay the rent, and you
hope to find some more cash 60 days out for the city
tax bill. You don't find it and you're in trouble.
MR. PERSILY reported that in most states with a sales tax, it is
called a sales-and-use tax. Technically, if a person who lives
in a state with a sales-and-use tax buys something in another
state and brings it home for use, that person owes the sales tax
because of using or consuming it in the state of domicile. He
continued:
Other than vehicles, which you enforce when you go to
register it and the state will say, "Well, if you
don't pay sales tax, you've got to pay it now or we
won't register the car," ... use tax is very difficult
to enforce.
There are some states that have a voluntary-payment
line on their income tax return, and it basically
says, "How much did you spend in other states on
goods? ... Add it up, multiply it by the state sales
tax, and send us the money." As you can imagine, the
compliance with the voluntary use tax is somewhat slim
- other than vehicles.
REPRESENTATIVE JAMES remarked that in Washington there was a
"pretty good 'gotcha' program on that." She noted that it
included boats and other high-ticket items, some of which
weren't necessarily licensed. "People were afraid not to, the
penalty was so steep," she added.
Number 1148
REPRESENTATIVE WILSON said she hadn't thought about a few
aspects, including the difference between Eddie Bauer and Lands'
End. Many people might switch from one to another just because
there wouldn't be a sales tax. She suggested the need to really
consider negative effects for businesses, such as the fact that
a business like Eddie Bauer, which has a physical presence in
Alaska, could be encouraged to leave Alaska [if a tax made it
cheaper to buy from out-of-state competition].
REPRESENTATIVE WILSON inquired about the change to Title 29
mentioned by Mr. Persily.
MR. PERSILY explained that Title 29 is the statute that gives
municipalities their taxing powers.
Number 1081
REPRESENTATIVE STEVENS noted that [an Alaskan] in Washington
State doesn't have to pay sales tax on items such as clothing
purchased there and brought to Alaska. He asked how it works in
Alaska, noting that many Russians come through Anchorage, for
example, and Canadians may come across the border in Southeast
Alaska. He asked whether it may be a disincentive to
nonresidents. He then asked Mr. Persily whether he has found
that most states allow a forgiveness or an exemption if someone
is taking "nonconsumables" back to his or her home community.
MR. PERSILY answered:
Some states do, but I guess we're in a different
position than many states. Other states that have a
stable economic plan want the visitors because the
visitors spend money in the businesses; the businesses
and the employees pay corporate and individual income
tax. There's a way for the state to recoup a share of
the economic activity in Washington.
In Alaska, because we're hurting for cash, we want the
visitors, but we don't want to exempt them from sales
or income tax; we want them to pay. So we could
exempt - you know, "Show your Washington driver's
license and all the gifts you buy are exempt" - but
that would seem to be contrary to what we need and
want to do. We want them to pay something.
I don't know if it would be a disincentive. ... If
someone spent a lot of money coming here on a
vacation, would they buy fewer gifts to take back
because there's a sales tax? I don't think so, since
most of them are used to paying a sales tax in their
own state.
Number 0985
REPRESENTATIVE FATE asked how many states have sales tax.
MR. PERSILY said it is 45 states.
REPRESENTATIVE FATE referred to Mr. Persily's mention of an
attempt to standardize the sales tax. He asked what rate that
standardization is aiming towards.
MR. PERSILY explained that it isn't aiming at a rate; rather, it
is aiming at a set of rules. He expanded on his answer:
A lot of it is being driven because states with sales
tax are losing a significant amount of money to the
Internet. And the states are concerned, so they want
the ability to tax sales on the Internet. And the
business community is concerned that if that finally
goes through and they have to pay tax, ... they would
prefer a standardized set of rules. The rates don't
bother them; that's easy enough to change in the
computer software. But they would like to deal with a
standardized set of rules, so you'd have one set of
rules per state, not a multitude for jurisdictions,
and that there's some agreement on how you would treat
Internet sales.
MR. PERSILY pointed out that the agreement, which approximately
20 states have adopted, says "states to administer any and all
sales-and-use taxes levied by local jurisdictions within the
state so that sellers ... collecting and remitting these taxes
will not have to register or file returns with, remit funds to,
or be subject to independent audits from local taxing
jurisdictions." He commented, "They want to deal with just the
state, and not 97 different laws."
Number 0833
REPRESENTATIVE FATE said he believes that is important to know.
He added:
If we're to have a sales tax in this state, I think
that we should have that very clear, because we're so
isolated from other states, you can't drive to your
next-door neighbor and buy goods. That will force a
lot of people into thinking that they will be using
either the Internet or other catalog-type services.
So I think it is very important for the state.
CHAIR COGHILL suggested that when Representative Whitaker
returned to the witness table, the committee should discuss how
to frame that.
Number 0815
REPRESENTATIVE JAMES said:
In the comparison of the administration of an income
tax versus a sales tax, it's been my perception that
maybe one of the most difficult parts of anything -
and expensive parts - is the audit function, because I
certainly wouldn't want to be having a tax just laid
out there and it's not monitored, to be sure that
people are complying and they're doing it properly.
There is another tax that is just a tax of the
adjusted gross income on the federal tax return. ...
Could you give us any kind of an indication of what
the cost of administering, at the state level, would
be of a sales tax under our current situation and this
particular piece of legislation ... versus an income
tax that would be simply ... something based on the
federal tax return?
Number 0758
MR. PERSILY replied:
The fiscal note on this sales tax bill [HB 303] says
that after some initial capital expenditures, you're
looking at a little bit more than $4 million a year,
which is shy of 2 percent of what would be raised off
of it.
The fiscal note on the governor's income tax bill -
which we just submitted yesterday - after some initial
startup expenses, settles out at about $7 million a
year. So an income tax would be more expensive to
collect than a sales tax - 7 versus 4 [percent].
REPRESENTATIVE JAMES inquired whether it would make any
difference if the percentage were applied to the adjusted gross
[income on the federal tax return]. She asked whether it would
be [less expensive to administer] and simpler.
MR. PERSILY answered:
Probably not significantly. ... One of the biggest
expenses we see with an income tax is just processing
400-and-some thousand returns every year and, since
many people would be getting refunds, getting those
out quickly, and pulling aside a certain amount [of
returns] for audits. ... I guess, as I think about it,
the simpler the tax, the simpler the audit, so ... you
might see some difference in your audit staff. But
the bulk of the staff for income tax is just
processing the paper and payments, and it probably
wouldn't matter one way or another ... on that.
CHAIR COGHILL commented that he appreciated the fiscal note
provided by Mr. Persily, "recognizing that we're wandering into
a very dynamic process here."
MR. PERSILY, in response to a question by Representative
Stevens, said:
With the income tax, ... with the governor's proposal
that would raise $350 million, it would be 2 percent.
But it would be $7 million whether you raise 350
[million] or 200 [million] from an income tax. You're
still going to have the same number of returns, the
same number of audits, the same number of employer-
withholding statements to deal with. So an income tax
is more labor-intensive to collect than a sales tax;
you just have more returns.
CHAIR COGHILL responded, "I don't know that it's more labor-
intensive; it's just that we shift the labor burden to the ...
employer and to the retailer."
Number 0599
REPRESENTATIVE HAYES asked what Alaska's economic growth and
general fund spending have been over the last ten years,
compared to other Western states.
MR. PERSILY said he didn't have those details, but compared to
other states, Alaska's economic growth has not been as robust
over the past decade. Most of it has been because of increased
federal spending and an increase in the PFD, rather than "what
we normally would think of as economic activity." He added:
The other states, as they were growing their economies
in the '90s, the states shared in that because of the
broad-based tax. ... A good example is, in the late
'90s, as individuals made a lot of money in the stock
market on stock options and as the market was booming,
we made some money with permanent fund dividends, but
that income is taxable. So states with a personal
income tax did very well off of it. And now, of
course, they're hurting because no one's making money
in the stock market and they're all writing off their
losses.
CHAIR COGHILL requested a copy of the document that Mr. Persily
had been reading from.
Number 0516
REPRESENTATIVE JAMES reported that a booklet she'd reviewed had
compared high-tax and low-tax states; Alaska was included as a
high-tax state because of income from the oil tax [and
royalties]. She expressed surprise at that.
MR. PERSILY responded:
I've had that discussion with many reporters in my
current position over the years. And, right, those
tables just take our tax revenue divided by our number
of residents. And that's misleading. What you should
do is take our tax revenue [and] subtract out oil
taxes and royalties. If you want to say what
residents pay, you're left with alcohol, tobacco,
[and] motor fuel tax, and we are a very low-tax state.
Number 0400
CHAIR COGHILL said compliance is one of the issues an
administration must deal with regarding, for example, making
sure employers file in a timely manner. He asked Mr. Persily to
provide some idea of how an administration might see its role in
accountability.
MR. PERSILY answered:
This is all new territory for us, in that we don't
have any broad-based taxes. We used to have an income
and excise tax division, which we - three years ago -
merged into [the] oil and gas tax division. And we
have less than one full-time person doing alcohol, and
less than one full-time doing motor fuel, and less
than one full-time doing tobacco tax. So it's pretty
much starting from 0 to 60 for us.
One thing we were concerned about is being able to ...
deal with businesses in a timely fashion. ... Our
recommendation would be not to short-staff the office.
As Representative James pointed out, businesses can
get into trouble if they're behind in their taxes.
And if we're behind in our work and we don't catch it
until three months [later], and now they've got a
$10,000 tax bill that they can't get out from under,
we haven't done anybody a good service. ...
This fiscal note proposes, if we're going to have an
income tax, let's staff it a level that we can be
responsive to businesses in a timely fashion, so that
we help them, rather than just blindside them [at]
some point later on in life and tell them they're in
trouble and we're going to start piling on fees and
penalties.
MR. PERSILY explained that although Alaska has big retailers
such as Wal-Mart, "we don't expect we'll have any problem with
them; they're automated." He estimated, however, that perhaps
tens of thousands of small, individual businesses in Alaska will
have to file tax returns - "people who have side businesses,
second businesses, small retail or handicraft businesses." He
added, "I don't know if 'friendly' is the word, but we want to
provide a ... good level of service to them, so that we're not
making it harder.
CHAIR COGHILL said he agreed wholeheartedly, adding that he was
expecting to talk to the sponsor about that.
Number 0233
REPRESENTATIVE JAMES mentioned the possibility that managing
450,000 tax returns, because of technological advances, may not
be labor-intensive except for the audit process.
MR. PERSILY replied:
We certainly looked at that. One problem we're having
is, because ... of the time crunch, ... we have to
assume that if there's an income or sales tax, it
would take effect January 1. We'd have to have forms
[and] booklets out to merchants or employers by
November if they're going to start withholding, if
they're going to start setting up their computers for
a sales tax. I'm assuming, again, that an income tax
or a sales tax doesn't pass until the last week of
session. ... That doesn't give us a whole lot of time.
Ideally, we would like to make it as electronic as
possible, and that may mean that the fiscal note you
see today, next year changes, because we're able to
come back and say, "We've tried this. We have found
that 'x' number of percentage we can handle
electronically. We don't need as much as we
thought.'"
Number 0085
REPRESENTATIVE JAMES said that is her point. She surmised that
it is possible to institute a sales tax more quickly than an
income tax, because an income tax would have to start the first
of January. Therefore, the fiscal note would apply to the first
part of the budget process that the legislature is working on
right now - the six months before January 1 - in order to
prepare for it. She said she assumes that with extra help [the
Department of Revenue] could do that. She added, "The money to
pay for that, it will probably have some quarterly-return
opportunities, but otherwise, it's not going to come in until
the following year, come April."
MR. PERSILY responded:
We agree. ... A sales tax would be easier to
administer. But we do believe we could get an income
tax in place for employees to start withholding
January 1st, remitting the withholding monthly. But
either or both of those would be a large task, and
we've already started assigning people we have to it,
pulling them off other jobs, because if the
legislature decides to pass one of those taxes, we
don't want to come back to you next fall and say,
"Gee, we sort of had some problems. Could we have 30
days more?" [Ends mid-speech because of tape change.]
TAPE 02-9, SIDE A
Number 0001
REPRESENTATIVE WILSON referred to Mr. Persily's mention of tens
of thousands of small businesses and 97 cities or municipalities
across Alaska that have some sort of tax now and that would need
to "shift gears and think things differently." She suggested
many of those business owners don't have a high level of
education; currently, they only need to keep simple records, but
that would change, creating a need for extensive education
regarding changes. She expressed concern, indicating she isn't
in favor of a sales tax.
Number 0149
MR. PERSILY clarified that "tens of thousands" was just a guess.
For example, he himself has a business license for consulting
work. He said he is guessing that with 630,000 [residents],
probably many small business operate out of people's homes, for
example, although items for resale would be exempt.
Number 0175
CHAIR COGHILL suggested that would add more importance to the
business license in this application. He expressed appreciation
to Mr. Persily and then invited Representative Whitaker to make
final recommendations and suggestions on a proposed committee
substitute (CS) or a sponsor substitute for the bill.
CHAIR COGHILL then said to Representative Whitaker it seemed it
would be better to have a flat, year-round sales tax rate. He
referred to Representative James's remarks about making it a
retail sales tax and asked whether "usage" is something that
should be added to the bill.
CHAIR COGHILL remarked that although repeal of Title 29 is
possible, having some alignment with what is already happening
in Alaska, as discussed by Representative Wilson [with regard to
communities that collect sales tax] is important. He asked
Representative Whitaker whether he could obtain or help the
committee obtain a study that shows what is required to do that.
Number 0289
REPRESENTATIVE WHITAKER replied that he'd be happy to do that.
He added that he would view any reasonable amendment and/or CS
to be a friendly amendment.
CHAIR COGHILL proposed that the Title 29 issue is a good one to
begin with. Referring to the 97 communities with an existing
sales tax, he said there needs to be "an incentive in there, I
think, for that community to do that, and I think ... getting a
percentage of that community's sales is a good way to do it."
He suggested perhaps addressing it with an amendment.
CHAIR COGHILL referred to his own experience in retail sales and
suggested monthly payments would be good. Noting that daily,
weekly, and monthly closeouts "were a matter of fact," he
suggested a monthly sales report isn't "that far out of line."
Number 0376
REPRESENTATIVE JAMES proposed the following conditions if there
is to be a sales tax: a small amount such as 2 percent; limited
exemptions; and the ability for municipalities to choose whether
to collect sales tax separately or to "piggyback" on the state's
ability to collect, and then eventually do away with their own
local collection agency. She said there was a fourth one, but
she wanted to think about how to phrase it.
Number 0480
REPRESENTATIVE FATE referred to the low tax rate, mentioned by
Representative James, of 2 percent. He suggested if 1 percent
were taken for administration, there still would be only a 1
percent tax.
REPRESENTATIVE JAMES replied in the negative, saying it is 1
percent of the tax, not 1 percent of the sales. She added,
"It's a very small amount, I know, because ... I get that on my
bed tax I collect; it's just peanuts."
REPRESENTATIVE FATE offered his estimation that a 4 percent
year-round sales tax would provide approximately $640,000.
REPRESENTATIVE WHITAKER responded that he didn't have a basis
for that assumption. He explained:
We worked under one set of assumptions as we began the
process. As we've tried to refine numbers, I cannot
definitively agree ... with what you're saying. And
we need to be a little cautious about projecting
revenue. We have broad ranges, and the best numbers
that I can come up with at this point are plus or
minus $50 million, one way or another. And so, we
need to go into this recognizing that. The numbers we
are dealing with are based upon 1997's revenue
numbers, and we should proceed cautiously.
Number 0579
REPRESENTATIVE FATE emphasized the need to consider the total
package, because the fiscal gap cannot be filled with a sales
tax or any other tax by itself.
REPRESENTATIVE WHITAKER agreed.
Number 0631
REPRESENTATIVE JAMES suggested there could be either monthly or
quarterly returns, for example, based on the total sales of a
business, so smaller businesses wouldn't file as often.
However, she stressed the importance of not having [a monthly
report] due until the end of the following month, because of
time lags relating to bank statements and bookkeeping. She
added, "That has caused an awful lot of problems in the
collection of tax and the filing of the report. And it's a lot
easier to file it right in the first place than it is to amend
it and/or make the adjustment on the following report."
Number 0699
CHAIR COGHILL again suggested looking at both what has already
happened in the 97 communities with a sales tax as well as
conformity regarding exceptions. He said it seems the
conformity issue will have to be dealt with anyway because of
dealing with information technology (IT). In looking at Title
29 and this issue, he suggested perhaps putting something in the
bill to address that. He added, "Certainly, one of the benefits
to doing this is there is an immediacy that I think that we
realize, that we won't in other tax issues." He indicated he'd
like to see frugality as well, but said this is a good start.
Number 0799
REPRESENTATIVE JAMES remarked that she'd have liked to have
asked Mr. Persily if there would be any synergies in the
Department of Revenue, as far as costs, from having both a sales
tax and an income tax. She requested that he get back with her
regarding that.
CHAIR COGHILL said it could be brought up Thursday [February 14]
as well.
REPRESENTATIVE JAMES proposed that in order to ensure fair and
equitable taxes, with everybody paying a little, perhaps there
should be a reasonable amount of both [a sales tax and an income
tax]. She added, "I'm open to that, as long as some of the
things that I ... fear with the implementation of a sales tax
[are] modified ... so it is not nearly as cumbersome as I think
it might be."
Number 0888
REPRESENTATIVE WHITAKER reiterated that he would look at any
reasonable CS as a friendly amendment. He added, "I look
forward to working with you both on conforming to a national
consistency movement, as well as Title 29 issues."
CHAIR COGHILL announced that he personally was going to pursue
language to address some of his own concerns, so that when there
is discussion comparing other proposals, it can be included. He
indicated although there are similar bills relating to income
tax, [HB 303] is unique regarding a sales tax; therefore, the
committee will work with Representative Whitaker in crafting
this sales tax legislation. He concluded by thanking
Representative Whitaker for his excellent PowerPoint
presentation. [HB 303 was held over.]
ADJOURNMENT
Number 0975
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 9:56
a.m.
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