Legislature(2005 - 2006)

04/15/2005 08:36 AM House W&M

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                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         April 15, 2005                                                                                         
                           8:36 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Bruce Weyhrauch, Chair                                                                                           
Representative Ralph Samuels                                                                                                    
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Max Gruenberg                                                                                                    
Representative Carl Moses                                                                                                       
MEMBERS ABSENT                                                                                                                
Representative Norman Rokeberg                                                                                                  
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 262                                                                                                              
"An Act relating to the taxation of income."                                                                                    
     - HEARD AND HELD                                                                                                           
HOUSE BILL NO. 263                                                                                                              
"An Act imposing a tax on employment; and providing for an                                                                      
effective date."                                                                                                                
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 262                                                                                                                  
SHORT TITLE: INCOME TAX                                                                                                         
SPONSOR(S): WAYS & MEANS                                                                                                        
04/08/05       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/08/05       (H)       W&M, STA, FIN                                                                                          
04/15/05       (H)       W&M AT 8:30 AM CAPITOL 106                                                                             
BILL: HB 263                                                                                                                  
SHORT TITLE: EMPLOYMENT TAX                                                                                                     
SPONSOR(S): WAYS & MEANS                                                                                                        
04/08/05       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/08/05       (H)       W&M, L&C, FIN                                                                                          
04/15/05       (H)       W&M AT 8:30 AM CAPITOL 106                                                                             
WITNESS REGISTER                                                                                                              
CHUCK HARLAMERT, Juneau Section Chief                                                                                           
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Offered information on HB 262 and HB 263.                                                                  
MICHAEL WILLIAMS, Auditor                                                                                                       
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Offered information on HB 262 and HB 263.                                                                   
LARRY MESHKIN                                                                                                                   
Wasilla, Alaska                                                                                                                 
POSITION STATEMENT:   Testified  in opposition to  HB 262  and HB
ART CURTIS, Co-Chair                                                                                                            
Alaskans for Fair Taxes                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During hearing  of HB 262, expressed support                                                               
for an income tax; and testified in opposition to HB 263.                                                                       
ACTION NARRATIVE                                                                                                              
CHAIR BRUCE WEYHRAUCH called the  House Special Committee on Ways                                                             
and  Means  meeting to  order  at  8:36:38 AM.    Representatives                                                             
Weyhrauch,  Samuels, Seaton,  Wilson, and  Moses were  present at                                                               
the  call to  order.   Representative  Gruenberg  arrived as  the                                                               
meeting was in progress.                                                                                                        
HB 262-INCOME TAX                                                                                                             
8:37:07 AM                                                                                                                    
CHAIR WEYHRAUCH announced that the  first order of business would                                                               
be  HOUSE BILL  NO.  262  "An Act  relating  to  the taxation  of                                                               
CHAIR WEYHRAUCH  explained that  this legislation  is essentially                                                               
the  House Bill  introduced  by Representative  Moses during  the                                                               
Twenty-Third Legislature.   However, HB 262  includes a provision                                                               
such that an income tax would only  take effect in the event of a                                                               
fiscal gap.   Furthermore, the amount  of the tax depends  on the                                                               
amount of the  gap as specified under Section 1.   He highlighted                                                               
that  this   particular  legislation  places  the   onus  on  the                                                               
legislature  to develop  a budget  so  that reoccurring  revenues                                                               
meet  reoccurring expenses.   This  legislation doesn't  prohibit                                                               
the  legislature from  using the  earnings of  the constitutional                                                               
budget reserve  (CBR) or  the earnings of  the permanent  fund to                                                               
balance the budget.  However,  if the legislature doesn't balance                                                               
the budget, the  citizens of Alaska pay and can  lay the blame on                                                               
the legislature.   He reiterated that HB  262 implements measures                                                               
to  bring revenues  into  the state  if  the legislature  doesn't                                                               
balance  the  budget, which  is  a  way  in  which to  force  the                                                               
legislature to  step up  to the  plate and  explain why  it would                                                               
rather  impose  an income  tax  than  balance  the budget.    The                                                               
aforementioned is the reasoning behind  Section 1.  The remaining                                                               
sections of  HB 262 are [basically]  Representative Moses' income                                                               
tax bill by which  one pays a state income tax  based on the size                                                               
of his/her federal  income tax.  Furthermore,  it allows property                                                               
tax exemptions and requires  everyone, residents and nonresidents                                                               
alike, to pay the income  tax.  Chair Weyhrauch acknowledged that                                                               
the  Department  of  Revenue  isn't   happy  with  this  type  of                                                               
legislation because it doesn't offer a stable revenue source.                                                                   
8:40:36 AM                                                                                                                    
CHUCK HARLAMERT,  Juneau Section Chief, Tax  Division, Department                                                               
of Revenue,  explained that  within the  Tax Division  duties are                                                               
split  and  his are  related  to  the cost  side  of  taxes.   As                                                               
specified  in the  fiscal note  analysis,  Mr. Harlamert  related                                                               
that  a broad-based  tax  that  turns on  and  off is  relatively                                                               
inefficient because  the department  has to maintain  a technical                                                               
base  of  staff  and  infrastructure to  process  returns.    The                                                               
department projects that the best way  to handle this tax type is                                                               
to invest  heavily in technology,  which enables the  division to                                                               
process these  returns on an  intermittent basis  with relatively                                                               
untrained  staff.   However, in  the off  years a  base level  of                                                               
technical staff will  be necessary to administer  the program and                                                               
handle appeals and ongoing issues.                                                                                              
8:43:00 AM                                                                                                                    
REPRESENTATIVE  SEATON inquired  as to  what is  included in  the                                                               
calculations when  determining there is  a fiscal gap.   He asked                                                               
specifically if  the income tax  would only go into  effect after                                                               
all the earnings are spent.                                                                                                     
MR. HARLAMERT  related his  belief that  in this  legislation the                                                               
language  "state  expenditures"  means current  expenditures  and                                                               
revenues.    Therefore, it  wouldn't  include  dipping into  [the                                                               
state's] savings accounts but rather  the revenues would be those                                                               
that are  earned through taxation  or royalties during  the year.                                                               
He said that the tax  would be imposed when expenditures [exceed]                                                               
current revenues.                                                                                                               
8:45:07 AM                                                                                                                    
REPRESENTATIVE SEATON asked,  for clarification purposes, whether                                                               
the current earnings of the  permanent fund that are available to                                                               
the  legislature are  included  in the  calculations of  revenues                                                               
versus expenditures.                                                                                                            
MR.  HARLAMERT said  he cannot  answer that  question because  it                                                               
depends upon how broadly the term  "revenues" is defined.  As the                                                               
legislation is currently written, it's very broad, he said.                                                                     
8:45:56 AM                                                                                                                    
REPRESENTATIVE SEATON  turned to  the fiscal note,  which details                                                               
$15-$20  million for  the capital  set-up and  $7-$8 million  for                                                               
operating expenses.   Even if  the rate  is 1 percent,  the state                                                               
would collect less revenue than  it costs to implement the income                                                               
tax, he highlighted.                                                                                                            
MR. HARLAMERT  explained that  when he calculates  the cost  of a                                                               
program he  assumes a program  that's roughly the quality  of the                                                               
current standards.   For instance,  the key  performance criteria                                                               
the  public  has for  a  state  income  tax  is that  the  public                                                               
receives its  tax refunds  before its federal  tax refunds.   The                                                               
aforementioned involves  a considerable amount  of infrastructure                                                               
and attention,  and therefore  at some level  a minimal  level of                                                               
service  has to  be provided,  even  if it's  uneconomical.   Mr.                                                               
Harlamert said  that if  the division knew  that these  tax rates                                                               
were going to  be at low levels, such as  5 percent, the division                                                               
would  probably "back  off" with  regard to  the program  quality                                                               
REPRESENTATIVE SEATON  opined that a quality  enforcement program                                                               
is necessary when instituting taxes, especially an income tax.                                                                  
8:49:27 AM                                                                                                                    
MICHAEL WILLIAMS,  Auditor, Tax Division, Department  of Revenue,                                                               
began  by   highlighting  that  the  revenue   analysis  of  this                                                               
legislation  is particularly  difficult given  its mechanics  and                                                               
uncertainty  with  some  of  the definitions.    He  then  turned                                                               
attention to  the fiscal note  which makes assumptions  about the                                                               
federal  tax  liability  and  the various  rates  of  income  tax                                                               
imposed  depending upon  the  deficit.   He  highlighted that  99                                                               
percent of  individuals report  their income  on a  calendar year                                                               
basis whereas  the state's revenue  system is on the  fiscal year                                                               
(FY),  which  would allow  the  possibility  of dividing  the  FY                                                               
income  under  separate  rates.     Therefore,  the  fiscal  note                                                               
analysis provides  information for  the half  year and  full year                                                               
revenue  provisions  for  each  rate.   The  other  part  of  the                                                               
uncertainty  of HB  262  is the  property  tax credit  provision,                                                               
which  is written  so broadly  that one  could presume  that real                                                               
estate taxes  or residential  property taxes  qualify as  well as                                                               
personal property  taxes.  For  instance, a small  business owner                                                               
who pays personal  property taxes on items such  as furniture and                                                               
equipment  inventory could,  under  certain interpretations,  use                                                               
his/her  business  or  personal   property  tax  credits  against                                                               
his/her individual income tax.                                                                                                  
MR. WILLIAMS said  that the other complexity  with the provisions                                                               
of   this   legislation   is  that   they   include   withholding                                                               
requirements such  that employers are going  to withhold payments                                                               
on the gross tax before any  credits.  Although the Department of                                                               
Revenue could  conceivably collect  upwards of  $100-$150 million                                                               
throughout the  year, it will  have to issue large  refunds after                                                               
people  have  filed  returns and  claimed  credits.    Therefore,                                                               
mechanically this  legislation has "large swings  in the revenue"                                                               
coming  in and  going back  out as  an refund,  because generally                                                               
credits aren't available until a return claim is filed.                                                                         
8:53:08 AM                                                                                                                    
MR.  WILLIAMS, in  response to  Chair  Weyhrauch, clarified  that                                                               
credits  are available  when  a  return is  filed.    He posed  a                                                               
situation in  which the return  is filed  on April 15,  2005, for                                                               
property taxes that  were paid during 2004 and  during which time                                                               
the  individual's wages  were withheld  at 10  percent throughout                                                               
all  of  2004.   However,  the  individual doesn't  file  his/her                                                               
return and claim  his/her credit until April 2005.   For example,                                                               
if an  individual has  $1,000 withheld  in 2004,  that individual                                                               
might have  a $1,000 in  property taxes paid to  the municipality                                                               
and  thus [the  state] will  end  up giving  it all  back to  the                                                               
individual on April 15.                                                                                                         
8:53:48 AM                                                                                                                    
MR. WILLIAMS,  in response to Representative  Gruenberg, answered                                                               
that  the state  would  collect the  interest  from the  withheld                                                               
money   until   it's   refunded.     In   further   response   to                                                               
Representative  Gruenberg,  Mr.   Williams  said  the  additional                                                               
income  generated by  that depends  on the  short-term "marginal"                                                               
rates, which he estimated to be about 1 percent.                                                                                
8:54:48 AM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if the  Internal  Revenue  Service                                                               
(IRS)  law  that   allows  tax  credits  for   Alaska  sales  tax                                                               
deductions would be applicable to property tax or income tax.                                                                   
MR. WILLIAMS clarified  that the sales tax, much in  the same way                                                               
as the  income tax,  could be  claimed as  a deduction  for those                                                               
able to itemize  deductions.  Under this  legislation, that would                                                               
go into the calculation of one's  state tax because it's based on                                                               
the federal  tax liability.   However,  it's unclear  whether the                                                               
numerous  credits,  such  as  the  child  tax  credit,  education                                                               
credit,  foreign tax  credit, business  tax  credits, and  earned                                                               
income tax  credit, would be  included in the calculation  of the                                                               
state's tax liability.                                                                                                          
REPRESENTATIVE SEATON  asked if  the property  tax paid  would be                                                               
deductible from the federal income tax.                                                                                         
MR.  WILLIAMS replied  yes,  and added  that  property taxes  are                                                               
currently deductible  for itemized  deductions and  thus property                                                               
taxes  would   be  allowed  as   an  itemized   deduction  before                                                               
calculating  the  federal tax  liability.    Therefore, it  would                                                               
essentially reduce  what one would  pay the state and  those same                                                               
dollars  would be  allowed  as  a credit  against  the state  tax                                                               
liability.   "So ...  in essence  you get  it twice,"  he pointed                                                               
8:57:06 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  inquired  as  to how  much  the  state                                                               
refunds  taxpayers  annually  because  of  overpaid  taxes.    He                                                               
recalled testimony  indicating that  [the income the  state earns                                                               
from overpayment]  is invested in short-term  treasury notes with                                                               
low interest rates.  He questioned  why the state is investing in                                                               
such  low rates  of interest,  and then  he inquired  as to  what                                                               
could be done to earn more interest.                                                                                            
MR.  HARLAMERT replied  that he  can't answer  the aforementioned                                                               
questions  accurately.   The  Tax Division  issues  refunds on  a                                                               
regular basis  for various  tax types of  which the  total refund                                                               
for corporate income  tax is no more than about  $5 million for a                                                               
peak year.   He informed  the committee  that all of  these funds                                                               
come  out of  the short-term  or  liquid portion  of the  state's                                                               
portfolio,  which needs  to be  maintained  in order  to pay  the                                                               
state's  bills.    He  said  that  essentially  [the  funds]  are                                                               
invested in short-term securities similarly  to the funds used to                                                               
pay wages.   He  opined that  it's the  short-term nature  or the                                                               
liquidity that  drives the  return.   Therefore, the  more refund                                                               
liabilities potentially available, the  larger the pool of liquid                                                               
assets is required  and as a result they receive  a lower rate of                                                               
REPRESENTATIVE  GRUENBERG  related  his  belief  that  earning  1                                                               
percent on  $5 million totals $50,000,  which is hardly a  lot of                                                               
money.  He asked  if there's a way to invest  in order to receive                                                               
a fair amount of return.                                                                                                        
9:00:24 AM                                                                                                                    
MR.  HARLAMERT  specified that  the  $5  million in  tax  refunds                                                               
issued  during  a high  refund  year  for  a corporate  tax,  for                                                               
example, is  immaterial on  an annual basis  to the  overall cash                                                               
management function.   "I don't think  it would effect us  at all                                                               
... whether that $5 million existed or not," he opined.                                                                         
REPRESENTATIVE  GRUENBERG   commented  that  $100,000   here  and                                                               
$100,000 there adds up.                                                                                                         
9:01:01 AM                                                                                                                    
LARRY MESHKIN, said:                                                                                                            
     I  strongly  object to  the  income  tax on  principle,                                                                    
     because  it's a  violation of  private property  rights                                                                    
     and privacy.   I believe  it's a form of  legal plunder                                                                    
     because my property  is taken from me by  force and for                                                                    
     the use  of others.  A  federal income tax is  hated by                                                                    
     many Americans  for good reason.   The founding fathers                                                                    
     did not  favor a  direct tax because  of its  damage to                                                                    
     the liberties of the people.   They favored an indirect                                                                    
     tax or a  consumption tax ....  Myself,  I believe that                                                                    
     state    spending    should    be   cut    to    what's                                                                    
     constitutionally  mandated  and  then  when  taxes  are                                                                    
     needed it should be a  flat sales tax on all purchases,                                                                    
     except for the basic  necessities of life and medicine.                                                                    
     And this  would help the poor.   ... a person  who pays                                                                    
     no tax  or very  little tax would  not be  motivated to                                                                    
     keep state  spending in line  and they would  just vote                                                                    
     for Representatives  to keep  the other guy  paying the                                                                    
     taxes.     I   also   don't   believe  that   targeting                                                                    
     nonresidents ...  with an income taxe  is right because                                                                    
     they use  little or  no state  services and  since they                                                                    
     can't vote [in Alaska],  they're a political vulnerable                                                                    
     target.  And  I believe if there was a  flat sales tax,                                                                    
     the services  they do  use would be  paid by  the sales                                                                    
     tax ....                                                                                                                   
9:03:49 AM                                                                                                                    
CHAIR  WEYHRAUCH highlighted  that the  aforementioned idea  of a                                                               
consumption  tax  to  exempt  the  basic  necessities  becomes  a                                                               
debatable notion depending on the  definition of "necessity."  He                                                               
related  that  the chairman  of  the  Federal Reserve  Board  has                                                               
discussed shifting  from an income tax  base financial management                                                               
structure  in  the U.S.  to  a  consumption  tax.   However,  the                                                               
aforementioned  would take  a significant  structural and  policy                                                               
seat  change with  regard  to the  way business  is  run in  this                                                               
9:05:24 AM                                                                                                                    
ART  CURTIS, Co-Chair,  Alaskans for  Fair Taxes,  encouraged the                                                               
committee to  consider reviewing a  variety of taxes and  a long-                                                               
term fiscal plan.   He related that most Alaskans  for Fair Taxes                                                               
favor making  an income  tax part of  any long-term  fiscal plan.                                                               
Furthermore, the  group believes that  an income tax is  the most                                                               
equitable  tax and  is preferable  to  a state  sales tax,  which                                                               
would overburden those communities that  already have a sales tax                                                               
in place.   Moreover, an income  tax is helpful for  the business                                                               
community  because  its  effects  are  predictable,  which  would                                                               
encourage  business.   He  acknowledged  that  no income  tax  is                                                               
foolproof.   Although a  consumption tax, as  is used  in Europe,                                                               
may  be desirable,  one must  remember that  Europeans have  also                                                               
constructed  a solid  social net  that's  not found  in the  U.S.                                                               
presently.   He  reiterated  his  belief that  an  income tax  is                                                               
essential to the long-term fiscal health of Alaska.                                                                             
9:08:11 AM                                                                                                                    
MR.  CURTIS,  in  response  to   Chair  Weyhrauch,  replied  that                                                               
Alaskans for  Fair Taxes  is a small  group of  interested people                                                               
who communicate via  email to alert one another  about the action                                                               
taking place at  the legislative level and to push  the idea that                                                               
an income  tax should  be an important  component of  the state's                                                               
fiscal solution.                                                                                                                
9:09:07 AM                                                                                                                    
CHAIR WEYHRAUCH reminded  the committee that part of  its duty is                                                               
to  put these  things on  the  table for  discussion purposes  as                                                               
various  alternative  measures to  bridge  any  fiscal gap.    He                                                               
acknowledged   that  the   bill  has   structural  problems   and                                                               
uncertainties,  particularly in  the  management of  how the  tax                                                               
would be imposed,  the revenue collected, as  well as determining                                                               
what revenues  would be available  under the bill.   Furthermore,                                                               
there is a question with regard  to how to manage the bureaucracy                                                               
of  the bill  if it  were implemented  in this  form.   Section 1                                                               
places  the  burden on  the  legislature  to balance  the  budget                                                               
because it imposes the tax only  if the legislature can't get its                                                               
fiscal house  in order, which  would result in the  public paying                                                               
the price.  Ultimately, the politician  pays at the ballot box if                                                               
the legislature  doesn't balance  the budget.   This legislation,                                                               
he pointed  out, doesn't preclude use  of any fund or  any source                                                               
of revenue available to the legislature to balance the budget.                                                                  
9:11:19 AM                                                                                                                    
REPRESENTATIVE WILSON quoted an  article from the Anchorage Daily                                                             
News, which presented  a study from Alaska's  Department of Labor                                                             
& Workforce Development (DLWD).   She related her belief that the                                                               
article highlights  the changes taking  place in Alaska,  such as                                                               
[the fact] that the fishing  industry has more employees than any                                                               
other industry in the state.   She read the following:  "Over the                                                               
last  two  decades  people  living  out of  state  have  come  to                                                               
domineer  Alaska's   commercial  fisheries.     With  nonresident                                                               
fisherman now accounting for the  majority of both the weight and                                                               
the  value of  the catch."   She  opined that  the aforementioned                                                               
article  highlights one  area in  which the  state could  pick up                                                               
money from  out-of-state workers.   She related that the  case is                                                               
similar in the  oil industry because the majority  of its workers                                                               
also are from out of state.                                                                                                     
9:13:18 AM                                                                                                                    
CHAIR WEYHRAUCH  recalled an earlier observation  that those out-                                                               
of-state employees don't vote [in Alaska].                                                                                      
9:13:29 AM                                                                                                                    
REPRESENTATIVE  SAMUELS said  that he,  too, has  seen statistics                                                               
that attempt  to have others  pay the  tax.  However,  [no matter                                                               
the type of  tax] Alaskan's would pay  the overwhelming majority.                                                               
He highlighted that it will be  difficult to "plug all the holes"                                                               
of getting around a tax.                                                                                                        
9:15:22 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  explained  that Alaska's  unitary  tax                                                               
creates  an exception  to the  "huge problem"  many other  states                                                               
have  with corporations  moving  income into  tax shelter  states                                                               
such as Delaware  or Nevada.  Therefore, with  the institution of                                                               
an income  or sales  tax there  also needs to  be a  provision in                                                               
order to prevent such tax shelters, he added.                                                                                   
9:17:02 AM                                                                                                                    
REPRESENTATIVE  SEATON  relayed  that many  of  his  constituents                                                               
support an  income tax that is  simple, fair, and has  the lowest                                                               
amount of  enforcement and  collection mechanisms  needed instead                                                               
of the  complicated structure proposed in  HB 262.  He  turned to                                                               
the credit proposal  which shifts the burden  to the out-of-state                                                               
workers, and opined  that those without property  tax credits are                                                               
going to  be hit the  hardest because  it allows more  credits to                                                               
those who  have accumulated the  most wealth and property  in the                                                               
state.   He  offered that  shifting the  property tax  credit has                                                               
genuine appeal in relation to  targeting the out-of-state worker,                                                               
although  it  doesn't  seem  to take  into  account  the  Alaskan                                                               
residents  who  don't  own  property  and  are  potentially  less                                                               
affluent.   Therefore, he encouraged  the committee  to carefully                                                               
consider to whom  the burden is shifted  when discussing property                                                               
credits.    Representative  Seaton then  expressed  concern  with                                                               
regard to when  [a proposal such as encompassed in  HB 262] would                                                               
be implemented  because permanent fund earnings  would be revenue                                                               
available to the legislature in  a given year, and furthermore if                                                               
that  revenue is  counted, then  there [probably]  wouldn't be  a                                                               
fiscal gap.                                                                                                                     
9:21:05 AM                                                                                                                    
REPRESENTATIVE  MOSES pointed  out the  he has  advocated for  an                                                               
income tax  for some  time, although there  are provisions  in HB
262 which he  doesn't favor.  He related his  belief that a long-                                                               
range  fiscal plan  is overdue,  and that  any long-range  fiscal                                                               
plan should include  a broad-based tax to be paid  by the people.                                                               
However,  a statewide  sales tax  is not  acceptable, he  opined,                                                               
because it's  one of the  main methods local governments  have to                                                               
raise money  at the local level.   He turned to  the property tax                                                               
exemption, and noted that there are  vast areas in the state that                                                               
don't pay property taxes.   He opined that the nonresident income                                                               
figures provided by DLWD aren't  complete because it doesn't seem                                                               
to include fisherman because they are considered businessmen.                                                                   
MR. HARLAMERT  said he believes  Representative Moses  is correct                                                               
in that  DLWD's figures are  based on wage income,  which doesn't                                                               
include those who are self-employed.                                                                                            
HB 263-EMPLOYMENT TAX                                                                                                         
9:24:31 AM                                                                                                                    
CHAIR WEYHRAUCH announced that the  final order of business would                                                               
be HOUSE BILL NO. 263, "An  Act imposing a tax on employment; and                                                               
providing for an effective date."                                                                                               
CHAIR WEYHRAUCH  explained that  this legislation  reinstates the                                                               
1980 education tax  which deducted $10 annually  from the payroll                                                               
of employees 19  years old or older.  The  monies would be placed                                                               
into a  fund that  would be  held separately  for education.   He                                                               
opined  that $10  per  person is  a small  amount  of money,  and                                                               
furthermore   it  illustrates   that   people  value   education.                                                               
Essentially,  this  is  an  income  tax for  the  employed.    He                                                               
highlighted that currently  a $40 payment is imposed  on those in                                                               
rural  education attendance  areas (REAAs)  and this  legislation                                                               
exempts  them  from  paying  the  additional  $10  education  tax                                                               
proposed in HB 263.                                                                                                             
9:27:42 AM                                                                                                                    
CHUCK HARLAMERT,  Juneau Section Chief, Tax  Division, Department                                                               
of Revenue, agreed that the  proposed tax is relatively small and                                                               
broad-based and  thus it's a  relatively inefficient tax  in that                                                               
the  state  will spend  a  lot  to collect  a  little.   From  an                                                               
enforcement  point  of  view,  there   is  the  need  to  prevent                                                               
fraudulent  refund claims.   He  acknowledged that  employees are                                                               
likely to  have more than  one job during  the year and  thus may                                                               
have  this withheld  twice, which  necessitates  having a  refund                                                               
program.    Therefore,  the  choice   becomes  whether  to  track                                                               
payments  by  individuals on  an  individual  basis in  order  to                                                               
ensure a refund  claim is true.  The division  has evaluated this                                                               
before and  determined that at  the $100 level, such  tracking is                                                               
economically justified, although  it may not be  justified at the                                                               
$10 level.   Mr. Harlamert also commented that  it's difficult to                                                               
justify what would  be normal decisions regarding  the quality of                                                               
the program with a tax at this level.                                                                                           
CHAIR  WEYHRAUCH asked  if the  $750,000 in  capital expenditures                                                               
listed on the fiscal note is a one-time capital expenditure.                                                                    
MR.   HARLAMERT   answered   that  the   aforementioned   capital                                                               
expenditure would be  over the first two-three years  of the tax.                                                               
The operating expenditures usually  include maintenance costs for                                                               
systems.   The  $750,000 is  intended to  generate a  system that                                                               
efficiently captures  employee data  that allows the  division to                                                               
validate refunds.   In further  response to Chair  Weyhrauch, Mr.                                                               
Harlamert  confirmed that  after the  $750,000 is  paid out,  the                                                               
program  would require  $1.1 million  in annual  operating costs.                                                               
He also confirmed that the  estimated revenue generated from this                                                               
tax in the second year would be $3.8 million.                                                                                   
9:31:44 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  asked  if the  permanent  fund  dividend                                                               
(PFD) is included in the definition of "compensation."                                                                          
9:31:56 AM                                                                                                                    
MICHAEL WILLIAMS,  Auditor, Tax Division, Department  of Revenue,                                                               
clarified that  the PFD wouldn't  be considered income  under the                                                               
provisions of HB  263.  The forms of compensation  that are being                                                               
reviewed  typically include  wages, salaries,  bonuses, tips,  or                                                               
income  from  self-employment.     With  regard  to  the  overall                                                               
program,  the fiscal  note views  this program  as a  stand-alone                                                               
program.    He explained  that  if  HB  263  were passed  at  the                                                               
proposed  lower level  in conjunction  with a  broad-based income                                                               
tax, the additional costs wouldn't  likely be incurred because it                                                               
could be  included in  the overall  administration of  the broad-                                                               
based income  tax.  He agreed  with Mr. Harlamert that  the lower                                                               
the tax, the less efficient the  tax becomes in terms of revenues                                                               
and  costs.   Generally,  an  efficient tax  is  one  in which  a                                                               
program  operates at  under  5  percent of  the  cost of  revenue                                                               
generated.   At the $10  tax level,  the program is  operating at                                                               
roughly 33 percent cost to revenue level.                                                                                       
9:34:13 AM                                                                                                                    
CHAIR WEYHRAUCH inquired  as to the amount the tax  would have to                                                               
be in order to be minimally efficient.                                                                                          
MR. WILLIAMS  answered that  when the  tax is  $100 it  brings in                                                               
about $38  million a year, which  results in a cost  of roughly 3                                                               
percent of  the total  revenue.   He submitted  that at  the $100                                                               
level it would be a more efficient tax system.                                                                                  
9:35:27 AM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  the  division  would  envision                                                               
sending back to  the employer a card specifying  that an employee                                                               
with multiple employers could [prove]  that he or she has already                                                               
paid the tax.                                                                                                                   
MR.  HARLAMERT answered  that ideally  the division  would desire                                                               
collecting as  much of the tax  as can be withheld  and condensed                                                               
at the employer level with as  few refunds as possible.  In order                                                               
to  strike  that  balance,  the   division  would  want  to  hold                                                               
employers  responsible for  withholding,  as  far as  practically                                                               
possible.  However, the division would  provide a way in which to                                                               
administer the program  on [the state's] behalf.   Therefore, the                                                               
division would envision that the  employee would need to show the                                                               
employer a pay  stub that evidences the withholding  from a prior                                                               
REPRESENTATIVE  SEATON  surmised then  that  the  pay stub  would                                                               
include a line  item denoting the education  tax deduction rather                                                               
than utilizing  a web-based  system by  which the  employer could                                                               
access, by  using the employee's social  security number, whether                                                               
the employee has paid the tax that year.                                                                                        
MR. HARLAMERT  acknowledged that one  choice could be  to capture                                                               
and  manage  such  detailed  information  on  an  employee  every                                                               
withholding period.   The other  choice could be to  do something                                                               
similar to what  the Internal Revenue Service (IRS)  does with W-                                                               
2s  and  wage  withholding  such   that  summary  information  is                                                               
collected  at  the  end  of  the  year  for  all  the  employer's                                                               
withholding by individuals  for the year.   The aforementioned is                                                               
cheaper, but  doesn't allow real-time information  on-line during                                                               
the year.   Therefore, Mr. Harlamert  said that it's a  matter of                                                               
how much the state wants to  pay for the service because once the                                                               
data is obtained it's not expensive [to manage it].                                                                             
9:39:20 AM                                                                                                                    
LARRY  MESHKIN  stated  his  opposition  to  the  employment  tax                                                               
because in principle  it's just like an income tax.   Mr. Meshkin                                                               
related the  following quote from  Robert Nosik (ph):   "Taxation                                                               
of earnings from labor  is on a par with forced  labor."  He also                                                               
offered  quotes along  the same  sentiment  from Walter  Williams                                                               
(ph) and  Allen  Keys (ph).  Mr. Meshkin then  opined that a flat                                                               
sales  tax,  when  it's  necessary,  is the  way  to  go  because                                                               
everyone would share in paying  for state services.  Furthermore,                                                               
when  everyone's involved,  he  opined that  there  will be  more                                                               
efficiency with the use of state services.                                                                                      
9:41:27 AM                                                                                                                    
ART  CURTIS,  Co-Chair,    Alaskans for  Fair  Taxes,  said  that                                                               
taxation is  the price  everyone pays for  living in  a civilized                                                               
society.    However, he  expressed  concern  with regard  to  the                                                               
employment  tax     because  if  it's  too   small,  it's  hardly                                                               
profitable    to  collect  it,  but  if  it's  large,  it's  very                                                               
9:43:11 AM                                                                                                                    
REPRESENTATIVE  SEATON commented  that the  employment tax  would                                                               
make more sense  if it was a minimum within  a generalized income                                                               
tax.    He  recalled  that  Representative  Wilson's  income  tax                                                               
proposal  last year  incorporated  a minimum  amount  of the  tax                                                               
going into the  education trust, which seemed to make  sense.  As                                                               
a stand-alone  tax, Representative Seaton expressed  concern with                                                               
regard to its [lack] of efficiency.                                                                                             
9:44:50 AM                                                                                                                    
REPRESENTATIVE  WILSON clarified  that  her proposed  legislation                                                               
last year  incorporated a  $100 [education  tax].   She indicated                                                               
that her  proposal took  into account the  fact that  many people                                                               
don't pay anything, although they  receive a lot of services from                                                               
the  state.     Therefore,  under  her   proposal  everyone  paid                                                               
something and  the thought was  that everyone received a  PFD and                                                               
thus could afford to [pay] $100.                                                                                                
9:45:35 AM                                                                                                                    
REPRESENTATIVE  SEATON pointed  out that  Representative Wilson's                                                               
legislation included the  PFD as income, and  therefore one could                                                               
check  a  box on  the  PFD  for the  tax  to  be taken  from  it.                                                               
However, this legislation doesn't include the PFD as income.                                                                    
9:46:02 AM                                                                                                                    
REPRESENTATIVE GRUENBERG asked  if the PFD was in  place when the                                                               
proposal encompassed in HB 263 was originally instituted.                                                                       
CHAIR WEYHRAUCH replied no, and added that the income tax of the                                                                
time was repealed at about the same time [as the education tax].                                                                
REPRESENTATIVE GRUENBERG pointed out that the only folks who                                                                    
would pay this proposed tax would be employed individuals while                                                                 
those with passive income escape.                                                                                               
9:47:13 AM                                                                                                                    
There being no further business before the committee, the House                                                                 
Special Committee on Ways and Means meeting was adjourned at                                                                    
9:47 a.m.                                                                                                                       

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