Legislature(2003 - 2004)
02/25/2004 07:00 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 25, 2004
7:00 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Bruce Weyhrauch, Vice Chair
Representative Vic Kohring
Representative Dan Ogg
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Paul Seaton
COMMITTEE CALENDAR
HOUSE BILL NO. 493
"An Act relating to adoption and revision of a long-term fiscal
plan for the State of Alaska."
PREVIOUS COMMITTEE ACTION
BILL: HB 493
SHORT TITLE: LONG TERM FISCAL PLAN
SPONSOR(S): REPRESENTATIVE(S) HARRIS
02/16/04 (H) READ THE FIRST TIME - REFERRALS
02/16/04 (H) W&M, FIN
02/25/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
DAVID TEAL, Director
Legislative Finance Division
Juneau, Alaska
POSITION STATEMENT: Provided comments during the discussion of
HB 493 and answered questions.
DAN DICKINSON, Director
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the discussion of
HB 493 and answered questions.
ACTION NARRATIVE
TAPE 04-7, SIDE A
Number 0001
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:00 a.m. Representatives Hawker,
Samuels, Kohring, Weyhrauch, Wilson, Gruenberg, Moses, and Ogg
were present at the call to order. Representative Rokeberg
arrived as the meeting was in progress.
HB 493-LONG TERM FISCAL PLAN
Number 0217
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 493, "An Act relating to adoption and revision of
a long-term fiscal plan for the State of Alaska."
CHAIR HAWKER listed the documents in the committee members'
packets. He spoke of a bar chart that showed three different
scenarios projected last year by the Department of Revenue (DOR)
comparing dividend splits of [percent of market value] (POMV)
proceeds and the resulting consequence on the constitutional
budget reserve fund (CBRF) balance. He said the graph depicting
the budget at $7.5 billion "in the hole" shows the reason behind
needing a long-term fiscal plan.
Number 0334
REPRESENTATIVE WEYHRAUCH asked if the chart reflected any growth
in the size of the CBRF, even if there is no additional
appropriation and there are increases only through investment
income.
CHAIR HAWKER said yes, there would be no additional investments.
"The charts indicate a consistent budget deficit for the next
few years without material additional revenues," he added.
Number 0408
REPRESENTATIVE OGG asked if it was possible to put more charts
together to have a realistic picture that shows if government is
kept at the size it is right now, what the cost would be
[through FY 2012].
CHAIR HAWKER said that the committee is headed in the direction
of Representative Ogg's suggestion. He noted that the second
chart showed a 2 percent increase.
REPRESENTATIVE WEYHRAUCH related:
The out years, say 2010, when the amount of the CBRF
falls below zero, realistically, it wouldn't show that
sort of significant decline. What that's trying to
reflect is the amount of money we would have to obtain
from other sources, bonding, or taxes, or other
revenues, in order to fill that margin between the
negative and the zero.
CHAIR HAWKER agreed. "We are not constitutionally allowed to
deficit spend," he said. He noted that when Representative
Weyhrauch cross-referenced the year 2010, that was presuming
$300 million a year in additional revenues. He emphasized that
[the charts] were benchmark models from last year's files.
CHAIR HAWKER announced the arrival of Representatives Gruenberg
and Seaton.
Number 0616
REPRESENTATIVE WEYHRAUCH moved to adopt HB 493 for discussion
purposes.
CHAIR HAWKER noted Version 23-LS1765\D [the original bill] was
before the committee.
REPRESENTATIVE GRUENBERG, speaking as cosponsor, introduced HB
493 as a vehicle requiring the state to adopt, now, and in the
future, a long-term, medium-range fiscal plan. He said it is a
simple bill, favored by a large number of people, that provides
a benchmark from which to work, a goal for which to strive, and
a series of road marks, missions, and measures in the fiscal
area. He expressed surprise that there is no statutory
requirement, already, to have a fiscal plan. He noted that
future legislation can't be bound, but could be directed to
[have a fiscal plan].
Number 0901
REPRESENTATIVE GRUENBERG explained that Section 1 adds
provisions in the uncodified law because it is the statement of
the current situation. The codified laws are titled "temporary
and special acts," he noted. [Reading through Section 1], he
pointed out on page 1, the disparity noted in paragraphs (1),
(2), and (3). He said that paragraph (3) doesn't provide the
only reason [to develop a fiscal plan], but does point out the
urgency. In paragraph (4) he emphasized the words "balance" and
"properly planned." He continued to read paragraph (5), and
then added that a variety of tools will be needed to achieve a
fiscal plan. He said the key in paragraph (5) is that the
[fiscal] plan is "balanced and fair to all Alaskans."
REPRESENTATIVE GRUENBERG explained that Section 2 is a new
section, entitled "Long-term fiscal plan." He said this public
finance section would add a new provision to the Executive
Budget Act, immediately after the statement of policy. He read
subsection (a) and opined it was the most important part of the
bill. He noted that five years seems like a reasonable period
of time.
REPRESENTATIVE GRUENBERG read [Section 2, subsection (b)] and
pointed out five points the legislative plan should consider.
He defined "real economic growth" [in paragraph (1)] as a
healthy, growing economy that provides business opportunities,
jobs, and the means to support families and the necessary state
services. He said "maintains a high quality of life" is
probably the most important [point]. He said he did not intend
environmental issues to be overlooked, but that the emphasis is
on developing natural resources. He noted paragraph (2) sounds
like the mission of the House Special Committee on Ways and
Means. Representative Gruenberg explained that in paragraph
(4), specific means to raise revenues were not noted and were
purposely left for the legislature to decide. The language [in
paragraph (5)] "prudent minimum balance in the fund" came from
the Fairbanks Conference [Conference of Alaskans, February 10-
12, 2004], he concluded.
Number 1702
REPRESENTATIVE OGG wondered if the intent of the bill implies
that [the state] does not have a balanced budget and is not
living within its means.
REPRESENTATIVE GRUENBERG opined that [the state] has a balanced
budget in the sense that it is able to fund the appropriations
each year, but, in the sense that money has to be drawn from the
savings account, there is not a long-term balance because [that
money] is going to run out.
REPRESENTATIVE OGG responded that in the last 10 years the
legislature has made fairly frugal decisions with the incoming
revenues, and has made choices about what to do with those
revenues. Over this period of time, there has always been a
balanced budget and excess revenues, he said.
REPRESENTATIVE GRUENBERG said the bill is intended to provide
for a future set of goals.
REPRESENTATIVE OGG asked if that is the case, what would change
at this time.
Number 1850
REPRESENTATIVE GRUENBERG replied that when he looks at whether
the budget is balanced, "I'm looking at it, not just whether we
have the ability to meet the bills in the current year, but what
we're doing in the sense of providing for the future." He
called the current situation a "period of transition"; cutting
state services and reducing state spending which can't be done
indefinitely. He said that Alaska has been traditionally
dependant on resources, most notably oil, with a finite life.
He stressed that, for stability, a long-term fiscal plan is
needed.
Number 2009
REPRESENTATIVE OGG maintained that there was a plan, long before
he was elected, which has allowed [the state] to come quite a
ways. He said the money has been used in a variety of ways: for
a permanent fund, inflation-proofing $7 billion over a period of
time, and for excess earnings available for the general fund.
He said the budget is balanced, but that [the state] is looking
down the road. He asked Representative Gruenberg what he
thought should be changed.
REPRESENTATIVE GRUENBERG suggested producing a publicly debated
plan so people in the state, and elsewhere, "would know where
we're going and how we're going to get there."
Number 2210
CHAIR HAWKER asked Representative Gruenberg what his vision is
for the work product.
REPRESENTATIVE GRUENBERG answered it could be any one of several
things: a temporary or special act that would be in effect for
five years, something permanent and amended as time went on, or
a concurrent resolution. He said he has left it intentionally
discretionary in the legislature. He added that Congress, each
year, has an omnibus resolution that is passed early in the
session, the amount [of money] is generally known, and then
individual appropriation bills are worked on.
CHAIR HAWKER asked if Representative Gruenberg's vision
interrelated to the missions and measures statutes, and if that
might be the place to integrate it.
REPRESENTATIVE HAWKER answered that is possible, but the bill is
more of an aspirational statement for the budgeting process. He
said the missions and measures legislation reach down to the
individual departments, but [HB 493] provides a macro approach.
He agreed that the two go together.
Number 2524
REPRESENTATIVE SAMUELS referred to the findings in [Section 1]
and said they suggest a significant disparity between available
revenues. He stated that is incorrect because the legislature
could appropriate the earnings of the permanent fund and there
would be plenty of money. He asked if Representative Gruenberg
is entertaining corrections or amendments.
REPRESENTATIVE GRUENBERG said he has no problem [accepting
amendments] because [the bill] is simple a vehicle for [the
legislature] to make policy statements. He said the intent is
to keep [the bill] fairly neutral and broad-brushed so it does
not become an advocacy statement.
Number 2704
REPRESENTATIVE WILSON said she is trying to envision what kind
of process this bill would involve. She indicated that in other
states there are two strong standing committees, one that would
do the appropriating, and the other that would look at the
financial status of the state. She said in Alaska there is a
strong finance committee that decides how the money will be
spent. There is not a standing committee that looks at the
finances of the state, the income, and makes adjustment
decisions. She asked Representative Gruenberg if he is
intending to make a change in the structure of the way things
are currently run.
REPRESENTATIVE GRUENBERG said absolutely, and that he is glad
Representative Wilson asked the question. He posited that the
creation of the [House Special Committee on Ways and Means] is
an extremely important step, and that there needs to be a
standing ways and means committee to look at planning and ways
to raise revenue. He said that over 30 states have such
committees. He remarked that he has plans to draft a resolution
which ensures continuance of the current committee as well as a
second standing ways and means committee.
REPRESENTATIVE WILSON thanked Representative Gruenberg for his
answer and stated that she has strong feeling about the issue.
Number 3033
REPRESENTATIVE OGG referred to page 2, line 11, and asked what
the intention of "the means" is, and how it differs from the
powers the legislature presently has.
REPRESENTATIVE GRUENBERG replied that it is within the
legislature's powers and does not intend to give the legislature
new powers. He said "the means" is policy, suggestions,
legislation, appropriations, or anything that would assist the
economy.
REPRESENTATIVE OGG paraphrased, "the plan must include the
following: the means." He said his understanding of the means
is "the authority" or "the power." He asked for further
clarification.
REPRESENTATIVE GRUENBERG replied that he is leaving [the
wording] intentionally vague. [The legislature] can pass
statutes, appropriations, taxing legislation, interstate
contracts, or any other traditional legislative tools, he said.
REPRESENTATIVE OGG responded that he heard Representative
Gruenberg saying something different than his own understanding
of "the means." He said the legislature already has the power,
or the means. He said he heard Representative Gruenberg say
[the legislature should] go one step farther and "identify those
tools and focus them on fostering a stable economy that
encourages economic growth." He asked if the plan was to have
the legislature address funds or direction to agencies to
accomplish these goals.
Number 3354
REPRESENTATIVE GRUENBERG said that might be one way, but it is
not only "direction to agencies." For example, it could be
taxes or permanent fund dividends, which deal directly with the
people themselves. He said it could also be a joint resolution
or a request to Congress - anything that might be appropriate at
the time.
CHAIR HAWKER suggested the word "means" might be replaced with
the word "ways."
REPRESENTATIVE GRUENBERG said absolutely, he has no problem with
any of the suggestions.
REPRESENTATIVE OGG agreed with Representative Hawker.
REPRESENTATIVE OGG asked for clarity on line 17, paragraph (3),
where it says [paraphrasing], "policies that protect the
principal of the Permanent Fund while using the earnings." He
remarked that there presently is a mechanism in place that does
exactly that. He requested a concrete explanation of what
[those lines] mean.
Number 3611
REPRESENTATIVE GRUENBERG replied that these are the issues that
the legislature should continue to examine. He did not mean to
say, in every case, that the legislature's not doing them now.
He said he is suggesting a formal and continuing process, not
just an ad hoc process. He added he is not saying there has to
be changes in any given example, or in the collective process.
REPRESENTATIVE OGG said he didn't find much "concrete" in
Representative Gruenberg's answer, and remarked that the
committee has been having this kind of discussion for the past
year and a half. He said he didn't want to hear, "We have to
keep working on that issue."
Number 3707
REPRESENTATIVE GRUENBERG responded, "That is the essence of the
purpose of the bill." He said Representative Wilson pointed out
one aspect of the bill, that there needs to be a committee
structure that allows and encourages [work] to be done as part
of the fiscal policy basis, the revenue raising basis, and
looking at ways to stabilize and grow the state. He said the
bill is not attempting to point a finger to say the legislature
is doing things wrong at the present time, it is to ensure that
the process continues in an established framework on a regular
basis. He opined that subsection (a), page 2, lines 7-9, is the
heart of the bill.
CHAIR HAWKER clarified procedures for the remainder of the
meeting.
Number 3905
REPRESENTATIVE SEATON said the biggest question mark in the
budget is the price of oil. He said he is trying to figure out
how "fuzzier and fuzzier projections going out year after year
for a 5-year oil projection gets us to a more finite fiscal
plan."
REPRESENTATIVE GRUENBERG replied that the 5-year figure is only
a suggestion, and he isn't wedded to it. He stated his own
views on oil fluctuations and suggested more planning be done.
REPRESENTATIVE SEATON referred to the extreme fluctuations in
oil price and said the range of the 5-year plan cannot be
nebulous.
REPRESENTATIVE GRUENBERG agreed and listed other variables that
could affect the plan.
CHAIR HAWKER pointed out that the next two speakers would be
talking about those variables.
REPRESENTATIVE GRUENBERG thanked the committee for the
discussion of the bill.
Number 4444
DAVID TEAL, Director, Legislative Finance Division, said that
[revenue projection] models such as those from the Permanent
Fund Division Department (PFDD), DOR, and Legislative Finance
Division, typically hold expenditures constant because they are
hard to predict. He noted that there were unavoidable
expenditures such as Public Employees' Retirement System (PERS)
and Teachers' Retirement System (TRS) cost increases at roughly
$34 million a year in general funds. He said such an increase
was not a one-time occurrence, but occurs this year and for the
next two years. After that the increase stops, but the
expenditure stays, he added.
CHAIR HAWKER surmised that in three years it is a $100 million
increase that year.
MR. TEAL said yes, the increase remains from then on.
Number 4646
MR. TEAL explained that Medicaid is increasing, nationwide,
approximately 15 percent per year. He said it was difficult to
change how much the state spends on Medicaid, but the state has
tried to contain costs and has lower rates than some states. He
said Alaska can expect increases in the cost of Medicaid if it
follows the national average, which would mean about $40 million
to $50 million more a year.
CHAIR HAWKER remarked, "That's general funds [increase]."
MR. TEAL replied yes, but even if [the state] was lucky to hold
the increase to one-third of the nationwide increase in
Medicaid, it would still mean in excess of $20 million a year in
added costs.
TAPE 04-7, SIDE B
Number 4618
MR. TEAL discussed education funding and said it is a question
of what [the legislature] wants to spend. It is known that PERS
and TRS [increases] have affected education very strongly this
year in the form of teacher layoffs. The school districts' cost
increase is expected to be 5 percent over the next four years in
a row. That would be about $34-5 million, annually, up to $100
million in three years, which remains from then on.
Number 4509
MR. TEAL explained that the cost for university spending, like
education, asks the question, "How much do you want to spend?"
The university would like an increase of $10-20 million to their
budget.
MR. TEAL indicated that, "Those were the main drivers," and
would increase [budget spending] to $300 million over where it
is now. He emphasized that [the expenses mentioned so far] do
not address the non-formula portion of the budget, which is
approximately $1 billion in general funds. He said to keep up
with inflation, "You're looking at another $20-$40 million
annually."
Number 4406
MR. TEAL cautioned:
When you look at these graphs of the CBR end-of-year
balance, and you see that even with POMV in place and
the several-hundred million dollars a year that it
would generate for state government, assuming that we
got a 40 or 50 or 60 percent split, and built into
this thing is a $300-million tax of some sort, whether
it is sales or income or any other source of revenue -
it doesn't make any difference - there's $300 million
worth of revenue built into this chart, and there is
no spending increase built into this chart. You can
see that if you want to build in a spending increase,
call it $300 million, by 2008, and you take away the
$300 million in tax revenue that we haven't achieved,
... you can see that that surplus is gone.
MR. TEAL pointed out that in 2006 [in the 2003 hearings
document], the bars are close together, but they rapidly spread
apart. Change is based only on the dividend split and makes it
difficult to see what the fiscal gap is. He emphasized the
differences between the various dividend splits. That makes it
difficult to add $300 million of additional spending to this
chart, he added.
Number 4131
MR. TEAL said the Legislative Finance Division graph takes the
revenue forecast and the flat budget and shows what the fiscal
gap is in each of those years. He noted by 2006 there would be
an $800 million fiscal gap, without the approximately $300
million just mentioned in "unavoidable increases." That comes
to a $1 billion fiscal gap by 2008. The graphs and models
reviewed typically look at flat expenditures and he does not see
them as being flat, he concluded.
Number 4012
REPRESENTATIVE WILSON asked how long it would take to get a tax
in place and get the revenues back.
MR. TEAL answered that is a question for [DOR], but he guessed
one and a half years.
Number 3929
CHAIR HAWKER mentioned that the first statutory mission in the
bill that created the [House Special Committee on Ways and
Means,] charged the committee with controlling state spending.
He asked Mr. Teal to reemphasize the inevitability of the
committed obligations which would increase state spending. He
asked what it would require, in Mr. Teal's opinion, to achieve a
level budget.
MR. TEAL replied that it is a judgment call. He related:
The simple way to do it is to look at inflation alone
because then you could say, well, we just keep up with
inflation. Doing that is something we haven't done in
education. Medicaid, of course, is a different
formula. It doesn't depend on inflation. There are
parts of the budget that would be affected by
inflation, and parts that wouldn't be. I think that's
it's safe to say that approximately $1 billion would
be directly affected by inflation. If inflation's 3
percent a year, that's $60 million a year in what you
might call, unavoidable.
Certainly the PERS/TRS cost increases, which are the
major drivers for the next several years, are
unavoidable. This year the state - of the $34 million
- funded approximately $20 million. To say they're
unavoidable is not exactly true, but I don't know how
long state agencies can continue to avoid a 5 percent
increase in personal services. The alternative, of
course, is that, say in three years, we've got a 15-20
percent increase in personal service costs. You can
look at that as, you either reduce personal services
expenditures some other way, through union
negotiations, or you have fewer people working. In
order to absorb this 20 percent increase in cost,
you're talking about laying off one out of five
people. So, I don't see how you can avoid that.
You can do some things legislatively to affect your
PERS/TRS increases and that may reduce them to -
instead of 23 percent - to 17 or 15 percent. But, the
way the PERS increases work ... it's going to be 5
percent this year, 5 percent next year, and probably 5
percent the following year .... The actuaries have
determined that we're horribly under funded in PERS
and we should have a 15-20 percent increase in cost,
but we're limited to a 5 percent increase per year.
If you manage to reduce the total cost, you will still
be facing 5 percent increase for the next several
years.
Number 3520
REPRESENTATIVE WILSON asked, whatever fix is in place for this
year's [cost increase], if next year [the legislature] would
have to find a way to address this year's cost as well as an
additional 5 percent.
MR. TEAL said no, it is 5 percent in a year, which is really one
out of 20. In TRS, for example, it would be four years of 5
percent increases, or 20 percent, or one out of every 5
teachers. In any one year it is one out of 20.
REPRESENTATIVE WILSON said that is what she meant.
MR. TEAL explained that Medicaid is not a contractual increase,
but a formula. He said the regulations are not in place to save
money. All of the money the Department of Health and Social
Services has saved by having a net zero supplemental is going to
Medicaid. He said the bottom line is, "I don't see how you're
going to avoid approximately $300 million in increases in the
next three-to-four years." He added that that does not include
capital costs; $70 million to $100 million in deferred
maintenance.
Number 3205
REPRESENTATIVE OGG [looking at the bar graph from Legislative
Finance] asked what would be the number added to the bottom of
the bar graph for years 2005-2008.
CHAIR HAWKER requested that Mr. Teal provide that information at
a later date.
MR. TEAL replied that the [2005 budget] is pretty accurate
because it is based on the governor's budget and there are no
new revenues built in.
REPRESENTATIVE OGG asked if education is included.
MR. TEAL said it includes the PERS cost, but not bills that
would give additional funds to school districts or
municipalities. It also assumes that the $98 million to $100
million in revenue that the governor expects, has not passed.
"The governor shows $400 million as the projected fiscal gap,
and [Legislative Finance] shows $565 [million]. He explained
that increases in funding for school districts have not been
included [in the 2005] budget, and he has heard that expense may
be up to $80 million. He said if PERS/TRS costs were to be
included, the budget could go up by $100 million [in 2005]. In
2006 and in 2007 there would be another [$100 million] added on,
he projected. At that point there would no longer be increases
in PERS/TRS costs, but there would be $100 million to $150
million annually for inflation and for Medicaid, he concluded.
Number 2822
REPRESENTATIVE ROKEBERG said his tallies add up to $100 million
for 2005, and asked if that amount should be added to $565
million.
MR. TEAL replied yes.
REPRESENTATIVE ROKEBERG continued to figure the costs in 2006
and extended them out to an excess of $400 million on top of the
structural gap. He concluded it is like adding roughly $130
million to every number. He asked for a one-page projection of
high/low ranges for a 10-year forecast. He remarked that the
numbers Mr. Teal is talking about are from the real world and no
one has faced up to them yet. He concluded that trying to get
accurate projections based on the real world is what the
committee is trying to do.
CHAIR HAWKER responded, "That absolutely pins the tail on this
donkey." He thanked Mr. Teal for his testimony.
Number 2430
DAN DICKINSON, Director, Tax Division, Department of Revenue
(DOR), presented information from a packet about oil production
in Alaska broken down by the fields involved. He said that
today half the number of barrels are being pumped as in 1988.
Prudhoe Bay is only producing one-quarter today of what it
produced in 1988, he added. None of the new fields are going to
compare to what happens when a mature field like Prudhoe Bay
declines at 8 percent a year.
MR. DICKINSON explained how page 2 overlays price on volume and
tells how much oil revenue the state took in. He said that when
the CBRF was passed in 1990, the peaks were chopped off and the
volatility was smoothed out. The most that was put back into
the CBRF was $17 million. He pointed out that the "cash cow,"
Prudhoe Bay, is not going to play the same role that it has
played in the past.
Number 2044
CHAIR HAWKER pointed out that the jagged line on the left side
of the page, the "Actual," smoothes out on the "Projected" half
of the page.
MR. DICKINSON said it was worth reminding everyone that the
projected side represents the average.
REPRESENTATIVE GRUENBERG suggested gas revenues be factored in.
MR. DICKINSON noted that page 14 of the packet addresses
possible increases from future oil and gas exploration. He said
the starting date may move to the right.
Number 1826
REPRESENTATIVE ROKEBERG pointed out that on the last chart [page
14] even the best-case scenario only shows about $1.9 million
[of possible increases in revenue]. He said that still leaves
[the state] short of paying the [fiscal] gap in 2016. He
characterized that as "scary."
REPRESENTATIVE WILSON characterized it as "a little terrifying."
Number 1715
MR. DICKINSON predicted that gas revenues will be more volatile
than oil revenues. It is easy to conceive of a gas price lower
than the tariff, he said, or the gas price could be three times
the tariff, making for hugely volatile revenues.
MR. DICKINSON referred to [page 3] and showed where the CBRF
would eventually close out to zero. He explained that page 4
shows the exhaustion of the CBRF as early as December 2005 and
as late as May 2012. He noted that predictions for the CBRF to
run out by now were wrong because the annual state budget has
decreased, and the $18 range in state spending is smoothing
things out. Spending has gone down, he said.
Number 1303
CHAIR HAWKER asked if there is inflation-adjusted, per-capita
general fund spending in this state, which he pointed out
"today, in fact, is less than in 1975, when we started the
pipeline."
MR. DICKINSON suggested people look at the Legislative Finance
website for more information. He continued to explain that page
6 plots two trends from the last 15 years: oil production
decreasing, and oil prices increasing. He said, previously, his
department was under forecasting the price rise and the amount
of revenue. The gross value of those two items is roughly the
same, he added. He said people don't believe this trend will
continue and that there will be a regression.
Number 0955
MR. DICKINSON talked about the numbers on page 8 which look at
the big picture from 2004-2020. There are two assumptions made
here: oil is at $22 a barrel and there are no extraordinary
resource developments. He maintained that in the future there
will be no new extraordinary resource developments. He
continued to explain that there would be a $1 billion deficit
over the next 15-year period.
Number 0826
CHAIR HAWKER asked if that is a $22-a-barrel projection.
MR. DICKINSON responded, "At an average." He referred to page 9
to show how $1 billion could be raised. He said any fiscal tool
could be mocked, so he used five of the most commonly mentioned
revenue tools to see what kind of effect they could have with
minimal damage. He opined that an income tax withholding could
be implemented in six months, but that a sales tax would take a
little longer.
REPRESENTATIVE WILSON said, "You probably could get something in
place in six months, but before we get a full year of revenues,
it would be a year and a half total, then."
MR. DICKINSON replied that his department would start on January
1 of the next year, which would produce half of the revenues in
that first fiscal year.
REPRESENTATIVE WILSON said it would take a while to be reflected
in the budget. She asked what year that would happen.
MR. DICKINSON said he believes it would be 2006, if the
legislature were to act now. He said the CBRF could help ease
the transition. He discussed an income tax; 1.5 percent flat
tax of the adjusted gross income (AGI) as found on page 10 of
the packet. He described how that would work, reading from page
10. People with an AGI of more that $100,000 would carry 33
percent of the tax.
Number 0244
CHAIR HAWKER asked Mr. Dickinson if he has the ability to come
up with the same sort of high-level analysis on taxable income
as opposed to tax liability or AGI.
MR. DICKINSON replied yes. He said that Mike Williams [Revenue
Auditor, Tax Division, Department of Revenue, Anchorage, Alaska]
could better answer that question because he has a more
sophisticated model. He noted that the information [on page 10]
is based on 2002 data, which he continued to explain. He said
there are many different ways to generate the $200 million.
CHAIR HAWKER asked what percent of Alaskan federal taxpayers
have an AGI over $100,000.
MR. DICKINSON said about 10 percent.
Number 0016
REPRESENTATIVE ROKEBERG said the cap tax liability at the amount
of dividend was very similar to former-Governor Jay Hammond's
fallback plan. He said it looks like the tax falls less on the
higher income people than the lower income people.
TAPE 04-8, SIDE A
Number 0030
MR. DICKINSON replied that once a person reaches a ceiling, he
or she is "capped out."
REPRESENTATIVE WILSON asked Mr. Dickinson what he perceives as
the amount of the dividend.
MR. DICKINSON said a flat $1000.
Number 0100
REPRESENTATIVE GRUENBERG asked what percentage of Alaskan's have
incomes over $100,000.
MR. DICKINSON said he thinks 10 percent have AGI greater than
$100,000.
REPRESENTATIVE ROKEBERG asked for the rationale on the $650
property tax credit and if that information is readily
available.
MR. DICKINSON explained that the amount is "a backed into number
based on what it would take if there was a 3 percent AGI and we
wanted to raise $200 million." He suggested Mike Williams could
provide more information about it.
Number 0235
REPRESENTATIVE ROKEBERG asked about personal property taxes and
said they complicate matters.
MR. DICKINSON said his department uses a document called Taxable
Alaska from Department of Community & Economic Development to
make some assumptions to carry those number as a credit against
the income tax numbers.
REPRESENTATIVE WILSON asked if someone's income level has to be
$600 before needing to file for federal income tax.
MR. DICKINSON said he believes that is correct.
REPRESENTATIVE WILSON asked if it is a double deduction.
Property owners would be able to deduct their property tax
twice, once at the federal level and once at the state level,
she said.
MR. DICKINSON explained that the property owner would be able to
deduct [property tax] so it would lower the tax that they owed,
and then they would be eligible for a credit against that
[amount].
Number 0453
MR. DICKINSON continued to explain the packet. Page 11 shows
how $200 million in sales tax could be raised, he said.
CHAIR HAWKER offered, "Sales and use [tax]."
MR. DICKINSON said yes, sales and use, and explained that the
tax would become an 1.8 percent add-on to local taxes in
communities where they already exist and a stand-alone in
communities where there is not already a sales and use tax. He
said if food and most services are excluded, the tax rate would
raise to 3 percent. He said it would be important to create a
single administrative entity, not a state organization, that had
both state and local representation. He said it was important
to meet the criteria specified in a streamlined sales tax
project which would include collecting tax on Internet and mail
order sales. He opined that a 1.8 percent addition to the
existing sales tax in communities would not be a huge
distortion, as compared to higher rates.
Number 0700
REPRESENTATIVE ROKEBERG asked whether Congress had restrictions
on states' collecting sales tax on Internet retail sales.
MR. DICKINSON said the words "could move towards," indicate
steps need to be taken. Currently, taxing the actual Internet
service itself is prohibited. "If the entity you're buying from
has nexus in your state, you can require that they collect
Internet sales tax." He said it would probably require a
federal law change.
REPRESENTATIVE ROKEBERG mentioned collecting taxes from web
sales.
MR. DICKINSON cautioned about separate entity rules.
Number 0908
MR. DICKINSON pointed out that page 12 shows how $200 million
could be drawn from the permanent fund. He read from the chart
to show 5 percent of $28 billion is available for distribution,
which would equal $1.4 billion, and 14 percent of that would be
$200 million. Page 13 refers to how $200 million could be
garnered from corporate income taxes, he said. He mentioned a
letter from the governor dated February 2, which laid out
reforms to the net operating loses (NOL) to capital gain and to
federal tax credits. He relayed that, at the moment, foreign
cruise ships are exempted from income tax, but domestic cruise
ships are not. He suggested several ways to collect revenue
from a head tax. Another place changes could be made is to the
oil and gas production taxes, he said. The corporate income tax
structure could be changed, he opined, as well as S-corps at
corporate and at individual-owner levels. All of these are
tools or ways of looking at corporate income tax to generate
more revenue for the state, he concluded.
Number 1333
REPRESENTATIVE GRUENBERG requested more discussions, such as
this one, where menus of revenue-raising ideas are brought up.
He suggested handouts be made of the various possibilities.
CHAIR HAWKER noted that there were more such meetings scheduled.
MR. DICKINSON replied that twice a year [DOR] puts out a
forecast with "think pieces" to lay out menus such as
Representative Gruenberg suggested.
REPRESENTATIVE GRUENBERG specified he was particularly
interested in the latest information on [page 13].
MR. DICKINSON said he would try to provide more specific
information about [corporate income tax].
CHAIR HAWKER said there would be future in-depth hearings on
this topic.
Number 1600
REPRESENTATIVE ROKEBERG wondered if "the 18 states that tax S-
corps do a double whammy on those people, and if they have an
income tax and a sales tax." He also commented on the cruise
ship head tax, saying a new federal law prohibits the money from
going into the general fund. He wondered if there was any
research on that topic, and if that was why the governor went to
a "bed tax" instead.
MR. DICKINSON said his understanding is that as long as the
spending coming from the general fund directly supports the
cruise ship industry, it's permissible. He said general taxes
can't be applied; only those that go to support [the cruise
ship] industry can be applied. He said, "If you had a broad
sales tax, which included, as a portion of the use tax, the
provision of services on the cruise ship, Department of Law
believes that would a belt-and-suspenders approach."
Number 1747
REPRESENTATIVE ROKEBERG said, "I was the author of what's known
as the OSG [Office of the Solicitor General] corporate tax case
regarding international trade and its impacts on international
trade and the treaties with over 175 countries that proscribes
or restricts foreign-bottomed vessels, aircraft, railcars,
satellites, et cetera, from being taxed by the state." He
requested feedback from Mr. Dickinson about a separate corporate
tax exception for cruise ships only, thereby abrogating the
international treaties and incurring the wrath of the State
Department, Department of Commerce, the United Nations, et
cetera. He asked what impact a breach of the treaty would mean
[to the state].
Number 1918
MR. DICKINSON said he could obtain that information. He said
that imposing a [head] tax on passengers may not violate the
treaty.
REPRESENTATIVE ROKEBERG replied that most ports around the world
have a head tax. Even California and Florida don't have
corporate taxes on foreign-bottomed cruise ships because of
treaty implications, he said. California has its own tax code,
not the United States code.
MR. DICKINSON, in answer to Representative Rokeberg's first
question, said all [18 states] have personal income tax and
treat [corporations] like C-corps, which are subject to the same
double tax.
REPRESENTATIVE ROKEBERG asked if LLCs [limited liability
companies] and sole proprietors are treated the same way as S-
corps [S corporations].
MR. DICKINSON responded that the research [in the packet] only
applies to the S-corps. He pointed out that some are franchise
taxes and some are flat taxes.
REPRESENTATIVE ROKEBERG said there was a huge shift in business
away from S-corps and LLCs and he wondered if the other states
were following suit.
MR. DICKINSON said his predictions were based on a 2002 model,
which has not started modeling the changes. He said page 14 has
already been discussed, but noted that there may be a gap in
time before [future developments] come in.
Number 2246
REPRESENTATIVE ROKEBERG referred to page 4 and asked if a matrix
had been done with a $1 billion floor in the CBRF and what the
dates would be.
MR. DICKINSON said he has not done a matrix like that. He
pointed to page 3 and said if $1 billion is subtracted from the
last two blue lines, it looks like the "drop-dead" date would be
2010.
REPRESENTATIVE ROKEBERG requested that Mr. Dickinson produce a
matrix with a $1 billion floor.
MR. DICKINSON said he would.
Number 2430
REPRESENTATIVE ROKEBERG said [the legislature] is looking at
trigger mechanisms and revenue-enhancement packages and such a
matrix would be helpful. He asked if the budget projection
chart produced by Mr. Corbus [Commissioner, Department of
Revenue] in Fairbanks at the [Conference of Alaskans] could be
obtained. He asked how far out revenue projections go.
MR. DICKINSON answered that the [Department of Revenue] has many
projections, but the one on the web site goes through 2020.
REPRESENTATIVE ROKEBERG said [that information] is important to
future discussions of enshrinement of the dividend. That debate
needs to be in the context of revenue projections because the
gap is going to be wider and a long-range context will be
needed, he said.
Number 2704
MR. DICKINSON said he could find the material from Fairbanks.
REPRESENTATIVE ROKEBERG said the model [on page 7] is a good
baseline.
MR. DICKINSON said it is important to focus on what happens with
growth and what kind of growth it is.
Number 2814
REPRESENTATIVE KOHRING referred to HB 493 and opined that the
contents of the bill are things that can already be done by the
legislature and do not need to be formalized and put into
statutes. He said he appreciated the intent of the bill, but
suggested the sponsors form their own caucus and advocate for
the proposed measures rather than formalizing it and going
through a time-consuming, expensive process.
REPRESENTATIVE KOHRING spoke about the issue of expected future
deficits and the fear mentioned [by the committee] about where
the money will come from. He said [the committee] should look
at the positive side and use the deficit as an incentive to
engage in further reform measures and further efficiency
measures. He said he believes that what the governor outlined
in Plan B ought to be looked at seriously, such as the mergers
and consolidations of government agencies. He suggested further
exploration of greater efficiencies in the bureaucracy. He
repeated that the deficit may be an opportunity for [the
legislature] to look at restructuring the bureaucracy.
Number 3045
REPRESENTATIVE GRUENBERG said he appreciates Representative
Kohring's comments, and said he is right in that the
legislatures of the future could do the planning that is
suggested in HB 493. He said [the bill] will make sure that it
is done and provides direction, "marrying the voluntary
participation concept with the concept that there are things
that we could do even today for greater efficiencies." He
offered Representative Kohring a challenge to form a
subcommittee with himself and one other member of the committee.
REPRESENTATIVE KOHRING said, "No, on setting up a subcommittee,
and, yes, I'd be happy to work with you." He said he has been
working on his own to come up with legislation, but that he
would be happy to work with Representative Gruenberg. He said
he doesn't think a formal subcommittee is necessary.
REPRESENTATIVE GRUENBERG said, "If you'd be willing to be on it,
I'm willing to be on it. Let's see if we can get a third
person, and let's do it."
CHAIR HAWKER said he would continue to take [that suggestion]
under advisement.
Number 3409
REPRESENTATIVE ROKEBERG said it is interesting to note the
testimony of this morning in the context of Plan B presented by
[Office of Management & Budget] to the Conference of Alaskans in
Fairbanks. He said [Plan B] is a very shocking plan and it came
about because of a request by the conferees to the
administration. It wasn't done to shock people, he said. He
said the amount of cuts totaled $420 million, and it is shocking
to see the impact on state government. He noted that
Representative Kohring has said, in the past, that even more
cuts should be made. He emphasized that it is frightening to
see the actual cuts. He said that what he has heard this
morning is, even if Plan B is implemented with all the
structural increases because of TRS/PERS, inflation and the
other issues, in three years the $400 million in savings would
be burned up. "We're going nowhere. That's how frightening it
is when you look at it," he concluded.
Number 3630
REPRESENTATIVE MOSES said he has enjoyed listening to the wake-
up call. He said he hopes those who campaigned on "no taxes, no
touching the dividend, just cut the budget," feel a little
guilty.
Number 3737
[HB 493 was held over.]
ADJOURNMENT
There being no further business before the committee, the *House
Special Committee on Ways and Means meeting was adjourned at
9:17 a.m.
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