Legislature(2003 - 2004)
02/27/2004 07:00 AM House W&M
| Audio | Topic |
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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 27, 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
COMMITTEE CALENDAR
HOUSE BILL NO. 470
"An Act relating to the taxation of income."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 470
SHORT TITLE: INCOME TAX ON INDIVIDUALS & FIDUCIARIES
SPONSOR(S): REPRESENTATIVE(S) MOSES
02/16/04 (H) READ THE FIRST TIME - REFERRALS
02/16/04 (H) W&M, FIN
02/27/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
TIM BENINTENDI, Staff
to Representative Carl Moses
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 470 on behalf of
Representative Moses, sponsor of the bill.
DAN DICKINSON, Director
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Explained aspects of HB 470 and answered
questions.
MIKE WILLIAMS, Revenue Auditor
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 470.
ACTION NARRATIVE
TAPE 04-9, 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, Moses, and Ogg were present
at the call to order. Representatives Rokeberg and Gruenberg
arrived as the meeting was in progress.
HB 470-INCOME TAX ON INDIVIDUALS & FIDUCIARIES
Number 0056
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 470, "An Act relating to the taxation of income."
CHAIR HAWKER spoke about the history of the bill since 1989, and
stated that the purpose of the meeting was to look at specific
ideas and investigate implications, complexities, and fiscal
consequences of personal income taxes. He said Representative
Moses, sponsor of HB 470, brings the bill forward at an
appropriate time. He reviewed the three goals of the [House
Special Committee on Ways and Means]: finding ways to manage the
cost of government, making government more efficient, and
raising revenues, with the ultimate goal of matching revenues
and expenses.
Number 0640
TIM BENINTENDI, Staff to Representative Carl Moses, Alaska State
Legislature, sponsor of HB 470, began by highlighting historical
features of income tax history in Alaska, as follows:
Net income tax was established, actually, in 1949 as
part of a major tax policy overhaul during territorial
days. It was levied on residents, non-residents,
fiduciaries, and corporations operating in Alaska.
The tax rate was simply 10 percent of a taxpayer's
federal tax liability and that applied to all income
levels. Tax administration and collection were
simple, and employers withheld 10 percent of what was
being withheld, already, for an individual's federal
withholding. The personal income tax successfully
withstood a constitutional challenge in 1950. The
court considered the tax reasonable since it was
structured according to one's ability to pay. Between
1949 and 1961 the tax rate gradually went from 10
percent to 16 percent.
MR. BENINTENDI continued to say:
In 1975, Alaska modified its tax structure by
introducing graduated tax rates on various levels of
income, bringing in that progressivity, I guess. And,
the range, at that time, was from 3 percent to 14.5
percent. It also expanded the section of tax law
dealing with non-resident taxable income. In FY77,
the Alaska personal income tax raised its highest
amount ever, which was $210 million. Personal income
tax was repealed in 1980, the same year that the
legislature appropriated $186 million to refund
everyone's 1979 and 1980 income tax payments.
Number 0853
MR. BENINTENDI referred to a 1989 research piece [ALASKA'S
PERSONAL INCOME TAX HISTORY] in the committee members' packets
and explained that Table 2 shows all the state tax revenue,
total personal income, and the percent of total personal income
the tax in the years 1959 through 1980.
MR. BENINTENDI, in answer to the question about why an income
tax is needed, said about half the population supports it. He
continued to say:
Forty-three states elsewhere in the country have some
variation on a personal income tax. Many Alaskans
have paid income taxes in other states where they've
lived prior to coming here. This bill derives tax
from income sources within Alaska only. General
support throughout our state is fairly consistent.
We've spared you loading up your packet with support
letters and a lot of cheerleading but, nonetheless, we
have tried to approach a number of non-profits,
individuals, and municipal entities who have supported
this tax in the past, and they're currently either
working on resolutions or getting support letters
ginned-up. It's been a pretty short threshold since
we heard we'd have the meeting, so that's in process.
But, it's fair to say, there's some pretty legitimate
support out there for income tax restoration.
Number 1025
MR. BENINTENDI continued to say:
In 1995 there was a bipartisan, long-range financial
planning commission appointed, and they exhaustively
went through a review of revenue measures for the
State of Alaska. In that exercise they recommended
the restoration of an income tax by the year 2002.
More recently here, in the last couple of weeks, AARP
has divulged poll results where they conclude that
half of the citizens in Alaska over 18 support an
income tax. This measure, our bill in particular,
would shift part of the tax burden to non-resident
workers and bring in about $30 million a year from
that group. And that is an estimate.
MR. BENINTENDI said there is sentiment in the state that out-of-
state workers don't contribute to services. Under this bill
those workers would not be able to take advantage of the
property tax credit. He remarked that about one third of
[income tax] revenue would come from out-of-state workers.
Number 1202
CHAIR HAWKER welcomed Representative Rokeberg to the meeting.
He asked Mr. Benintendi if [HB 470] was crafted with the active
involvement of professional tax counsel.
MR. BENINTENDI replied [it was drawn up] by bill drafters with
input from legal counsel.
CHAIR HAWKER said, at this point, [the committee] is looking at
the macro structure of the bill, but that the finer points would
have to be dealt with later on. He pointed out that the
legislature has established Alaska as a preeminent location for
trusts, due to its tax policies. He wondered if that idea had
been specifically considered in the bill.
Number 1342
MR. BENINTENDI responded that the sponsor has always felt
fiduciaries, estates, and trust income should be "hooked in."
He said several years ago, then-Representative Al Vezey put
Alaska on the map in terms of being an attractive state for
developing state planning, estates, and trusts, because it had
no income tax. He said it was an issue that needed
consideration. "Right now, our bill does propose to tax those
entities," he said.
REPRESENTATIVE SAMUELS asked for clarification about one third
of the money from state income tax coming from out-of-state
workers.
MR. BENINTENDI replied it is fair to say about one third of the
money would come from that source.
CHAIR HAWKER made a point of clarification by adding, "That is,
from this bill as it is structured, which has a significant
credit for persons owning real estate and paying personal
property taxes in this state."
Number 1521
DICK DICKINSON, Director, Tax Division, Department of Revenue
(DOR), responded to Mr. Benintendi's statement by saying if the
total revenue from just the income tax portion is $344 million,
and out-of-state workers represent 10 percent of the payroll,
after all the credits the total comes to about $30 million. He
asked Mike Williams to comment.
Number 1600
MIKE WILLIAMS, Revenue Auditor, Tax Division, Department of
Revenue, Anchorage, Alaska, said Department of Labor (DOL), in
their non-resident report, suggests that about $900 million in
wages from Alaskan sources goes to non-residents, so $30 million
might be a little high, but in the ballpark.
CHAIR HAWKER asked if a mathematical average of non-residents
earning $900 million in wages turns out to be about $15,000 per
worker.
MR. WILLIAMS said he believes that is correct.
Number 1651
REPRESENTATIVE WEYHRAUCH agreed with Mr. Benintendi and the
sponsor that there has been a lot of interest in this bill. It
seems like a psychological hurdle has been overcome to begin to
discuss an income tax as a fiscal tool, he said. At the
Southeast Conference last summer, he said he discussed an income
tax with a zero percent rate. He asked if one of the major
philosophic purposes of the bill is to capture the income from
out-of-state workers who take their incomes south without
investment in the state.
MR. BENINTENDI replied that it is one of the sponsor's main
objectives.
REPRESENTATIVE WEYHRAUCH asked if an out-of-state worker who
invests in in-state property would be taxed.
MR. BENINTENDI explained that a number of out-of-state people
own property, and the issue of the tax credit had constitutional
problems in the early days. The first thought was to have the
property tax credit applied just to Alaskan residents, and that
was found to be unconstitutional. Eventually, the tax credit
was for any [property] taxes paid in a municipality.
MR. DICKINSON added that under the definition from DOL, the
person would have to have been a resident for two years and
eligible for a [permanent fund dividend].
Number 2000
REPRESENTATIVE OGG asked if using the term "federal tax
liability" is 10 percent of one's federal taxable income, or if
it is 10 percent of the federal tax paid.
MR. BENINTENDI pointed out that in HB 470 the tax liability
figure is used, which is simple and follows the federal tax
structure.
REPRESENTATIVE OGG asked if it is the same as the original state
income tax.
MR. BENINTENDI said it is a function of the federal tax
liability.
Number 2140
CHAIR HAWKER asked about the DOR handout on the three typical
bases for qualifying for state taxes.
MR. DICKINSON stated that there is a difference between tax
liability and tax paid and he asked Mr. Williams to explain the
difference.
CHAIR HAWKER pointed out that the members had a 2003 form 1040,
and Schedules A & B in their packets.
Number 2232
MR. WILLIAMS referred to his memo of February 26, 2004, which
contains a table on personal income tax rate comparison. It
shows how much revenue Alaska might get under adjusted gross
income (AGI), under federal taxable income, and under net
federal tax liability. He explained that AGI is the equivalent
of line 34 of the 2003 form 1040. Federal taxable income is the
same as line 40; the gross income, plus the personal exemptions,
and either the standard or itemized deduction. Itemized
deductions are typically mortgage interest, property taxes, and
charitable contributions. The net federal tax liability is line
54, after federal credits.
MR. WILLIAMS continued to explain that at 1 percent of AGI the
state would generate about $138 million. The equivalent rate
applied using federal tax income would be 1.38 percent, and 7.0
percent using the net federal tax liability. He said he did not
go past 10 percent [on the chart] because there comes a point
when the rate can't calculate more that $1 billion in tax, and,
practically, this state couldn't sustain more than $1 billion in
tax, anyway. He emphasized that personal income tax alone would
not fill the [fiscal] gap.
CHAIR HAWKER noted that Mr. Williams' point about income tax
alone not filling the gap was written into the document [memo of
February 26,2004]. He asked about the range of the tax rates
which were based on net federal tax liability in the previous
state income tax, abolished in 1981.
MR. WILLIAMS answered that the rates at the time of repeal were
based on federal taxable income and ranged in from 3 percent to
14.5 percent, a graduated rate, with about a dozen income
brackets. If that structure were still in place, it would
generate about $750 million, he said.
MR. WILLIAMS continued to explain [net] federal tax liability,
noting that, currently, there is no other state that uses
percent of federal tax liability as a tax base. There were
three states until recently: North Dakota, Vermont, and Rhode
Island. He said he believes the reason is that federal tax
liability concedes a lot of policy and decision-making about the
tax to members of Congress, and too much revenue was being lost
due to changes in the IRS code. He said a study in the District
of Columbia, where tax burdens at various income levels were
analyzed, shows an effective rate of between 3-4 percent.
Number 2843
CHAIR HAWKER noted that in the members' packets is a chart that
compares state individual income tax rates.
REPRESENTATIVE OGG asked if the old state tax is based on
federal taxable income, and the proposed state tax is based on
the net federal tax liability.
MR. WILLIAMS said that is correct.
REPRESENTATIVE ROKEBERG asked if line 40 is federal taxable
income, in Mr. Williams' model.
MR. WILLIAMS said it is.
REPRESENTATIVE ROKEBERG asked about the net federal tax
liability.
MR. WILLIAMS said the rates generated for net federal tax
liability are based on current IRS tax data, using line 54 from
the current federal return form.
Number 3000
REPRESENTATIVE ROKEBERG said, "Just so everybody understands,
we've got three different potential federal tax bases for
benchmarks to work from." He said it is necessary to be very
clear about which number is being talked about. He asked if the
document of HB 470 scenarios [Department of Revenue Comparative
Analysis HB 470] in the bill packet is based on AGI.
MR. WILLIAMS answered that the scenarios are strictly based on
HB 470 structures which start with AGI and look at what an
Alaskan's tax liability would be.
REPRESENTATIVE ROKEBERG asked if line 54 is being used for the
deductions.
MR. WILLIAMS said that is correct. He explained [reading from
the chart], "There's a point where you get to just above the
Alaska Income Tax line. It says tax before credits or tax after
credits, under the Federal Return Values." He said he is not
clear if HB 470 was intended to be before or after credits, so
he figured it out both ways.
REPRESENTATIVE ROKEBERG asked Mr. Williams if he is referring to
calculations on line 40 and line 54.
MR. WILLIAMS apologized for not having a form 1040 in front of
him, but said it is not line 40.
CHAIR HAWKER said it is line 43.
MR. WILLIAMS said, line 43, the federal income tax before
credits. He said there are many [ways to calculate it].
REPRESENTATIVE ROKEBERG said that it is important to understand
the base data.
Number 3421
REPRESENTATIVE WILSON asked if Alaska income tax before federal
credits is line 43, and after credits is line 54.
MR. WILLIAMS said that is correct.
REPRESENTATIVE SAMUELS asked Mr. Benintendi if, before the
property tax exemption, about $340 million would be raised and
that amount reduced to $100 million.
MR. BENINTENDI said yes.
CHAIR HAWKER asked Mr. Benintendi to explain the tax
calculations in HB 470.
Number 3549
MR. BENINTENDI explained the bill beginning with page 1, line
13. There would be three phase-in years to ease [the income
tax] back into the system, he said. The $20,000 figure, the
federal tax liability, is the benchmark, and there is a scale of
income earners of less than, and more than, $20,000. He read
from page 2, [lines 3-17], to explain the percentage of tax per
year, based on income level.
CHAIR HAWKER asked if, for the rate differential throughout the
phase-in, the bill maintains a 5 percent spread between those
folks with federal income tax liability of less than $20,000 and
those with more than $20,000. He noted that these were not
marginal rates, but a complete shift of change of rate going
back to dollar one of a person's income. If a person has less
than $20,000, their rate of tax would be 5 percent, but if they
earn a penny more of income - $20,000.01 - their rate of tax
would be 10 percent, or $2,000. So that penny of income has
cost them $1,000, he added.
MR. WILLIAMS said that is correct, as written now.
CHAIR HAWKER asked if that is the intent [of the bill].
MR. WILLIAMS indicated that it isn't and replied that the bill
certainly could be worked on.
CHAIR HAWKER said that his point is that [the bill] has not been
looked at in detail by tax attorneys yet, so there are
unintended consequences of the structure, as it exists.
REPRESENTATIVE WILSON suggested the bill be graduated.
MR. DICKINSON explained that on federal taxes on the first
$20,000 a person could pay 5 percent, and then on the next
dollar he or she would pay 10 percent. "But, when you earn that
additional dollar, you don't immediately incur an additional
$1,000 in taxes. It becomes a marginal rate, not an average
rate. You pay 10 percent on what is earned over $20,000," he
explained.
CHAIR HAWKER pointed out that the rates are dependant on the
federal tax liability factor which is subject to change for
every single change of federal tax code. "We would be more
subject to federal influence on this than if we went and taxed a
basis for taxation, a revenue basis." He asked if the bill
includes taxing permanent fund dividends.
MR. BENINTENDI replied, "Under this bill, dividends would be
taxed."
REPRESENTATIVE OGG said it seems that the middle segment of tax
payers, because they own property, have no net tax liability, so
that the bill seems to be aimed at the very high and very low
end of taxpayers. He asked if that is the intent of the bill.
MR. BENINTENDI responded that he couldn't break it down so
distinctly, so he does not have an opinion.
Number 4230
REPRESENTATIVE OGG said it seems like the middle is being left
out.
MR. BENINTENDI said that is good information because the intent
of the sponsor is to soften the impact of the tax on working
families and homeowners. He said there is room for adjustment
because that is not the intent [of the bill].
REPRESENTATIVE ROKEBERG asked Mr. Dickinson what policy
guidelines he needs in order for his department to create new
models for the committee to work with.
MR. DICKINSON said one of his department's missions is to
provide new models.
CHAIR HAWKER requested a new model that contains familiar input
parameters and output formats.
MR. DICKINSON mentioned that he plans to put the information on
the web, also.
Number 4634
REPRESENTATIVE WILSON she said the model assumes that the family
has two children still at home.
TAPE 04-9, SIDE B
Number 4628
REPRESENTATIVE WILSON continued to say there are many families
whose children are no longer in the home. She said she would
like to see more of a break for those working families with
children still at home.
CHAIR HAWKER noted that the sections of the bill are
modifications to the existing Title 43. He asked Mr. Dickinson
to explain Title 43 and how HB 470 fits into it.
MR. DICKINSON deferred to Mr. Williams for the answer.
MR. WILLIAMS asked if Representative Hawker is asking how the
bill meshed in with the current income tax Act.
CHAIR HAWKER asked, "What is the Alaska Net Income Tax Act,
currently?"
MR. WILLIAMS explained that Title 43, Chapter 20, the Alaska Net
Income Tax Act, is the vehicle used for taxing corporations.
The proposed bill would mesh the taxation of individuals in with
the current statutes.
CHAIR HAWKER asked if it would be better to keep the two
entities separate.
MR. WILLIAMS suggested, from an administrator's perspective, a
separate chapter be created for individuals rather than marrying
it with the corporate income tax.
REPRESENTATIVE WEYHRAUCH asked why line 13, on page 1, didn't
say "for 2005" to make it simpler.
MR. DICKINSON replied that, typically, what is said is "for a
taxable year beginning...."
Number 4113
REPRESENTATIVE WEYHRAUCH asked the sponsor why the 1980 version
of the income tax was not introduced instead.
MR. BENINTENDI answered that he is not sure.
REPRESENTATIVE WEYHRAUCH asked if there was any consideration to
having a "kick-out" if the Constitutional Budget Reserve (CBR)
exceeded $2 billion, or if revenues to the state through percent
of market value (POMV), or huge gas or oil developments, managed
to close the gap between expenses and revenues.
MR. BENINTENDI replied, "No, we consider this bill a work-in-
progress or, certainly, a vehicle to be amended, and we did not
get into that area at all. It's certainly possible."
Number 4038
REPRESENTATIVE MOSES said his main objective [for sponsoring the
bill] is to try to get the non-residents to contribute for
services provided. He said he hopes to reinstate [the income
tax] to the way it originally was. The bill undoubtedly needs
technical amendments, he added.
CHAIR HAWKER said in future sessions the details would be
fleshed out.
REPRESENTATIVE WILSON stated that because Alaska has no state
income tax, a lot of businesses are set up to pay the least
amount of taxes. She suggested the bill consider this issue.
CHAIR HAWKER agreed with Representative Wilson.
MR. BENINTENDI pointed out the issue of whether or not to hook
subchapter S corporations (S-corps), limited liability companies
(LLCs), and sole proprietorships into this bill.
CHAIR HAWKER asked Mr. Benintendi to address on whom the bill
assesses taxes.
MR. BENINTENDI replied, "It would be individual wage earners,
estates, and trusts. As it is written, S-corps are not
impacted."
CHAIR HAWKER asked Mr. Dickinson to discuss how personal income
tax affects S-corps.
MR. DICKINSON explained that entities that are not real people
can be taxed on two levels, as an entity or as a "pass-through."
Pass-through means that the income earned is passed through to
its owners. He said the problem with corporations is that they
are taxed at both levels; double taxation of corporate profits.
The IRS code, in order to fix the problem of double taxation
which is allowed for subchapter C corporations (C-corps), set up
a new category for smaller corporations called subchapter S
corporations (S-corps). Whatever profits they earn get
distributed back to the owners.
Number 3426
MR. DICKINSON gave examples of limited liabilities which are
taxed at the entity level, and explained that the owners would
pay themselves in wages, issue themselves a W2, and call
themselves a wage earner. He said the bill should be clear whom
it targets.
CHAIR HAWKER made the point that if [the legislature] passes an
individual state income tax bill, then there would be a way to
collect taxes on those earnings that are currently transferable
and avoidable in the current corporate taxation structure.
MR. DICKINSON said that is correct, because now, if you can move
the corporate income to an individual level, it is tax-free. He
made the point that LLCs have the option of being treated at the
entity level or at a pass-through level. Whatever election they
choose on their federal return would be done at the state level.
Every state does it differently, he said.
REPRESENTATIVE WILSON said the "fair thing" should be done. She
asked what that might be.
MR. DICKINSON said, if you look at 50 states, you would find 50
ways of dealing with corporate taxes. He said there is no best
solution, but experts say, "You should have the fewest
distinctions, the broadest rates, and the most inclusive
[policy]."
Number 3050
REPRESENTATIVE ROKEBERG, speaking from personal experience as a
small business owner and participant in several LLCs, answered
Representative Wilson's question. He said now LLCs are more
typical than S-corps, which he termed antique. He pointed out
that the important element in LLCs is that businesses get the
corporate tax treatment under federal law of personal, single
taxation, not federal taxation. Avoiding double taxation is
fair, especially for small business entities, he added, and he
suggested adopting the same philosophy reflected in the federal
tax code as the appropriate way to go. He pointed out that net
income is taxed in a C-corp. He said it might be worth
examining the issue of large entities using the LLC model as an
avoidance to paying taxes. That might be done by putting a
floor on income. He said small businesses are the biggest job
generator in the state, "the driver behind our economy in a lot
of ways." He repeated the idea that [Alaska] should follow the
federal model.
Number 2800
CHAIR HAWKER said the same dialogue was looked at last year
during the discussion of consumption-based taxes, in order to
avoid double taxation.
REPRESENTATIVE WILSON asked if Representative Rokeberg is saying
that because LLCs are taxed at the federal level, they should
not be taxed again at the state level.
REPRESENTATIVE ROKEBERG defined double taxation as when the
dividends or net profits of a business are taxed twice, once
when issued as a dividend or a draw, and again on a personal
income statement.
CHAIR HAWKER said that Representative Rokeberg is setting up the
analysis of the bill in order to avoid double taxation.
MR. DICKINSON added that it would be double taxation by the
federal government and then double taxation by the state. It
does not mean once by the federal government, and then, once by
the state. He said that, typically, a major corporation will
pay federal tax and corporate income tax in all 50 states.
REPRESENTATIVE SAMUELS asked if boat owners are S-corps, and who
would be targeted for the tax.
REPRESENTATIVE MOSES replied that the boat owner is paid for by
the processing plant, given a 1099 for the fish delivered, and,
in turn, pays his crew a share and gives them a 1099, which
should credit back to his 1099. There is a trail that can be
followed.
REPRESENTATIVE SAMUELS said he was wondering about the boat
captain versus the boat owner. He offered a scenario whereby
the boat owner leases his boat to a holding company based in
Seattle and adjusts it so that the boat captain never makes a
nickel. The lease payment goes to Seattle, [and no tax is
collected]. He wanted to know the percentage of out-of-state
workers in the various industries. He predicted it is mostly
fishers, not oil workers.
Number 2227
CHAIR HAWKER said DOL had a recent analysis which would be made
available to the committee and which would answer that question.
MR. DICKINSON recalled that the fishing industry is either the
highest or the second highest [out-of-state business].
REPRESENTATIVE WEYHRAUCH said fishing is the second highest
employer in the state and, so, is probably one of the highest
out-of-state employers.
MR. WILLIAMS responded to Representative Samuel's question about
boat owners by saying it is possible that when a boat owner
leases to an Alaskan resident the form of business could be
structured such that no corporate or income tax is paid. For
example, if a Seattle boat owner sets up a LLC, S-corps, or a
partnership in which it leases a boat to an Alaskan captain,
because [Alaska] does not have a personal income tax or a
corporate income tax on pass-through entities, it is possible
for the Seattle boat owner to receive [profits] income tax free,
from an Alaskan standpoint.
CHAIR HAWKER asked if there would be a tax consequence in the
domicile of the corporation.
MR. WILLIAMS replied there would be.
REPRESENTATIVE SAMUELS followed up to say, "If I was going to
[avoid taxes], I would find a state with no corporate income
tax, set up a holding company based there, lease the boat back
to myself, as an individual, and make sure that the payment was
such that I never made a dime, no matter how much crab I caught.
The money would flow to the state with no income tax, and I
would get away with all the money."
MR. WILLIAMS pointed out that that is why Nevada Corporations
are so popular.
Number 2000
REPRESENTATIVE GRUENBERG inquired if the Alaska tax law could be
structured to tax cases, [such as Representative Samuels
mentioned], so Nevada Corporations could not be used.
MR. DICKINSON replied that Alaska could certainly attempt to do
so. He said there are ways to close some of the options
mentioned by Mr. Williams. Defining small corporations would be
part of the issue.
CHAIR HAWKER asked Mr. Benintendi to explain Section 10 of the
bill.
REPRESENTATIVE OGG referred to Section 8, subsection (b), line
4, the words "and the credit may not exceed the actual tax paid
to the other state or territory." He said this idea was omitted
in subsection (c) and clarity may be needed.
MR. BENINTENDI said it is a point well taken, but he suspected
it was because the bill is only impacting income sources within
Alaska. He said he is open to making changes.
CHAIR HAWKER said the bill is a conceptual piece, at the moment,
and had not undergone the scrutiny of tax counsel. He said
there are many unclear issues. "For example, are there
carryovers for unused credits?", he wondered.
REPRESENTATIVE OGG he said it looks like there is a potential
open door there.
MR. BENINTENDI spoke about Section 10 of HB 493. He said the
sponsor went with the lead of the bill drafters and attorneys on
this section. He said it is up to the will of the committee to
make changes.
CHAIR HAWKER suggested that tax counsel take a look at this
section to make it consistent with current IRS reporting
requirements. He pointed out that there is a provision for
making a reporting that says "within 30 days after termination
of employment" which is inconsistent with federal employment
reporting. He asked Mr. Benintendi if he envisions making the
withholding process familiar to folks, consistent with the idea
of federal withholding reporting to the state on an annual
basis, and the employer reporting to both the employee and the
regulatory agency.
Number 1446
MR. BENINTENDI said yes, the model in the bill should be as
familiar to the taxpayer as possible.
CHAIR HAWKER indicated that the bill will not move out of
committee today.
REPRESENTATIVE ROKEBERG asked if the intention is to work on a
committee substitute in the next few days.
CHAIR HAWKER answered that, at the moment, the plan is to look
at HB 493, corporate tax issues, and oil price projections next
Wednesday. The committee is planning to revisit HB 470 next
Friday.
REPRESENTATIVE ROKEBERG suggested that a new committee
substitute be circulated as soon as possible.
CHAIR HAWKER said the Department of Revenue would work with the
sponsor to flesh out the bill. He wondered if a subcommittee
should be formed.
REPRESENTATIVE WEYHRAUCH said he is planning to get the bill out
to people in the tax industry and to see if the entities that
Representative Samuels mentioned could be addressed.
CHAIR HAWKER said he'd like to get a more mature version of the
bill and, using the professional community, take care of the
more obvious issues.
REPRESENTATIVE ROKEBERG said the bill needs a lot of work and a
lot of elements will be added to it.
REPRESENTATIVE OGG said he has heard interest in having a
minimum amount paid under this bill, as well as a cap.
REPRESENTATIVE ROKEBERG suggested that a variety of revenue
legislation should come before the committee to generate
feedback about what policies need to be made.
CHAIR HAWKER said there are several [revenue] bills in committee
such as the head tax concept, this bill, and corporate tax
structures. He emphasized that there is "no one silver bullet",
and additional revenues must be found. He said that even with
the proposed B version budget, which includes major reductions
in state spending, it would only be a year or so before other
inflating aspects appear. "One revenue source just isn't an
appropriate, wise, prudent, or, even, feasible solution," he
added.
Number 0622
REPRESENTATIVE GRUENBERG requested that the committee consider
looking at other vehicles such as [HB 236], HB 493, as well as
HB 470, and any others.
CHAIR HAWKER pointed out that House Special Committee on Ways
and Means, since it is a special committee, is precluded from
introducing any more bills at this date.
REPRESENTATIVE GRUENBERG suggested that the committee might want
to ask the Rules Committee to introduce new bills if they are
needed.
REPRESENTATIVE WILSON mentioned that HB 321 does have a cap at
both ends. She asked if bills could be merged.
REPRESENTATIVE ROKEBERG replied that there are a number of
techniques that could be used. He said there are ways to
introduce new bills if necessary, and there are a number of
bills that had been introduced that the committee could work
with or modified. He mentioned HB 298.
CHAIR HAWKER agreed that HB 298 is a linkage bill that would do
a lot of the structural "heavy lifting" in building a fiscal
policy.
REPRESENTATIVE KOHRING asked if the committee was at closing
comments.
CHAIR HAWKER responded that the committee would continue until
9:00 a.m.
Number 0338
REPRESENTATIVE KOHRING said a major consideration of the income
tax is its effect on the economy. He stated a concern that the
income tax is a drain on the economy. He cautioned the
committee not to focus solely on raising revenue for the state
treasury. He said his primary goal is to help grow the state's
economy, create jobs, and further industry, and he opined that
an income tax would be a drag on that process. He suggested the
best thing to do in the long run is to keep taxes to an absolute
minimum to allow private individuals and small businesses to
retain as much of their own money as possible so that most of it
gets reinvested into the economy, which, in turn, expands the
economy. "We, as a state, are going to benefit much more
greatly from that than if we were to extract a large amount of
that money out of the economy through taxes of this nature," he
surmised.
Number 0159
REPRESENTATIVE SAMUELS said he agrees with Representative
Kohring, and added:
We need to look at the economic impact of taxes, but
we also need to look at the economic impact of the CBR
going down to zero and what that would do to the bond
rating. We need to look at the situation if the
market drops and there are no earnings in the
Permanent Fund, and the price of oil drops and there
is no money. What do you do when you are forced to go
in there and cut $1.2 billion? We also need to look
at the economic impact of that side of it, too. They
are all bad choices, but the option of doing nothing
is not very pleasant, either.
CHAIR HAWKER remarked that is why he chooses the term,
"dilemma," for this situation.
REPRESENTATIVE GRUENBERG said in 1985 there were problems at
least as difficult as the ones today. Each period of time has
its own problems and it is up to the leadership to recognize the
challenge and to find the solutions, he said.
TAPE 04-10, SIDE A
Number 0035
REPRESENTATIVE WEYHRAUCH said he was staff in 1982 in Senate
Finance. Even then, there was a macro on everyone's computer
that said, "in these times of declining state revenues."
[Declining revenue] is always used to justify somebody's
position. He said that Representative Kohring has a legitimate
point, and he didn't want "the first words out of our mouths to
be taxes", particularly when we are trying to attract private
investment in the state. He said he goes back to the letter
[from the Conference of Alaskans] requesting the legislature to
look at options. He said he feels that [this bill] is a
legitimate option to look at. He suggested that the sponsor
address the question, "How is this bill going to affect me?" and
have [DOR] produce a model to show various situations.
Number 0213
REPRESENTATIVE WILSON suggested an economist speak to the
committee about the various [fiscal plan] scenarios in order of
impact. She opined that an income tax is lower on the matrix
than cutting government jobs and other things.
CHAIR HAWKER noted that DOR has included a preliminary
discussion of economic consequences and the alternatives in
their analysis that has been provided to the committee.
REPRESENTATIVE OGG related a story about Lou Williams, Jr.,
whose father was working at the time the state introduced the
first income tax in 1948-9. The year before the income tax
began, the state budget was around $2 million over what they
were taking in as revenues. He said the problem was that the
state had the money, but it was tied up in accounts. The
legislature was wrestling with a growing government after World
War II and discussing how to make it work by using income taxes.
He said the legislature, today, is doing the same and is in a
similar situation; the state has accounts and it has money, but
the access is restricted. He said the comparison is very
similar, and [the issue] still has to be dealt with.
Number 0619
REPRESENTATIVE ROKEBERG concurred with Representative Wilson's
request to ask an economist to speak to the committee about
revenue issues and their impact on the economy. He suggested
Dr. Goldsmith, recalling his presentation two years ago.
CHAIR HAWKER added that Dr. Goldsmith spoke to the committee
last year, as well.
REPRESENTATIVE ROKEBERG said he appreciates Representative
Kohring's admonition to be aware of the impacts [of taxation],
and said he cannot agree with him more; however, he said he
thinks it is important that the committee recognize the impacts
of doing nothing. A "soft landing" economic model has been
talked about for years, but he said [the economy] is so bad that
people don't even use that term any more. He said, "We are
heading for a cliff. There is not going to be a soft landing."
He opined that this has been a foreseeable incident. "[The
legislature] would not be performing their constitutional duty
if they did not take up these issues and try to educate the
public about where we are financially," he said. He emphasized
that many do not understand that Alaska is three years away from
a huge crisis. He compared today's times with 1986 when then-
Governor Sheffield had to take draconian measures. He pointed
out that even with huge cuts, the problem would remain if
additional revenues are not generated. "It's time for a
reexamination of our entire fiscal situation," he concluded.
Number 0942
CHAIR HAWKER stated that the committee was formed with clear
objectives: managing costs, increasing efficiencies, and
balancing revenues and expenditures. A year ago the highest
priority was economic development, he said, adding:
We are a resources-development state, a state that
wants to be pro-business. In this committee we've
taken on the nuts and bolts of balancing our state
budget, and our first priority was fiscal discipline.
The first action of the committee was to hear, debate,
and move forward, the constitutional spending limit
bill. The second issue was the role the permanent
fund earnings would take in future state fiscal
planning, and the POMV was considered as a tool.
Third, were issues of structuring the general revenue
system.
CHAIR HAWKER continued:
Today, we're having a debate on income taxation. This
isn't the first thing we leaped to. This is not
something we made as our first priority. It is
something, as our overall debate has continued ...
We're coming to recognize there is no silver bullet to
solve the state's fiscal situation. Budget cuts
aren't going to get us there alone, use of the
permanent fund earnings is not going to get us there
alone, and any single change to the general revenue
system is not going to get us there alone. We've got
to look for a matrix of solutions.
CHAIR HAWKER said the committee is on the fifth point of a four-
point plan; addressing future oil price volatility with some
mechanism that provides [the state] with the security that the
constitutional budget reserve is not depleted. He emphasized
that the committee's process has been a thoughtful process. The
fact that the committee is discussing an income tax does not
mean that the committee endorses a particular bill, nor does it
condemn a particular bill. The committee is conducting a debate
to bring the facts and circumstances of the state before the
people and before the members of the legislature so that the
committee has the information to make the necessary intelligent
decisions. He thanked the members of the committee for
contributing to an extremely productive, important, and powerful
dialogue that shows the people, despite the conference of
mayors' no-confidence vote, that this committee is moving in the
right direction. "We are, in fact, making progress on these
issues," he concluded.
Number 1348
CHAIR HAWKER said public testimony would be taken at a future
date.
REPRESENTATIVE GRUENBERG indicated that the committee has not
taken up a large number of bills, but has taken up a lot of
weighty subjects. He suggested having more meetings for public
testimony in order to move through the process.
CHAIR HAWKER replied that the committee should be prepared for
an increased schedule as the issues mature.
REPRESENTATIVE ROKEBERG referred to the models [from DOR] in the
bill packet and asked why the $1.5 million, in the non-resident
portion of the Year 2 projections, is different from the number
discussed earlier.
Number 1720
MR. WILLIAMS responded that the models he uses capture all ways
that [non-residents] are reported in Alaska, and there have been
some difficulties in interpreting how you determine a non-
resident. He said that DOL uses the strictest standards,
meaning those who receive a Permanent Fund Dividend (PFD). He
said he takes the difference between wages reported by Alaskan
employers versus wages reported on income taxes filed from an
Alaskan address and attributes that difference to non-residents.
That creates a smaller non-resident number than what DOL
suggests, he added.
REPRESENTATIVE ROKEBERG said the earlier number was $30 million
and now it is down to $1.5 million.
Number 1835
MR. DICKINSON replied that [the calculation] starts with the
total number of Alaskans who file a return. The difference that
Mr. Williams is characterizing are dollars that showed up as
being received by an Alaskan address, but not paid by an Alaskan
employer. He said it is the reverse situation of people who are
employed in Alaska for three months and then go back to their
home states and file. He asked Mr. Williams if that is
relevant.
MR. WILLIAMS said it is relevant.
REPRESENTATIVE ROKEBERG said, "Except, we're looking at a huge
difference, here."
MR. WILLIAMS replied that part of the problem is that the data
he has is aggregate. He said he doesn't know specifically, on a
stratified basis, how much the non-residents earned, which
causes difficulties in projection.
REPRESENTATIVE ROKEBERG said there seems to be a problem because
the earlier testimony suggested $30 million to $34 million,
which has been consistent over the years. But the model shows
only $1.5 million.
MR. WILLIAMS replied that part of the problem is that the tax
base HB 470 uses is a percent of federal tax liability. A non-
resident might only earn a portion of his or her income in
Alaska, and the federal tax liability has to be apportioned even
further. It has a diminishing effect on the non-resident
revenue potential.
REPRESENTATIVE ROKEBERG suggested that the DOL model backwards
to get $30 million.
MR. DICKINSON stated that the starting number he uses is from
DOL, which is roughly 10 percent of the total, "or $900-
something million, total." He said this model is using a much
different definition of non-resident.
REPRESENTATIVE ROKEBERG said the model needs clarification. He
asked where the numbers for the tax credit in the form of
homeownership, personal property, and real property, come from.
Number 2255
MR. WILLIAMS replied that the credit for homeownership came from
the Department of Community & Economic Development's publication
called Alaska Taxable put together by Steve Van Sant. He said
he took the total assessed value of residential real property in
the various municipalities and applied its perspective mill rate
to come up with a total potential credit base, then he used the
United States Census Bureau's statistics which says there is 68
percent homeownership in Alaska, and attributed it back to the
revenue that could come from Alaskans.
MR. DICKINSON said, although that may seem imprecise, the
potential credit is much larger than the income tax base. A lot
of the credit is not being used, he noted.
REPRESENTATIVE ROKEBERG asked about commercial valuations.
MR. DICKINSON said a distinction is made between residential and
commercial [valuations].
REPRESENTATIVE ROKEBERG asked if the state assessor has figures
for the real and personal property taxes throughout the
municipalities and the state.
MR. WILLIAMS answered that the state assessor's publication does
distinguish between residential and commercial, and he said he
only uses the residential properties as a potential credit base.
He mentioned that HB 470 has provisions for both real and
tangible personal property paid to a municipality, so it is
conceivable that an individual who has a business and is paying
property tax on personal property could use that as a credit
against tax in HB 470.
REPRESENTATIVE ROKEBERG asked if there is any other "like data"
on personal property tax collections.
MR. WILLIAMS said [the other data] is not detailed.
REPRESENTATIVE ROKEBERG asked if fishing vessels qualify for
personal property taxes in certain ports of the state.
MR. BENINTENDI said he does not know.
REPRESENTATIVE ROKEBERG said he is aware of a legal case making
distinctions between residential and commercial property.
Legally, it has been challenged in the courts so it is a
difficult factor. He said it is an area that needs to be looked
at. The personal property exemption may be going too far, as
far as a tax credit build-up. He suggested that a future model
should make a distinction between those numbers. He said he
would like to see resolution on out-of-state income and get to
the bottom of the argument as to how many that actually is.
Number 2800
CHAIR HAWKER mentioned that one of the target hearings is on
non-resident taxation, nexus out-of-state taxation,
constitutional ramifications, and creative concepts that might
be used to tax non-residents directly without imposing state
taxes on residents.
REPRESENTATIVE ROKEBERG pointed out that DOR uses a high
standard of resident definition that revolves around the PFD.
Under state law, the establishment of residency is based more on
intent and on other issues, rather than longevity. Therefore,
there are fewer non-residents than meets the eye, he maintained,
and he disputed the DOL numbers as being way too high.
REPRESENTATIVE MOSES said it appears that fishermen are not
covered under the estimates of non-resident earnings because
there is no payroll record. The pamphlet that DOL puts out
specifically states that lodge owners, boat owners, and
fishermen are not included.
CHAIR HAWKER replied that that is the "1099 area" he is talking
about.
REPRESENTATIVE ROKEBERG said that Representative Moses is
exactly right, and asked if there were any other statistics
about offshore fisheries.
REPRESENTATIVE MOSES said even process workers are considered
independent businessmen because they are paid on a share basis.
He said there are hundreds and hundreds of those.
Number 3131
CHAIR HAWKER said that this is the nexus topic he would like to
pursue. "How far does our nexus extend? How can we look at
corralling the greatest source of wealth that is leaving this
state as we develop our own revenue policies?" he asked.
REPRESENTATIVE GRUENBERG said this is part of an issue that
other states have been very involved in. He mentioned that he
has attended a session at the National Conference of State
Legislatures on Internet sales.
Number 3232
CHAIR HAWKER noted that is another issue brought up in a
discussion of consumption taxation. He made closing comments,
thanking the members and guests for their participation.
[HB 470 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:15 a.m.
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