Legislature(2005 - 2006)
04/15/2005 08:36 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB262 | |
| HB263 | |
| Adjourn |
* 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
April 15, 2005
8:36 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 262
"An Act relating to the taxation of income."
- HEARD AND HELD
HOUSE BILL NO. 263
"An Act imposing a tax on employment; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 262
SHORT TITLE: INCOME TAX
SPONSOR(S): WAYS & MEANS
04/08/05 (H) READ THE FIRST TIME - REFERRALS
04/08/05 (H) W&M, STA, FIN
04/15/05 (H) W&M AT 8:30 AM CAPITOL 106
BILL: HB 263
SHORT TITLE: EMPLOYMENT TAX
SPONSOR(S): WAYS & MEANS
04/08/05 (H) READ THE FIRST TIME - REFERRALS
04/08/05 (H) W&M, L&C, FIN
04/15/05 (H) W&M AT 8:30 AM CAPITOL 106
WITNESS REGISTER
CHUCK HARLAMERT, Juneau Section Chief
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Offered information on HB 262 and HB 263.
MICHAEL WILLIAMS, Auditor
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Offered information on HB 262 and HB 263.
LARRY MESHKIN
Wasilla, Alaska
POSITION STATEMENT: Testified in opposition to HB 262 and HB
263.
ART CURTIS, Co-Chair
Alaskans for Fair Taxes
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 262, expressed support
for an income tax; and testified in opposition to HB 263.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:36:38 AM. Representatives
Weyhrauch, Samuels, Seaton, Wilson, and Moses were present at
the call to order. Representative Gruenberg arrived as the
meeting was in progress.
HB 262-INCOME TAX
8:37:07 AM
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE BILL NO. 262 "An Act relating to the taxation of
income."
CHAIR WEYHRAUCH explained that this legislation is essentially
the House Bill introduced by Representative Moses during the
Twenty-Third Legislature. However, HB 262 includes a provision
such that an income tax would only take effect in the event of a
fiscal gap. Furthermore, the amount of the tax depends on the
amount of the gap as specified under Section 1. He highlighted
that this particular legislation places the onus on the
legislature to develop a budget so that reoccurring revenues
meet reoccurring expenses. This legislation doesn't prohibit
the legislature from using the earnings of the constitutional
budget reserve (CBR) or the earnings of the permanent fund to
balance the budget. However, if the legislature doesn't balance
the budget, the citizens of Alaska pay and can lay the blame on
the legislature. He reiterated that HB 262 implements measures
to bring revenues into the state if the legislature doesn't
balance the budget, which is a way in which to force the
legislature to step up to the plate and explain why it would
rather impose an income tax than balance the budget. The
aforementioned is the reasoning behind Section 1. The remaining
sections of HB 262 are [basically] Representative Moses' income
tax bill by which one pays a state income tax based on the size
of his/her federal income tax. Furthermore, it allows property
tax exemptions and requires everyone, residents and nonresidents
alike, to pay the income tax. Chair Weyhrauch acknowledged that
the Department of Revenue isn't happy with this type of
legislation because it doesn't offer a stable revenue source.
8:40:36 AM
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department
of Revenue, explained that within the Tax Division duties are
split and his are related to the cost side of taxes. As
specified in the fiscal note analysis, Mr. Harlamert related
that a broad-based tax that turns on and off is relatively
inefficient because the department has to maintain a technical
base of staff and infrastructure to process returns. The
department projects that the best way to handle this tax type is
to invest heavily in technology, which enables the division to
process these returns on an intermittent basis with relatively
untrained staff. However, in the off years a base level of
technical staff will be necessary to administer the program and
handle appeals and ongoing issues.
8:43:00 AM
REPRESENTATIVE SEATON inquired as to what is included in the
calculations when determining there is a fiscal gap. He asked
specifically if the income tax would only go into effect after
all the earnings are spent.
MR. HARLAMERT related his belief that in this legislation the
language "state expenditures" means current expenditures and
revenues. Therefore, it wouldn't include dipping into [the
state's] savings accounts but rather the revenues would be those
that are earned through taxation or royalties during the year.
He said that the tax would be imposed when expenditures [exceed]
current revenues.
8:45:07 AM
REPRESENTATIVE SEATON asked, for clarification purposes, whether
the current earnings of the permanent fund that are available to
the legislature are included in the calculations of revenues
versus expenditures.
MR. HARLAMERT said he cannot answer that question because it
depends upon how broadly the term "revenues" is defined. As the
legislation is currently written, it's very broad, he said.
8:45:56 AM
REPRESENTATIVE SEATON turned to the fiscal note, which details
$15-$20 million for the capital set-up and $7-$8 million for
operating expenses. Even if the rate is 1 percent, the state
would collect less revenue than it costs to implement the income
tax, he highlighted.
MR. HARLAMERT explained that when he calculates the cost of a
program he assumes a program that's roughly the quality of the
current standards. For instance, the key performance criteria
the public has for a state income tax is that the public
receives its tax refunds before its federal tax refunds. The
aforementioned involves a considerable amount of infrastructure
and attention, and therefore at some level a minimal level of
service has to be provided, even if it's uneconomical. Mr.
Harlamert said that if the division knew that these tax rates
were going to be at low levels, such as 5 percent, the division
would probably "back off" with regard to the program quality
aspect.
REPRESENTATIVE SEATON opined that a quality enforcement program
is necessary when instituting taxes, especially an income tax.
8:49:27 AM
MICHAEL WILLIAMS, Auditor, Tax Division, Department of Revenue,
began by highlighting that the revenue analysis of this
legislation is particularly difficult given its mechanics and
uncertainty with some of the definitions. He then turned
attention to the fiscal note which makes assumptions about the
federal tax liability and the various rates of income tax
imposed depending upon the deficit. He highlighted that 99
percent of individuals report their income on a calendar year
basis whereas the state's revenue system is on the fiscal year
(FY), which would allow the possibility of dividing the FY
income under separate rates. Therefore, the fiscal note
analysis provides information for the half year and full year
revenue provisions for each rate. The other part of the
uncertainty of HB 262 is the property tax credit provision,
which is written so broadly that one could presume that real
estate taxes or residential property taxes qualify as well as
personal property taxes. For instance, a small business owner
who pays personal property taxes on items such as furniture and
equipment inventory could, under certain interpretations, use
his/her business or personal property tax credits against
his/her individual income tax.
MR. WILLIAMS said that the other complexity with the provisions
of this legislation is that they include withholding
requirements such that employers are going to withhold payments
on the gross tax before any credits. Although the Department of
Revenue could conceivably collect upwards of $100-$150 million
throughout the year, it will have to issue large refunds after
people have filed returns and claimed credits. Therefore,
mechanically this legislation has "large swings in the revenue"
coming in and going back out as an refund, because generally
credits aren't available until a return claim is filed.
8:53:08 AM
MR. WILLIAMS, in response to Chair Weyhrauch, clarified that
credits are available when a return is filed. He posed a
situation in which the return is filed on April 15, 2005, for
property taxes that were paid during 2004 and during which time
the individual's wages were withheld at 10 percent throughout
all of 2004. However, the individual doesn't file his/her
return and claim his/her credit until April 2005. For example,
if an individual has $1,000 withheld in 2004, that individual
might have a $1,000 in property taxes paid to the municipality
and thus [the state] will end up giving it all back to the
individual on April 15.
8:53:48 AM
MR. WILLIAMS, in response to Representative Gruenberg, answered
that the state would collect the interest from the withheld
money until it's refunded. In further response to
Representative Gruenberg, Mr. Williams said the additional
income generated by that depends on the short-term "marginal"
rates, which he estimated to be about 1 percent.
8:54:48 AM
REPRESENTATIVE SEATON asked if the Internal Revenue Service
(IRS) law that allows tax credits for Alaska sales tax
deductions would be applicable to property tax or income tax.
MR. WILLIAMS clarified that the sales tax, much in the same way
as the income tax, could be claimed as a deduction for those
able to itemize deductions. Under this legislation, that would
go into the calculation of one's state tax because it's based on
the federal tax liability. However, it's unclear whether the
numerous credits, such as the child tax credit, education
credit, foreign tax credit, business tax credits, and earned
income tax credit, would be included in the calculation of the
state's tax liability.
REPRESENTATIVE SEATON asked if the property tax paid would be
deductible from the federal income tax.
MR. WILLIAMS replied yes, and added that property taxes are
currently deductible for itemized deductions and thus property
taxes would be allowed as an itemized deduction before
calculating the federal tax liability. Therefore, it would
essentially reduce what one would pay the state and those same
dollars would be allowed as a credit against the state tax
liability. "So ... in essence you get it twice," he pointed
out.
8:57:06 AM
REPRESENTATIVE GRUENBERG inquired as to how much the state
refunds taxpayers annually because of overpaid taxes. He
recalled testimony indicating that [the income the state earns
from overpayment] is invested in short-term treasury notes with
low interest rates. He questioned why the state is investing in
such low rates of interest, and then he inquired as to what
could be done to earn more interest.
MR. HARLAMERT replied that he can't answer the aforementioned
questions accurately. The Tax Division issues refunds on a
regular basis for various tax types of which the total refund
for corporate income tax is no more than about $5 million for a
peak year. He informed the committee that all of these funds
come out of the short-term or liquid portion of the state's
portfolio, which needs to be maintained in order to pay the
state's bills. He said that essentially [the funds] are
invested in short-term securities similarly to the funds used to
pay wages. He opined that it's the short-term nature or the
liquidity that drives the return. Therefore, the more refund
liabilities potentially available, the larger the pool of liquid
assets is required and as a result they receive a lower rate of
return.
REPRESENTATIVE GRUENBERG related his belief that earning 1
percent on $5 million totals $50,000, which is hardly a lot of
money. He asked if there's a way to invest in order to receive
a fair amount of return.
9:00:24 AM
MR. HARLAMERT specified that the $5 million in tax refunds
issued during a high refund year for a corporate tax, for
example, is immaterial on an annual basis to the overall cash
management function. "I don't think it would effect us at all
... whether that $5 million existed or not," he opined.
REPRESENTATIVE GRUENBERG commented that $100,000 here and
$100,000 there adds up.
9:01:01 AM
LARRY MESHKIN, said:
I strongly object to the income tax on principle,
because it's a violation of private property rights
and privacy. I believe it's a form of legal plunder
because my property is taken from me by force and for
the use of others. A federal income tax is hated by
many Americans for good reason. The founding fathers
did not favor a direct tax because of its damage to
the liberties of the people. They favored an indirect
tax or a consumption tax .... Myself, I believe that
state spending should be cut to what's
constitutionally mandated and then when taxes are
needed it should be a flat sales tax on all purchases,
except for the basic necessities of life and medicine.
And this would help the poor. ... a person who pays
no tax or very little tax would not be motivated to
keep state spending in line and they would just vote
for Representatives to keep the other guy paying the
taxes. I also don't believe that targeting
nonresidents ... with an income taxe is right because
they use little or no state services and since they
can't vote [in Alaska], they're a political vulnerable
target. And I believe if there was a flat sales tax,
the services they do use would be paid by the sales
tax ....
9:03:49 AM
CHAIR WEYHRAUCH highlighted that the aforementioned idea of a
consumption tax to exempt the basic necessities becomes a
debatable notion depending on the definition of "necessity." He
related that the chairman of the Federal Reserve Board has
discussed shifting from an income tax base financial management
structure in the U.S. to a consumption tax. However, the
aforementioned would take a significant structural and policy
seat change with regard to the way business is run in this
country.
9:05:24 AM
ART CURTIS, Co-Chair, Alaskans for Fair Taxes, encouraged the
committee to consider reviewing a variety of taxes and a long-
term fiscal plan. He related that most Alaskans for Fair Taxes
favor making an income tax part of any long-term fiscal plan.
Furthermore, the group believes that an income tax is the most
equitable tax and is preferable to a state sales tax, which
would overburden those communities that already have a sales tax
in place. Moreover, an income tax is helpful for the business
community because its effects are predictable, which would
encourage business. He acknowledged that no income tax is
foolproof. Although a consumption tax, as is used in Europe,
may be desirable, one must remember that Europeans have also
constructed a solid social net that's not found in the U.S.
presently. He reiterated his belief that an income tax is
essential to the long-term fiscal health of Alaska.
9:08:11 AM
MR. CURTIS, in response to Chair Weyhrauch, replied that
Alaskans for Fair Taxes is a small group of interested people
who communicate via email to alert one another about the action
taking place at the legislative level and to push the idea that
an income tax should be an important component of the state's
fiscal solution.
9:09:07 AM
CHAIR WEYHRAUCH reminded the committee that part of its duty is
to put these things on the table for discussion purposes as
various alternative measures to bridge any fiscal gap. He
acknowledged that the bill has structural problems and
uncertainties, particularly in the management of how the tax
would be imposed, the revenue collected, as well as determining
what revenues would be available under the bill. Furthermore,
there is a question with regard to how to manage the bureaucracy
of the bill if it were implemented in this form. Section 1
places the burden on the legislature to balance the budget
because it imposes the tax only if the legislature can't get its
fiscal house in order, which would result in the public paying
the price. Ultimately, the politician pays at the ballot box if
the legislature doesn't balance the budget. This legislation,
he pointed out, doesn't preclude use of any fund or any source
of revenue available to the legislature to balance the budget.
9:11:19 AM
REPRESENTATIVE WILSON quoted an article from the Anchorage Daily
News, which presented a study from Alaska's Department of Labor
& Workforce Development (DLWD). She related her belief that the
article highlights the changes taking place in Alaska, such as
[the fact] that the fishing industry has more employees than any
other industry in the state. She read the following: "Over the
last two decades people living out of state have come to
domineer Alaska's commercial fisheries. With nonresident
fisherman now accounting for the majority of both the weight and
the value of the catch." She opined that the aforementioned
article highlights one area in which the state could pick up
money from out-of-state workers. She related that the case is
similar in the oil industry because the majority of its workers
also are from out of state.
9:13:18 AM
CHAIR WEYHRAUCH recalled an earlier observation that those out-
of-state employees don't vote [in Alaska].
9:13:29 AM
REPRESENTATIVE SAMUELS said that he, too, has seen statistics
that attempt to have others pay the tax. However, [no matter
the type of tax] Alaskan's would pay the overwhelming majority.
He highlighted that it will be difficult to "plug all the holes"
of getting around a tax.
9:15:22 AM
REPRESENTATIVE GRUENBERG explained that Alaska's unitary tax
creates an exception to the "huge problem" many other states
have with corporations moving income into tax shelter states
such as Delaware or Nevada. Therefore, with the institution of
an income or sales tax there also needs to be a provision in
order to prevent such tax shelters, he added.
9:17:02 AM
REPRESENTATIVE SEATON relayed that many of his constituents
support an income tax that is simple, fair, and has the lowest
amount of enforcement and collection mechanisms needed instead
of the complicated structure proposed in HB 262. He turned to
the credit proposal which shifts the burden to the out-of-state
workers, and opined that those without property tax credits are
going to be hit the hardest because it allows more credits to
those who have accumulated the most wealth and property in the
state. He offered that shifting the property tax credit has
genuine appeal in relation to targeting the out-of-state worker,
although it doesn't seem to take into account the Alaskan
residents who don't own property and are potentially less
affluent. Therefore, he encouraged the committee to carefully
consider to whom the burden is shifted when discussing property
credits. Representative Seaton then expressed concern with
regard to when [a proposal such as encompassed in HB 262] would
be implemented because permanent fund earnings would be revenue
available to the legislature in a given year, and furthermore if
that revenue is counted, then there [probably] wouldn't be a
fiscal gap.
9:21:05 AM
REPRESENTATIVE MOSES pointed out the he has advocated for an
income tax for some time, although there are provisions in HB
262 which he doesn't favor. He related his belief that a long-
range fiscal plan is overdue, and that any long-range fiscal
plan should include a broad-based tax to be paid by the people.
However, a statewide sales tax is not acceptable, he opined,
because it's one of the main methods local governments have to
raise money at the local level. He turned to the property tax
exemption, and noted that there are vast areas in the state that
don't pay property taxes. He opined that the nonresident income
figures provided by DLWD aren't complete because it doesn't seem
to include fisherman because they are considered businessmen.
MR. HARLAMERT said he believes Representative Moses is correct
in that DLWD's figures are based on wage income, which doesn't
include those who are self-employed.
HB 263-EMPLOYMENT TAX
9:24:31 AM
CHAIR WEYHRAUCH announced that the final order of business would
be HOUSE BILL NO. 263, "An Act imposing a tax on employment; and
providing for an effective date."
CHAIR WEYHRAUCH explained that this legislation reinstates the
1980 education tax which deducted $10 annually from the payroll
of employees 19 years old or older. The monies would be placed
into a fund that would be held separately for education. He
opined that $10 per person is a small amount of money, and
furthermore it illustrates that people value education.
Essentially, this is an income tax for the employed. He
highlighted that currently a $40 payment is imposed on those in
rural education attendance areas (REAAs) and this legislation
exempts them from paying the additional $10 education tax
proposed in HB 263.
9:27:42 AM
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department
of Revenue, agreed that the proposed tax is relatively small and
broad-based and thus it's a relatively inefficient tax in that
the state will spend a lot to collect a little. From an
enforcement point of view, there is the need to prevent
fraudulent refund claims. He acknowledged that employees are
likely to have more than one job during the year and thus may
have this withheld twice, which necessitates having a refund
program. Therefore, the choice becomes whether to track
payments by individuals on an individual basis in order to
ensure a refund claim is true. The division has evaluated this
before and determined that at the $100 level, such tracking is
economically justified, although it may not be justified at the
$10 level. Mr. Harlamert also commented that it's difficult to
justify what would be normal decisions regarding the quality of
the program with a tax at this level.
CHAIR WEYHRAUCH asked if the $750,000 in capital expenditures
listed on the fiscal note is a one-time capital expenditure.
MR. HARLAMERT answered that the aforementioned capital
expenditure would be over the first two-three years of the tax.
The operating expenditures usually include maintenance costs for
systems. The $750,000 is intended to generate a system that
efficiently captures employee data that allows the division to
validate refunds. In further response to Chair Weyhrauch, Mr.
Harlamert confirmed that after the $750,000 is paid out, the
program would require $1.1 million in annual operating costs.
He also confirmed that the estimated revenue generated from this
tax in the second year would be $3.8 million.
9:31:44 AM
REPRESENTATIVE SAMUELS asked if the permanent fund dividend
(PFD) is included in the definition of "compensation."
9:31:56 AM
MICHAEL WILLIAMS, Auditor, Tax Division, Department of Revenue,
clarified that the PFD wouldn't be considered income under the
provisions of HB 263. The forms of compensation that are being
reviewed typically include wages, salaries, bonuses, tips, or
income from self-employment. With regard to the overall
program, the fiscal note views this program as a stand-alone
program. He explained that if HB 263 were passed at the
proposed lower level in conjunction with a broad-based income
tax, the additional costs wouldn't likely be incurred because it
could be included in the overall administration of the broad-
based income tax. He agreed with Mr. Harlamert that the lower
the tax, the less efficient the tax becomes in terms of revenues
and costs. Generally, an efficient tax is one in which a
program operates at under 5 percent of the cost of revenue
generated. At the $10 tax level, the program is operating at
roughly 33 percent cost to revenue level.
9:34:13 AM
CHAIR WEYHRAUCH inquired as to the amount the tax would have to
be in order to be minimally efficient.
MR. WILLIAMS answered that when the tax is $100 it brings in
about $38 million a year, which results in a cost of roughly 3
percent of the total revenue. He submitted that at the $100
level it would be a more efficient tax system.
9:35:27 AM
REPRESENTATIVE SEATON asked if the division would envision
sending back to the employer a card specifying that an employee
with multiple employers could [prove] that he or she has already
paid the tax.
MR. HARLAMERT answered that ideally the division would desire
collecting as much of the tax as can be withheld and condensed
at the employer level with as few refunds as possible. In order
to strike that balance, the division would want to hold
employers responsible for withholding, as far as practically
possible. However, the division would provide a way in which to
administer the program on [the state's] behalf. Therefore, the
division would envision that the employee would need to show the
employer a pay stub that evidences the withholding from a prior
employer.
REPRESENTATIVE SEATON surmised then that the pay stub would
include a line item denoting the education tax deduction rather
than utilizing a web-based system by which the employer could
access, by using the employee's social security number, whether
the employee has paid the tax that year.
MR. HARLAMERT acknowledged that one choice could be to capture
and manage such detailed information on an employee every
withholding period. The other choice could be to do something
similar to what the Internal Revenue Service (IRS) does with W-
2s and wage withholding such that summary information is
collected at the end of the year for all the employer's
withholding by individuals for the year. The aforementioned is
cheaper, but doesn't allow real-time information on-line during
the year. Therefore, Mr. Harlamert said that it's a matter of
how much the state wants to pay for the service because once the
data is obtained it's not expensive [to manage it].
9:39:20 AM
LARRY MESHKIN stated his opposition to the employment tax
because in principle it's just like an income tax. Mr. Meshkin
related the following quote from Robert Nosik (ph): "Taxation
of earnings from labor is on a par with forced labor." He also
offered quotes along the same sentiment from Walter Williams
(ph) and Allen Keys (ph). Mr. Meshkin then opined that a flat
sales tax, when it's necessary, is the way to go because
everyone would share in paying for state services. Furthermore,
when everyone's involved, he opined that there will be more
efficiency with the use of state services.
9:41:27 AM
ART CURTIS, Co-Chair, Alaskans for Fair Taxes, said that
taxation is the price everyone pays for living in a civilized
society. However, he expressed concern with regard to the
employment tax because if it's too small, it's hardly
profitable to collect it, but if it's large, it's very
regressive.
9:43:11 AM
REPRESENTATIVE SEATON commented that the employment tax would
make more sense if it was a minimum within a generalized income
tax. He recalled that Representative Wilson's income tax
proposal last year incorporated a minimum amount of the tax
going into the education trust, which seemed to make sense. As
a stand-alone tax, Representative Seaton expressed concern with
regard to its [lack] of efficiency.
9:44:50 AM
REPRESENTATIVE WILSON clarified that her proposed legislation
last year incorporated a $100 [education tax]. She indicated
that her proposal took into account the fact that many people
don't pay anything, although they receive a lot of services from
the state. Therefore, under her proposal everyone paid
something and the thought was that everyone received a PFD and
thus could afford to [pay] $100.
9:45:35 AM
REPRESENTATIVE SEATON pointed out that Representative Wilson's
legislation included the PFD as income, and therefore one could
check a box on the PFD for the tax to be taken from it.
However, this legislation doesn't include the PFD as income.
9:46:02 AM
REPRESENTATIVE GRUENBERG asked if the PFD was in place when the
proposal encompassed in HB 263 was originally instituted.
CHAIR WEYHRAUCH replied no, and added that the income tax of the
time was repealed at about the same time [as the education tax].
REPRESENTATIVE GRUENBERG pointed out that the only folks who
would pay this proposed tax would be employed individuals while
those with passive income escape.
9:47:13 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:47 a.m.
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