Legislature(2001 - 2002)
03/18/2002 01:38 PM Senate JUD
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ALASKA STATE LEGISLATURE
SENATE JUDICIARY COMMITTEE
March 18, 2002
1:38 a.m.
MEMBERS PRESENT
Senator Robin Taylor, Chair
Senator Dave Donley, Vice Chair
Senator John Cowdery
Senator Gene Therriault
Senator Johnny Ellis
MEMBERS ABSENT
All Members Present
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 33
Proposing an amendment to the Constitution of the State of Alaska
relating to limiting the rate of state income and sales and use
taxes.
HEARD AND HELD
SENATE JOINT RESOLUTION NO. 37
Proposing an amendment to the Constitution of the State of Alaska
relating to officers and employees of the executive branch.
MOVED SJR 37 OUT OF COMMITTEE
SENATE JOINT RESOLUTION NO. 38
Proposing amendments to the Constitution of the State of Alaska
relating to information regarding proposed expenditures.
MOVED SJR 38 OUT OF COMMITTEE
PREVIOUS SENATE COMMITTEE ACTION
SJR 33 - No previous action to record.
SJR 37 - See State Affairs minutes dated 2/26/02.
SJR 38 - See State Affairs minutes dated 2/26/02.
WITNESS REGISTER
Mr. Larry Persily
Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered questions about income and sales
taxes.
Senator Pete Kelly
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented SJR 37 and SJR 38.
ACTION NARRATIVE
TAPE 02-9, SIDE A
Number 001
CHAIRMAN ROBIN TAYLOR called the Senate Judiciary Committee
meeting to order at 1:38 a.m. All members were present. The
committee took up SJR 33.
SJR 33-CONSTITUTIONAL AMENDMENT: TAX CAP
SENATOR ALAN AUSTERMAN, explained that SJR 33 limits the amount
of income and sales tax that can be imposed on the populace of
Alaska. He introduced this measure after he participated in
discussions to find a way to devise a long-range financial plan
and balanced budget based upon the income of the State of Alaska.
During those discussions it became apparent to him that within
the near distant future other revenues will be placed upon the
populace, such as an income or sales tax. He heard concern
expressed about Alaska having a "runaway" government based on its
ability to tax. He and Representative Harry Crawford have
introduced this resolution to satisfy that concern.
SENATOR COWDERY asked what the administrative costs of collecting
an income tax will be and how much money will be collected. In
addition he asked what percent the last income tax was set at.
SENATOR AUSTERMAN deferred to the Department of Revenue for
answers to those questions. He noted the resolution places a
maximum limit at 5 percent so a 1 percent income tax could be
imposed.
SENATOR COWDERY asked how many hard dollars the income tax might
raise.
SENATOR AUSTERMAN said he does not have a hard dollar figure
because it would depend on the percentage.
SENATOR COWDERY asked if a formula is available for every percent
collected.
SENATOR AUSTERMAN again deferred to staff from the Department of
Revenue.
SENATOR THERRIAULT indicated the committee has a proposed
committee substitute that expands the language with regard to the
income tax so that no matter what method is used to calculate the
state income tax, the tax will be limited to five percent. He
asked Senator Austerman if he was involved in drafting the
proposed committee substitute.
SENATOR AUSTERMAN said he was not able to sit in on the House
hearings where that change was made to the House resolution. He
submitted the proposed committee substitute to make the Senate
version comparable to the House version. He pointed out the
objective is to limit state income tax to five percent of the
federal gross income tax and the five percent limit would be
imposed on any method used to calculate the tax.
CHAIRMAN TAYLOR informed members that his staff worked on
preparing the committee substitute but that Senator Austerman had
no objections to it.
SENATOR THERRIAULT moved to adopt the proposed committee
substitute to SJR 33 as the working document of the committee.
SENATOR ELLIS objected and asked if the proposed document was a
sponsor substitute or a committee substitute.
CHAIRMAN TAYLOR clarified that it is a sponsor substitute.
SENATOR ELLIS removed his objection.
CHAIRMAN TAYLOR said he was not sure that was an appropriate
procedure but if not, the committee will correct it. He explained
that if the committee adopts the proposed document, it will
become a Senate Judiciary Committee substitute but if Senator
Austerman introduces it on the Senate floor, it will become a
sponsor substitute.
SENATOR DONLEY noted that once a bill has a hearing, a sponsor
substitute cannot be introduced.
CHAIRMAN TAYLOR clarified that the appropriate motion is to adopt
the document as a committee substitute. He noted that with no
objection to that motion, the document was adopted as the Senate
Judiciary Committee substitute (22-LS1413\C).
SENATOR COWDERY referred to page 1, line 12, and asked if "the
rate of a sales tax" refers to the retail or wholesale cost of
products. He commented that there has been talk that some cities
already have retail sales taxes so the thought was to impose a
sales tax on the wholesale level for the state. He asked Senator
Austerman what his intention is.
SENATOR AUSTERMAN said his assumption is that it would be both on
a statewide basis.
SENATOR COWDERY asked, "On retail sales or wholesale sales?"
SENATOR AUSTERMAN replied, "First off, retail sales for sure. Now
- I don't think that - the discussion hasn't come up. I don't
have an answer for you other than to say that we have not
discussed that."
SENATOR DONLEY said he was initially concerned about that
question when he first read the bill because he didn't want this
rate to impact the excise taxes. He said the state wants to have
the flexibility to charge a higher rate for certain commodities
through excise taxes, which he believes are wholesale taxes. He
asked a representative from the Department of Revenue to respond.
MR. LARRY PERSILY, Deputy Commissioner of the Department of
Revenue (DOR), stated:
I am not aware [that] any of the sales tax discussions
this session have centered on wholesale. To us, all of
- the way we read the legislation, all the sales tax
bills before the legislature would deal with retail
sales. The excise tax is different and that is on a
specific item, such as alcohol excise or tobacco excise
or motor fuel excise. We would not read this tax cap as
applying to that but I guess certainly someone could
make the argument it would but we read those as an
excise tax, not as a general sales tax.
SENATOR DONLEY asked if that excise tax is actually on sales to
retailers. He thought that Senator Cowdery was getting at what
some might call a wholesale tax.
SENATOR COWDERY said it should be identified in the resolution.
SENATOR DONLEY said, "We're talking about retail here."
MR. PERSILY said the excise motor fuel, alcohol and tobacco taxes
are all collected at the wholesale distributor level.
SENATOR DONLEY said his point was that 5 percent is below the 8
cents per gallon collected on the motor fuel tax. He said his
concern is messing up the existing tax rates on excise taxes so
the resolution needs to be clear that it pertains to a retail tax
limitation.
CHAIRMAN TAYLOR asked Mr. Persily to respond to Senator Cowdery's
question about the rate of the former income tax levied in the
state.
MR. PERSILY said the former income tax was not assessed on
federal adjusted gross income, it was assessed on taxable income
and it varied from 3.5 to 14.5 percent. If one converted that
income to adjusted gross income, the 14.5 percent of taxable
income would exceed 5 percent of one's adjusted gross income. He
pointed out that none of the proposals before the legislature
this year come close to 5 percent of adjusted gross income. They
range from 1 percent to 3.5 percent.
CHAIRMAN TAYLOR said he thought Alaskans paid a percentage of
their federal tax amount.
MR. PERSILY said it was changed so that when it was finally
abolished in 1979 it was a sliding scale percentage of one's
taxable income.
CHAIRMAN TAYLOR thought he paid 17 percent of the amount he paid
to the federal government.
MR. PERSILY said he does not know what it was prior to tax the
time it was abolished, but if it was 17 percent of one's
liability, that would convert to less than 5 percent of one's
adjusted gross income.
SENATOR DONLEY asked if DOR could provide a short summary of the
meaning of "federal adjusted gross income." He said he is
wondering what kinds of income are excluded from that as that
should be an important policy consideration if the legislature is
going to adopt it as a standard. He noted he has some concerns
because he does not know if race horses are considered an
exclusion.
MR. PERSILY replied:
Adjusted gross income pretty much is all income.
Federal taxable income, as the Senator explained, would
incorporate those deductions, exemptions credits
allowed under federal law so you end up with your total
income after deductions, exemptions, and that's what
you pay federal tax on or, if the state tax were
assessed on federal taxable income, that would be what
you pay your state tax on. The third proposal out
there, as the Chairman explained, is a straight
percentage of your federal tax bill - the three
different tax bases you could use.
CHAIRMAN TAYLOR said Senator Cowdery's next question was what
will it cost to administer this system. He said that would depend
upon which mechanism is chosen will become much more burdensome
to administer if a totally different state tax form is used and
one is taxed on all of their orange groves and race horses as
opposed to merely paying a flat percentage of one's federal tax.
MR. PERSILY said certainly the complexity of any personal income
tax in Alaska would be reflected in the fiscal note. Even simple
accommodations for people who work in another state will have to
be calculated. None of the proposals advancing in the legislature
assess the tax on federal tax liability. The proposals either use
adjusted gross income or federal taxable income. DOR's best
estimate to administer an income tax for either one will cost
about $6 million. He said that even if it is simplified as much
as possible, there are 420,000 to 440,000 taxpayers to deal with.
SENATOR COWDERY asked if the tax should be based on income
derived only in Alaska.
MR. PERSILY said it would so that if a person had two jobs, one
in Alaska and one in California, the state would only collect on
the portion earned in Alaska.
SENATOR DONLEY asked how that will work if the other state has no
income tax. He said he thought if the other state does not have
an income tax, the home state gets that revenue.
MR. PERSILY said he is not sure about that. He knows that issue
has come up in places that have municipal taxes so that, for
example, someone may work in Manhattan but live in a suburb, and
will have to pay the municipal tax in Manhattan. He was not sure
whether the State of Alaska could tax all income if some income
is earned in Washington and the person lives in Washington.
SENATOR DONLEY said he believes Oregon residents who work in
Alaska pay Oregon taxes on the income earned in Alaska.
CHAIRMAN TAYLOR affirmed that is true and said it is also true of
retirees living in California and Oregon even though their income
was earned in Alaska.
SENATOR THERRIAULT asked if DOR has calculated how a statewide
sales tax might impact the financial feasibility of a gas
pipeline. He asked how having 5 percent of any transaction might
tip the economics.
MR. PERSILY said DOR would recommend that if the legislature
adopted any kind of a sales tax bill, that natural gas, similar
to oil moving through the pipeline should be exempted, as would
construction material. DOR sees a sales tax as a retail tax, not
a tax on goods used in the manufacture of something that will be
taxed later. Therefore, DOR would recommend exempting the gas
moving through a pipeline, construction material used in the
construction of a line and the construction of office buildings.
SENATOR THERRIAULT said he wasn't thinking so much of the product
going through the line as the construction of the line. He asked
how a piece of steel and cutting time that he sells at his
welding shop and charge sales tax on that will be used in the
construction of the gas line will be figured into the
construction cost of the line.
MR. PERSILY said that is a policy call for the legislature. He
said DOR's recommendation, looking at large construction projects
and knowing what effect a sales tax would have on a multi-billion
dollar project, is that the legislature make some accommodation.
CHAIRMAN TAYLOR noted that homeowners in Alaska face that problem
everyday if they live in communities that impose a sales tax.
Wrangell residents pay 7.5 percent so if one buys $75,000 worth
of construction materials to build a house at the local store,
the tax would be quite high. The city council got around that
problem by requiring sales tax to be paid on the first $1,000 of
products for a single project.
MR. PERSILY said in Juneau, when one gets a building permit, all
purchases for that project under the building permit are exempt
from sales tax. That provides an incentive to get a permit and
follow the building code because no matter what one pays for the
permit, they'll come out far ahead on savings on sales tax.
CHAIRMAN TAYLOR said it is wise to consider that problem because
the regressive aspects of a sales tax make it one of the most
offensive taxes in existence.
SENATOR DONLEY moved to insert the word "retail" after the word
"a" on page 1, line 12, so that it reads, "(b) The rate of a
retail sales tax levied..." [Amendment 1]
CHAIRMAN TAYLOR announced that with no objection, Amendment 1 was
adopted.
SENATOR DONLEY noted the intent of this resolution is to put a
limit on the percent of tax and not to deal with the details of
particular tax proposals.
CHAIRMAN TAYLOR agreed but said it is important to get an answer
to what constitutes "federal adjusted gross income."
MR. PERSILY repeated it refers to total income.
SENATOR DONLEY wanted to know why it is referred to as adjusted.
MR. PERSILY said he hasn't figured that one out. He said the tax
people said there are a few minor adjustments that do not apply
to most people. He then offered to get that information for
members.
SENATOR COWDERY said he hopes the sponsor's intent is to apply it
only to income derived in Alaska.
SENATOR DONLEY agreed that is an issue, as well as how the
instate/out-of-state income question would integrate with the
constitutional provision.
SENATOR AUSTERMAN said that he and Representative Crawford
intended this to apply to an Alaska state income tax based on
Alaska income. He suggested placing the word "Alaska" on line 7
for the purpose of clarification. He repeated that he and
Representative Crawford intended that it apply to Alaskan income
and that they are not after income earned in other states. He
pointed out that would happen automatically anyway because the
federal law reads that way.
SENATOR COWDERY expressed concern that because the word "federal"
is included, one could derive income from almost every other
state and still be subject to federal adjusted gross income.
CHAIRMAN TAYLOR asked Senator Austerman to select the manner by
which the state will do this and require that the rate of an
individual income tax levied by the state not exceed five percent
of federal income tax.
SENATOR DONLEY said he does not agree with that approach because
that will be back to the bottom line tax. He said his biggest
concern with the resolution is that the state will be at the whim
of Congress to simply pass a new federal law that redefines what
"adjusted gross income." He doesn't believe that Alaska's
constitution should be tied to something that can be changed by a
simple act of Congress. He noted the problem gets worse if it is
tied to the bottom line of one's federal tax liability because
then all of the deductibles and the gigantic 1,000-page tax code
will be incorporated into Alaska's constitution. That will raise
a lot of public policy calls and he does not support the federal
tax code. He said he would prefer to go to an inclusive
definition and set a lower taxation rate to avoid having to deal
with other states' special provisions in the tax code. He
maintained that his public policy goal is to minimize the impact
of the federal process on any potential revenue for the state.
CHAIRMAN TAYLOR said he mentioned it because he believes the
former state income tax, when it was figured at 3.5 to 14.5
percent of what one paid the feds, was simple to administer and
calculate. He said he believes the maximum amount the state
charged was approximately the same amount of maximum credit that
an Alaskan taxpayer could get as a deduction against the federal
tax obligation so that if one owed $1,000 in taxes to the federal
government and would have to pay $145 to the State of Alaska, the
$145 was taken as a credit against either the income upon which
the federal tax was figured or as a credit against the tax
obligation owed to the federal government.
SENATOR AUSTERMAN said he does not recall how the credit was
applied.
CHAIRMAN TAYLOR clarified that he meant that if one didn't have
the state tax, you would have paid that much more to the federal
government anyhow.
MR. PERSILY explained that state income tax is deductible from
federal income. No state has the authority to tax a credit
against federal tax liability so if one earns $30,000 and paid
$1,000 in state income tax, the $1,000 could be taken as a
deduction against taxable income, just like one could for medical
expenses or home mortgage interest. He pointed out that CSSJR
33(JUD) says the state income tax may not exceed 5 percent of
federal adjusted gross income or, if levied on any basis other
than federal adjusted gross income, it may not exceed the
equivalent of 5 percent of adjusted gross income, so there is no
need to define whether it is adjusted gross income or based on
something else; that can be done in an income tax bill.
CHAIRMAN TAYLOR said his only concern is that the federal rate is
30-something percent, so the state will add another five percent
on and taxpayers could pay 39 percent for taxes.
MR. PERSILY clarified that the federal tax rate is after
deductions so it differs from the 5 percent before any
deductions. He suggested that most people who are in the 34
percent tax bracket have a lot of write-offs.
CHAIRMAN TAYLOR said his concern is that the person paying in the
high tax bracket today is paying that on a net amount, after
deductions. CSSJR 33(JUD) hardly provides a limit if it is a flat
5 percent on gross income with no deductions allowed. He noted it
could be a much higher percentage than what the taxpayer pays at
34 percent with deductions. He said he knows of a lot of
businesses that do not earn 5 percent net, yet the state could
tax them at that rate.
SENATOR AUSTERMAN noted the resolution does not include
corporations.
CHAIRMAN TAYLOR acknowledged that it applies to individuals but
maintained that corporations will still pay at 7 percent.
MR. PERSILY informed members that the corporate rate varies from
zero to 9.4 percent of net.
CHAIRMAN TAYLOR noted that is based on net after allowable
deductions. The definition in CSSJR 33(JUD) does not provide for
any deductions.
MR. PERSILY said that is correct but it doesn't say the personal
income tax has to be based on adjusted gross income. He noted:
You could have taxable income or federal tax liability
but then you would convert it just for the sake of this
amendment to make sure it doesn't exceed the equivalent
of 5 percent on gross. We don't see where this
constitutional amendment would dictate which form of
calculating your tax you use.
SENATOR AUSTERMAN agreed that CSSJR 33(JUD) just sets a limit.
CHAIRMAN TAYLOR said he could easily see where a person might
easily pay a small amount of federal taxes because of allowable
deductions but pay a huge amount of state taxes and the limit
would provide no relief whatsoever.
SENATOR COWDERY said he too has concerns about using federal
adjusted gross income.
SENATOR AUSTERMAN said he assumes the bill will not move out of
committee today and can get more definitive answers for Senator
Cowdery. He noted on the question of the taxation of the piece of
steel that Senator Therriault talked about, he believes that
would be determined by the make up of the tax package and would
not be affected by CSSJR 33(JUD). He pointed out that, regarding
local taxes, every community is different and in Kodiak no
purchase over $25 is taxed. He said drafting a statewide sales
tax will require a lot of discussion. He repeated that those
details will come to play at a later time and that this
resolution merely provides a ceiling.
CHAIRMAN TAYLOR said he applauds what Senator Austerman is trying
to do but he finds it difficult to understand whether that
limitation will be meaningful without proper definition.
SENATOR AUSTERMAN agreed and said that since this is the first
hearing, he will get answers to members' questions.
SENATOR ELLIS asked when it might be rescheduled.
CHAIRMAN TAYLOR estimated in one week.
SJR 37-CONST AM: HIRING FREEZE
SENATOR PETE KELLY, sponsor of SJR 37, said the measure will give
the legislature the authority to require the governor to
institute a hiring freeze if the legislature determines one is
necessary. Without that constitutional authority, the legislature
is unable to because of the separation of powers doctrine; SJR 37
provides that authority. Currently the new budget contains 858
new employees, according to the Division of Legislative Finance.
The Administration has argued that number and revised it downward
to 500 plus, but either number represents a large number of new
employees being added to the budget when the state is facing a
gap between revenues and expenditures. He said he is not trying
to place blame, as legislators may be responsible for some of
those employees; it is the nature of doing business and trying to
keep up with federal programs. The purpose of SJR 37 is to
provide a tool so that the nature of business can be structurally
changed and the people's branch of government can have more
impact into the size and scope of the budgets that have been
offered in recent years. Should this constitutional amendment
pass, it will have no impact on this Administration but will give
future legislators a tool to reduce state budgets if they find
themselves with an Administration that is unwilling to take
proactive steps to do so.
SENATOR KELLY informed members that in prior testimony on another
resolution that encourages the governor to institute a hiring
freeze, he has been asked how much this resolution will save and
to justify it. He said the fact is he does not know how much it
will save but hiring freezes are one of those self-evident truths
in businesses. He believes those who are against a hiring freeze
should justify their opinions of why this tool shouldn't be
offered.
SENATOR COWDERY asked if a [joint] resolution needs a simple
majority vote to pass.
SENATOR KELLY said that does and noted that the purpose behind
that is that the legislature is the policy maker yet, because of
the strict separation of powers rules in Alaska, the legislature
is sometimes not able to implement policy when it comes to
budgetary issues. It should be the will of the legislature to do
so without having to go through the bill process, which is why he
introduced this measure as a resolution. He does not want the
measure to be vetoed or to go through a fight on the floor.
CHAIRMAN TAYLOR said he learned while watching a television show
that 46 states are facing deficit budgets. He said he has been
shocked to see the numbers the Alaska legislature is looking at
today and the lack of any attention to any type of reductions or
prioritizations by departments.
TAPE 02-9, SIDE B
CHAIRMAN TAYLOR said he finds it hard to believe the other 45
governors are crazy because they are trying to reduce their
budgets. Several states have imposed both hiring freezes and
restrictions on travel. He recalled that Governor Sheffield
actually impounded funds and was chastised for it, but that was
his attempt to do everything he could during a deficit the state
faced in 1986. He maintained that he will be shocked if the
legislature will ever have to impose a hiring freeze in the
future. He then asked Senator Kelly if he is aware of any other
state that doesn't use this type of a tool.
SENATOR KELLY said he does not know who does or doesn't, but he
included in members' packets a copy of Governor Locke's recent
memo that imposes a hiring freeze. He agreed with Senator Taylor
that governors all over the United States have gone into "high
gear" to deal with deficit problems. He said Alaska is more
fortunate in that it does have some money in the bank and a
smaller government so it has the ability to get its hands around
the problem but it can't if it won't institute something as
simple as a hiring freeze, which does no damage to current
employees.
CHAIRMAN TAYLOR said Washington State is only facing a $1.6
billion deficit in a much larger budget.
SENATOR KELLY said Washington's total budget is $23 billion.
CHAIRMAN TAYLOR noted Alaska is facing a 43 or 46 percent
deficit.
SENATOR ELLIS asked if Senator Kelly's measure applies only to
general funds and whether he found anyway to go after positions
funded by other sources, such as fees or airport funds. He then
SENATOR KELLY'S response was inaudible.
SENATOR ELLIS said that many government positions are funded with
a combination of funds. He asked if all positions that are funded
with any general funds will be covered under this freeze.
SENATOR KELLY said he would imagine those details will be defined
in statute by a future legislature, which would then institute a
freeze by resolution when need be. SJR 37 merely gives the
authority, it does not provide the specifics.
SENATOR ELLIS asked if Senator Kelly's point is that the details
can be dealt with later and worked out in statute.
SENATOR KELLY said before a statute would be of any value at all,
the Constitution will have to be amended.
CHAIRMAN TAYLOR felt that Senator Ellis raised a good point as
the words "general fund" are not in the resolution and said he
found the answer to be fascinating. He asked, "Has the subterfuge
of the words 'other funds' now carried with it enough authority
that if your position was funded by 'other funds' that that
somehow isn't general funds?" He said that attaching that kind
of definition worries him.
SENATOR KELLY said that is possible and acknowledged that he did
not understand Senator Ellis's question at first. He explained
that SJR 37 merely provides the legislature with authority at a
later date, it does not specify which funds.
SENATOR COWDERY moved SJR 37 to its next committee of referral
with individual recommendations.
SENATOR ELLIS objected.
CHAIRMAN TAYLOR announced the motion carried with Senators
Cowdery, Therriault and Taylor voting in favor, and Senator Ellis
opposed.
SJR 38-CONST AM: PRIORITY OF EXPENDITURES
SENATOR PETE KELLY, sponsor of SJR 38, informed members they
previously heard from Representative Dyson about a prioritized
budget. He is of the opinion that a prioritized budget falls into
the same category as a hiring freeze; in other words nothing in
the Constitution can force the governor to do either. SJR 38
would allow the legislature to require a prioritized budget. He
noted Representative Dyson's bill places the details in statute.
There being no further testimony or questions, SENATOR COWDERY
moved SJR 38 to its next committee of referral with individual
recommendations and asked for unanimous consent.
CHAIRMAN TAYLOR announced that with no objection, SJR 38 will
move to Senate Finance.
There being no further business to come before the committee,
CHAIRMAN TAYLOR adjourned the meeting at 2:35 p.m.
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