Legislature(2017 - 2018)BUTROVICH 205
01/26/2017 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| Presentation on the Effects of Various Taxes on Alaska's Economy | |
| Discussion: the Mechanics of Collecting Sales Tax | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
January 26, 2017
3:31 p.m.
MEMBERS PRESENT
Senator Mike Dunleavy, Chair
Senator David Wilson
Senator Cathy Giessel
Senator John Coghill
Senator Dennis Egan
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: The Effects of Various Taxes on Alaska's Economy
- HEARD
DISCUSSION: The Mechanics of Collecting Sales Tax
- HEARD
WITNESS REGISTER
JARED WALCZAK, Policy Analyst
Center for State Tax Policy
The Tax Foundation
Washington, D.C.
POSITION STATEMENT: Provided an overview on The Tax Foundation's
activities.
BOB BARTHOLOMEW, Finance Director
Finance Department
City and Borough of Juneau
Juneau, Alaska
POSITION STATEMENT: Provided an overview of Juneau's tax
collection.
CLINTON SINGLETARY, Sales Tax Administrator
Finance Department
City and Borough of Juneau
Juneau, Alaska
POSITION STATEMENT: Provided an overview of Juneau's sales tax
collection.
ACTION NARRATIVE
3:31:28 PM
CHAIR MIKE DUNLEAVY called the Senate State Affairs Standing
Committee meeting to order at 3:31 p.m. Present at the call to
order were Senators Giessel, Egan, Wilson, and Chair Dunleavy.
^Presentation on the Effects of Various Taxes on Alaska's
Economy
PRESENTATION: The Effects of Various Taxes on Alaska's Economy
3:31:53 PM
CHAIR DUNLEAVY announced that the committee will hear a
presentation from the Center for State Tax Policy. He asked that
Mr. Walczak address broad-based taxes given that Alaska has had
a generation of no broad-based taxes. He noted that some people
hope that Alaska has another generation of no broad-based taxes,
a discussion that the Legislature will have this year.
3:32:36 PM
SENATOR COGHILL joined the committee meeting.
3:33:13 PM
JARED WALCZAK, Policy Analyst, Center for State Tax Policy, The
Tax Foundation, Washington, D.C., specified that he will address
the following:
· Considerations that are associated with the various broad-
based taxes other states levy.
· Pros and cons of each tax.
· Administrative questions.
· Ways Alaska will possibly structure the various broad-based
taxes.
He divulged that The Tax Foundation is an 80-year old tax-policy
research organization based out of Washington, D.C. and detailed
as follows:
· Works at both the federal and state levels.
· Provides analysis and research on tax issues.
· Nonpartisan and strives to be a resource for members of
both parties across the ideological spectrum by primarily
focusing on a state's revenue targets and how to best
structure taxes as simply and transparently as possible to
achieve neutrality without picking winners or losers.
MR. WALCZAK summarized that The Tax Foundation addresses how a state
can have a tax code within its revenue parameters that is as pro-
growth as possible.
3:34:58 PM
He said Alaska has been a very unique place for many years. The
ability to forgo not one, but multiple major taxes is very
unique. He noted that most states with similar tax attributes
have a significant natural-resource economy with some sort of a
severance or extraction tax that can be a substantial portion of
the budget: South Dakota, Texas or Wyoming.
He said one of the advantages to a resource economy is the
exportation of a state's tax burden; for example, Alaska's oil
and gas production tax is being paid by people outside of the
state. The legal incidence of Alaska's oil and gas production
tax is going to be the oil company, but the economic incidence
is on everyone who is purchasing the final product outside of
Alaska.
He noted that in some years, as much as 90 percent of Alaska's
revenue has essentially come from the oil industry which is
great for the average taxpayer who does not pay very much, but
living and dying on one product creates an extremely volatile
tax structure; e.g., no revenue in 2015.
He set forth that one reason why Alaska has an extreme reliance
than other states is due to the structure of its severance tax.
The severance tax in many states is based on volume or on price
where revenue is generated even when there is no profitability;
however, Alaska's system is on net revenue which is much closer
to a high-rate corporate income tax on one industry where Alaska
realizes all of the benefits during the good years, but no
revenue like in 2015 when the companies lost money. Alaska's
volatile tax structure suggests that there needs to be some
mechanism.
3:37:44 PM
CHAIR DUNLEAVY addressed Mr. Walczak's statement that there was
virtually nothing collected in Alaska and noted that there was a
royalty collected.
MR. WALCZAK pointed out that he was referring to the production
or severance tax. He admitted that Alaska collects other taxes:
royalty and property. He specified that $460 million on average
is paid annually in property taxes on the pipeline; however, the
bulk of the state's collection comes from the severance tax.
He set forth that volatility can be addressed in a number of
ways. He said one way is to put things aside in good years and
noted that Alaska has more than any other state in substantial
reserves with over $56 billion in the permanent fund and all of
the different funds. He pointed out that Alaska's funds are both
statutorily and constitutionally protected.
He said Alaska's ability to reserve some of its funding in the
good years allows the state to get by in its volatile tax
structure in ways other states could not. He referenced a study
that shows most states over the last 15 years averages revenue
swings of plus or minus 5 percent. Wyoming, a resource heavy
state like Alaska, has revenue swings close to 12 percent. He
revealed that no state gets close to Alaska's 34 percent plus-
or-minus revenue swing. He summarized that in the good years,
Alaska's tax revenue is really good, but in the bad years it's
tough; being able to smooth that out with reserves is very
valuable.
3:40:03 PM
He said the other thing that can be looked at is tax revenue
diversification, something that is certainly on the table.
Alaska benefits a lot by not having an individual-income tax or
sales tax, but the reason for consideration includes additional
revenue, revenue diversification and more stable tax structures.
He pointed out that there are always tradeoffs. He said
stability for the state government is important, but the state's
economic health must be considered and every tax, to some
degree, is going to disadvantage some activity; this is just the
nature of taxation or any cost.
He said the broad-taxation choices are as follows:
· Capital tax:
ƒCorporate income tax or other taxes on capital goods.
ƒEffect:
¾Reduce investment which has a strong effect on
economic growth.
¾Legal incidence is going to be on the owners of
capital.
· Labor tax:
ƒIndividual income tax.
ƒEffect:
¾Changes labor productivity: people on the whole are
going to work less and fewer people are going to be in
the labor force.
¾Competitive advantages for some people for being in
other states: companies may have to pay a little more
to be competitive, which may reduce employment due to
higher salaries that applies pressure for some
individuals to migrate to other states where there are
better opportunities.
¾Falls almost entirely on labor.
MR. WALCZAK summarized that the previously mentioned tax
scenarios are in the margin and there is no sense that levying
any of the taxes will result in some mass exodus where everyone
leaves, but people do respond to taxes.
3:41:52 PM
He set forth that the third broad tax is consumption:
· Consumption tax:
ƒGeneral sales tax or excise tax.
ƒLess disadvantageous than a decrease in investment or in
labor.
ƒConsumption is more flexible where people can determine
how much they spend.
ƒSales taxes can be regressive if solely based on a goods-
only tax from the 1930s.
ƒSales tax is more neutral if personal services are taxed
as well.
ƒEffect:
¾Higher consumer prices.
He detailed that most states do have a somewhat regressive sales
tax because they have an old sales tax that is based on the
economy from the 1930s when sales taxes were first imposed. He
noted that 50 years ago the nation's economy was two-thirds
goods and one-third services, currently the economy is two-
thirds services and one-third goods. He set forth that the U.S.
is a service-oriented economy with sales taxes that are goods
oriented, which makes for a somewhat more regressive tax. He
explained that people of all income levels need to purchase the
staples of life, but a lower-income person will spend a higher
percentage of their income on the "staples" than a higher-income
individual who has more flexibility in their consumption. He set
forth that services flips the equation because personal services
are consumed much more by higher-income individuals. Sales taxes
are made needlessly regressive when personal services are not
included. He summarized that including personal services
broadens the base, lowers the overall rate and the tax becomes
much more neutral.
3:44:59 PM
MR. WALCZAK pointed out that Alaska's local-sales taxes
contribute to regressivity primarily with the use of sales-tax
caps. He noted that every locality has a sales-tax cap and some
"caps" are high enough that they do not make an enormous
difference. He detailed that Juneau's "cap" is $12,000 where
most purchases are being covered; however, some communities have
"caps" as low as $500 which makes the tax more regressive
because wealthier individuals are getting a tax break on big-
ticket items. He said a state considering a broad-base
consumption tax needs to think about the distributional effects
that can result in a lot of issues. He set forth that a state
can make a neutral tax, but structure must be considered rather
than just borrowing what some other state did because of a
previous date going all the way back to the 1930s.
CHAIR DUNLEAVY asked to verify that the concept of broad-and-low
means a broad tax that is across as many goods and services as
possible, resulting in a percentage that is kept low. He added
that excluding more means the percentage has to grow on fewer
sectors, goods or services.
MR. WALCZAK answered correct. He revealed that more states are
cutting individual and corporate taxes, but increasing sales
taxes. He explained that the increases are not because states
have decided to shift more towards consumption, but because the
sales taxes are eroding. He detailed that erosion occurs when
taxes for a limited base continues to be a smaller portion of a
state's economy. He pointed out that excise taxes are constantly
ratcheted up; for example, state cigarette taxes keep rising
because less people smoke and taxes increase to maintain
revenue. He said a narrow base without erosion controls requires
continuous tax increase to keep up. He opined that coming back
to vote on tax increases is not what anyone wants to do.
3:48:05 PM
SENATOR WILSON asked that Mr. Walczak address the services
covered by a services tax.
MR. WALCZAK explained that ideally, all final sales or
"terminus" of services would be included. Every state captures
at least a couple of business inputs, some capture a lot. He
noted that three states capture approximately 100 service-tax
categories: Hawaii, New Mexico and South Dakota. He opined that
personal services would not only include barbers or dry
cleaners, but accounting and legal services as well. He
cautioned that taxing "intermediate," "business to business" or
"business inputs" causes multiple taxation, also called
"pyramiding."
3:50:21 PM
CHAIR DUNLEAVY asked to confirm that theoretically a sales tax
would be charged for a carpenter that does work on someone's
house.
MR. WALCZAK answered yes.
CHAIR DUNLEAVY asked if a sales tax can be imposed on monthly
rent.
MR. WALCZAK replied that rent theoretically could be, but rent
would probably be excluded due to an equity issue in taxing home
ownership as well. He noted that the materials used in
constructing a home is taxable, but the labor often is not. He
added that what to tax on a modular home is in question and
typically a half-rate tax is imposed. He pointed out that a
broad-based tax would include the service side of home
construction.
3:52:01 PM
SENATOR EGAN asked what occurs for out-of-state modular-home
construction.
MR. WALCZAK explained that sales taxes are typically
"destination sourced," meaning that the sales tax is paid where
the good or service is being received or utilized, not where it
is purchased from. He pointed out that use-tax compliance comes
into question and he noted that businesses comply at a high rate
due to audits; however, individuals generally do not do a very
good job of remitting their use-tax and most states do not deal
with it. He noted that legally everyone has to pay their use-
tax, but the odds of someone buying something from Amazon and
filling out a form at the end of the year and noting an online
purchase is low. He admitted that Alaska will have a higher
percentage of sales that originate out of state, but noted that
Alaska will not have cross-border activity where people drive to
a neighboring state to avoid paying higher taxes.
3:53:48 PM
SENATOR EGAN pointed out that a sales tax is imposed on goods
from businesses with a presence in Alaska; however, an item
purchased online from Amazon is not taxed.
MR. WALCZAK explained that "economic nexus" is required by the
Supreme Court from the 1992 Quill decision. He revealed that two
states have passed legislation to test the Quill decision.
SENATOR EGAN noted that some people have tried to include USPS,
UPS and FedEx as instate warehouses for storing and delivering
packages.
MR. WALCZAK explained that the courts are not going to allow the
scenario that Senator Egan described. He admitted that
challenges to the Quill decision regarding marketplace fairness
could affect destination-based-remote transactions.
He advised that if Alaska would be looking at a sales tax that
the state look at a group of other states that are involved in
streamlining sales taxes in anticipation of new federal
legislation. He projected that states will be required to have
their sales taxes look a certain way, have unified collections
and be simplified. He pointed out that the U.S. has over 10,000
sales-tax regimes and requiring every retailer to comply with
10,000 different sales-tax jurisdictions can be exceedingly
complex. He suggested that if Alaska is creating a sales tax
from scratch that the state look closely at the best practices
for a streamlined sales tax so that remote sales taxes can be
collected to avoid an overhaul.
CHAIR DUNLEAVY asked that Mr. Walczak hit the main points on a
sales tax as it relates to Alaska and what the state's
differences may be versus the Lower 48. He asked that Mr.
Walczak address income tax and property tax as well.
3:57:52 PM
MR. WALCZAK concurred that Alaska is unique compared to a lot of
states, which makes superimposing experiences from other states
more difficult. He pointed out that the state does not have
border competition where people drive to other states to buy
something. He said a larger percentage of purchases in Alaska
are going to be "use" rather than "sales" tax based simply
because more things are being shipped in and purchased from
companies outside of the state. Alaska has higher costs of goods
which creates price sensitivity issues depending on what the
sales tax is when higher prices already exist.
MR. WALCZAK said the state has some unique opportunities because
a patchwork of local sales taxes already exist with high
compliance costs, individual remittances and requirements for
everyone. He pointed out that consolidating local and state
sales taxes is cost beneficial to remitting companies due to one
source of collections and audits.
He opined that a sales tax often has advantages over an income
tax in that consumption effects are less detrimental. Both the
income and sales taxes do export to some degree; however, no tax
will export the way that the severance tax shifts the economic
burden on the rest of the country and not on Alaska. He said the
majority of an income or sales tax is going to be borne by
Alaskans, but not all of it. He detailed that an income tax will
capture taxes from out-of-state workers and a sales tax captures
tourism spending.
4:00:45 PM
SENATOR WILSON asked to clarify that it is better to have a
sales tax than an income tax.
MR. WALCZAK replied that a sales tax is generally more
economically advantageous. He admitted that distributional
effects on which populations to burden should be considered, but
a sales tax will have less of an effect on economic growth. He
admitted that the average payer in Alaska will face a relatively
low-tax environment from either a sales or income tax. He said a
significant portion can be exported, but a sales tax is probably
preferable of the two systems. He pointed out that purchases can
be scaled up or down with a sales tax versus individual income,
so the effects of an income tax to some degree are going to make
it more costly to work in the state. He said either tax will
have some effect on wages due to the higher cost of living and
prices. He noted that there is an inverse correlation between
income taxes and population shifts that is larger than in a
sales tax, but both taxes would have some effect.
4:03:01 PM
SENATOR GIESSEL noted that the proposed income tax was based on
federal-income tax. She referenced a news article that said
using the federal-income tax is unusual.
MR. WALCZAK concurred with Senator Giessel's observation. He
revealed that Alaska was one of six states that used the
federal-income tax system when the state last had an income tax.
Alaska would be the only state if it adopted the federal-income
tax. He disclosed that every state is slightly different in how
they structure their income taxes, most begin with a federal
definition of income and then adjustments are made; e.g.,
incentives are provided or something is taxed more heavily, but
the federal definition of income is the base.
He explained the advantages to using the federal definition of
income as follows:
· The federal government's audit opportunities is captured.
· States adopt their own rates and brackets.
He noted that Alaska previously adopted wholesale the entire
federal system and then just scaled it down to 15 percent. Most
states adopt the federal definition of income and create single
rate or progressive rate systems. He divulged that 18 states
have single rate income taxes; e.g., 3 percent or 5-percent
bracket rates.
He explained that the pro of adopting what Alaska used to have
is the incredible simplicity for the taxpayer, multiply the Form
1040 results by 15 percent; also, the state would have
advantageous auditing and administrative costs.
He set forth that the con in importing the entire federal system
is that like it or not, there are incentives, deductions and
exemptions in the federal code that may or may not be
appropriate for Alaska that the Legislature may or may not wish
to include. He added that any changes made by the federal
government is immediately imported into Alaska without the state
doing anything. He explained that whether or not the state wants
to adopt a mortgage interest deduction, the same treatment of
charities, child tax credit, earned income tax credit (EITC),
treatment of capital gains income, dividend interest income, the
state will be adopting the entire system for all of its pros and
cons.
He summarized that states have chosen not to import the entire
federal system. He noted that the federal government is looking
at potential tax reform within the next two years which could
radically change what the income tax looks like and the state
may be a part of the change whether it wants to or not.
SENATOR EGAN explained that since statehood, municipalities have
traditionally had the option of using a sales tax. He noted that
sales taxes and property taxes vary throughout the state. He
asserted that he has serious concerns about allowing a state-
sales tax. He pointed out that non-resident workers in his
district pay no more than the sales tax on a can of beer on
their way back home. He admitted that companies that employ non-
resident workers pay a property tax, but residents do not get
direct benefit.
4:08:23 PM
MR. WALCZAK concurred and noted that Senator Egan's concern is
very legitimate. He pointed out that there will be economic
activity that is simply not subject to either a sales or income
tax for out-of-state participants. He noted that an income tax
does not capture tourism revenue and a sales tax does not
capture the part-time Alaska employment. He disclosed that
nationwide, Alaska's reliance on most taxes is fairly low. He
detailed that Alaska has over 100 sales-tax jurisdictions, but
property taxes are still much larger, primarily due to the
pipeline or industrial property.
CHAIR DUNLEAVY noted that an upcoming presentation from ISER
will show that a sales tax captures more outside income for
Alaska then an income tax.
He set forth that the committee meeting's presentations should
not be interpreted as a tax advocate discussion, but rather a
way for the committee to get up to speed as to what the various
taxes are like, how the taxes can be modeled in Alaska, and what
are the things the state will have to look at.
He pointed out that Mr. Walczak mentioned that Alaska is unusual
in its varied taxes. He opined that Alaskans are generally
skeptical of taxes and are "taxaphobic." He said the Legislature
is having tax discussions because more and more folks are
advocating for alternative revenues and the committee wants to
get as much information as possible.
4:12:45 PM
SENATOR WILSON asked for details on the costs associated with
tax enforcement and collection.
MR. WALCZAK explained the costs associated with various taxes as
follows:
· Sales tax:
ƒRelatively low costs for the state because retailers are
the tax collector and remitter.
ƒRetailers bear some of the burden of collection.
ƒAdministration costs are generally lower than an income
tax.
ƒCompliance tends to be fairly high because it is tougher
for a business to cheat due to transaction counts.
· Individual income tax:
ƒFew actually get reviewed, even at the federal level.
ƒMore expensive to have compliance and administrative cost
on an income tax.
ƒLess costly than corporate taxes, but more expensive than
sales tax.
· Corporate income tax:
ƒCost more due to complexity: apportionment of income,
determining what is taxable within a company, and
appeals.
ƒBusinesses appeal a lot because difficult questions are
subject to rulings and court decisions.
ƒMost expensive of the major taxes because corporate
income taxes are fairly small share in most states'
revenue.
MR. WALCZAK said neither of the taxes are going to be
extraordinarily expensive for Alaska, but the costs are real,
especially if taxes only raise a limited amount of revenue. He
noted that estimates suggest that 50 to 70 full-time employees
will be required for either of the taxes. He summarized that
raising less money from any tax will mean a higher percentage
will go towards audit collections, etc.
4:16:15 PM
CHAIR DUNLEAVY asked Mr. Walczak to address how property taxes
in the Lower 48 differ from Alaska.
MR. WALCZAK answered that property taxes are the oldest taxes in
the country and therefore have probably changed the most over
the years. He said at one point every state had a tax on real
property at the state level as well as taxes on tangible
personal property.
He revealed that most states have exempted most personal
property, at least for individuals. He noted that there was a
time when an individual had to calculate out the cost of
everything they owned to remit an annual tax. He opined that the
country may be a more materialistic culture and most people
would not be able to easily determine how much they actually
possess in personal property. He said most states either
outright exempt all home-personal property or have a high enough
threshold that only impacts the wealthiest people. He revealed
that fewer and fewer states tax business personal property;
however, outside of Alaska, every state in every locality has
real property taxes at the local level.
MR. WALCZAK disclosed that 14 states have some sort of real-
property tax at the state level where only certain classes,
industries or personal properties are taxed. He noted that some
states levy a property tax on rail cars or on airplanes, whereas
local taxes are levied on all real property, including
improvements. He added that some states have distinct classes of
property with either different assessment ratios or rates. He
said the most common practice is to have a single rate with
different assessment ratios where residential property is
assessed at a 50-percent assessment ratio and commercial or
industrial at a 70-percent assessment ratio.
4:18:57 PM
He admitted that tax disadvantages occur when a lot of the tax
burden is shifted to just a couple of property types, especially
from an assessment limitation. He referred to California's "Prop
13" that set off a tax revolt decades ago where the ability for
residential-property assessment values to rise was dramatically
limited and the burden shifted to commercial property or new
property placed in the system. He detailed that the end result
caused an adverse effect where a massive lock-in incentivized
people to not sell their property, a scenario that should be
avoided. He explained that there are property tax limitations
that can make sense to avoid pricing people out of their homes
and noted "circuit breakers" where lower-income individuals can
be protected from certain increases. He added that some states
use levy limits or collections limits; however, a state should
be careful in not creating some perverse incentives or a
wholesale shift. He revealed that Iowa put limits on residential
and agriculture properties that resulted in commercial and
industrial rates becoming prohibitively expensive where Tax
Increment Financing (TIF) are being used.
4:20:31 PM
He explained that a TIF means some revenue collection goes
towards a dedicated project; for example, a district's property
taxes for a commercial development goes towards building some
sort of infrastructure. He pointed out that Iowa uses kind of a
ridiculous TIF system where taxpayers are paid back because they
can't repeal their residential and agriculture property tax
limits statute. He asserted that the Iowa example is not
efficient, neutral or fair because not every business receives a
TIF. He said tax neutrality means taxes should be predictable
with horizontal equity where similarly situated and profiled
businesses pay about the same. He set forth that there is always
a cost with incentivized tax systems where certain economic
activities, industries and taxpayers benefit at the cost of
someone else who has fewer resources or who is less certain.
MR. WALCZAK continued that neutral is good because perfectly
projecting what an economy is going to look like in 10 or 20
years is not possible. He pointed out that a lot of states have
built tax codes entirely around an industry mix that either
existed or one that ought to exist; when reality diverges from
that, as inevitably it will at some point, the tax codes can be
very uncompetitive. He said North Carolina was a good example of
a state that had high taxes and "middle of the pack" collections
due to huge "carve outs" for favorite industries like tobacco
and textiles. Everything ran pretty smoothly when the favorite
industries made up the majority of the economy, but tobacco and
textiles no longer do and the state woke up and realized that
they could not attract new businesses due to a tax code that was
not competitive. He revealed that North Carolina reformed their
tax code to one that is much more neutral with a broader base
and lower overall rates where industries that previously would
never have looked at the state now say North Carolina could, a
valuable experience for a lot of states.
4:24:17 PM
At ease.
4:24:34 PM
CHAIR DUNLEAVY called the committee back to order. He noted that
Alaska has a lot of exempt land, specifically native-corporate
land. He asked if land purchased outside of a native
corporation's exempt land might potentially be taxable.
MR. WALCZAK replied that to the best of his knowledge, tribal
lands themselves in other states are sovereign and a state
cannot impose a property tax on them, but lands purchased
outside of tribal lands is subject to the same tax treatment
that other states have.
CHAIR DUNLEAVY announced his intention to bring Mr. Walczak
back. He asked that Mr. Walczak briefly address an overall
property tax in Alaska in addition to income and sales taxes.
4:27:12 PM
MR. WALCZAK replied that he certainly wants to work with the
committee. He said there are probably members who want to avoid
imposing any new broad-based tax, but noted that there is an
opportunity to get it right. He disclosed that most taxes in the
rest of the country are gradual creations over time of
miscellaneous provisions that sounded good at one point and may
even be good in isolation, but there are hundreds of tax
provisions that have become a bit of a hodge-podge of ideas that
perhaps do not work together as a cohesive whole. He remarked
that no one regardless of their political affiliation would
start from scratch and design most of the systems that currently
exist. He asserted that starting from scratch is actually an
opportunity instead of importing some other state's tax code
that is over a hundred years of miscellaneous accretions. He set
forth that Alaska should ask what the tax principles are that
stand behind the structural issues.
He addressed the different taxes as follows:
· Property tax:
ƒAdvantages:
· Relatively little behavioral effects.
· Real property is not going anywhere and does have
value.
· Comes closer to passing a benefits test.
· Generally benefit property owners roughly in
proportion to the value of the property.
ƒUnusual for states to tax property partly because the
benefits test is more tenuous versus local governments
that provide direct benefits for: roads, street lighting,
police services, and fire-and-ambulance.
· Sales tax:
ƒAdvantages:
· More limited economic effect that reduces consumption
rather than investment or labor.
· Most economists would say that a minor negative effect
on consumption is preferred than on other categories.
· Captures income from tourists.
· Compliance costs are cheaper.
ƒDisadvantages:
· Not capturing much from seasonal workers that would
have to be captured through an income tax.
· Regressivity when compared to an income tax.
¨ Legitimate concern that can be addressed through a
neutral-tax framework with a broad base that
captures services and eliminates caps.
· Income tax:
ƒAdvantages:
· Progressivity can be built into the tax.
· Captures out-of-state income.
ƒDisadvantages:
· Some degree of economic reduction.
· Cost of working in the state will be driven up.
MR. WALCZAK said compliance costs for the various taxes will not
be massively different. He opined that income and sales taxes
will be fairly similar depending on their structures. He set
forth that additional income tax considerations include:
· Should the federal tax base be used?
· Should the entire federal tax system be adopted wholesale?
· Should the tax be a percentage of the federal levy?
· Does the state want its own rates and brackets?
· Will the state be ready for federal tax reform if it
happens?
· Will the base be broadened with a lower rate?
He summarized that most states prefer to have more fiscal
control that is based on the needs of the state versus adopting
the entire federal system. He pointed out that adopting the
entire federal system puts control in the hands of what the
federal government does.
4:31:48 PM
CHAIR DUNLEAVY thanked Mr. Walczak and noted that his
presentation gives the committee an introduction on things to
think about. He pointed out that the intent is to educate
committee members as well as Alaskans as to what may be looked
at. He asserted that some legislators still hope and believe
that there are ways to potentially avoid a broad-based tax.
4:32:44 PM
At ease.
^DISCUSSION: THE MECHANICS OF COLLECTING SALES TAX
DISCUSSION: The Mechanics of Collecting Sales Tax
4:34:23 PM
CHAIR DUNLEAVY called the committee back to order. He announced
that the committee's next topic addresses tax concepts,
something foreign to Alaskans for the past 40 years on a
statewide basis, but not foreign to many of the state's
municipalities. He set forth that Bob Bartholomew and Clinton
Singletary with the City and Borough of Juneau will talk about a
municipality's sales tax, what are the mechanics, pros and cons,
exemptions, and how the taxes are collected.
4:35:03 PM
BOB BARTHOLOMEW, Finance Director, Finance Department, City and
Borough of Juneau (CBJ), Juneau, Alaska, detailed that Juneau is
one of 105 local governments that have a sales-tax program. He
opined that the state might be starting from scratch with a
sales tax, but 105 communities with a variety of programs will
have to be brought in as well.
He pointed out that CBJ's sales-tax code is 45 pages long with
local citizens and businesses that interpret it completely
differently. He concurred that a broad-based sales-tax program
is a good tax policy goal and CBJ is known to have a very board
sales-tax program.
He provided details about CBJ's sales and property taxes as
follows:
· Collects sales taxes from services, goods, commercial
rentals, but not from residential rentals.
· 4,000 registered merchants.
· 60 percent of sales-tax revenue goes into CBJ's general
operating budget.
· 40 percent of sales-tax revenue goes into CBJ's capital
projects and to keep deferred maintenance from growing.
· CBJ's revenue ratio from sales taxes and property taxes is
50:50.
· 60 percent of property taxes goes to education.
· 40 percent of property taxes goes into CBJ's general
operating budget.
4:37:39 PM
MR. BARTHOLOMEW provided the history of CBJ's sales tax as
follows:
· City charter adopted after CBJ unification in 1970 that
said any sales tax requires voter approval.
· 1-percent sales tax adopted in 1970.
· 3-percent temporary-sales tax adopted in 1983 and
continually renewed by voters every 5 years.
· 1-percent temporary-sales tax adopted in 1996 and
continually renewed by voters every 5 years. The tax
primarily goes towards capital projects.
· Inflation has caused the cost of goods and services to go
up, but revenues have grown in line with inflation.
CHAIR DUNLEAVY asked if CBJ suffers under the dedication clause
for its tax stream on a local level where revenue can be
dedicated.
MR. BARTHOLOMEW replied that CBJ cannot dedicate. He explained
that CBJ's voter pamphlets specifies the city-and-borough's
desire to spend the sales tax on capital.
CHAIR DUNLEAVY clarified that CBJ "designates" sales tax
spending.
MR. BARTHOLOMEW answered yes. He revealed that if the CBJ
assembly chooses to spend the sales taxes differently, the
intent is shared with the voters.
4:39:35 PM
CLINTON SINGLETARY, Sales Tax Administrator, Finance Department,
City and Borough of Juneau, Juneau, Alaska, reiterated that CBJ
has a 5-percent sales tax that is broad based. He noted that
Lower 48 companies have commented that CBJ has one of the
broadest taxes that they have encountered. He specified that CBJ
taxes the retail sale of goods, services performed in Juneau,
all rentals except for long-term residential, like apartment
rentals.
CHAIR DUNLEAVY asked if CBJ taxes food.
MR. SINGLETARY answered yes.
CHAIR DUNLEAVY asked if CBJ taxes medicine.
MR. SINGLETARY answered no.
CHAIR DUNLEAVY asked if CBJ taxes clothes.
MR. SINGLETARY answered yes. He revealed that an additional 3-
percent rate is added to alcoholic beverages and marijuana
products. For FY16 there was $45 million in revenues received
only from the 5-percent sales tax, $2.4 billion in actual gross
sales reported for all retail goods, services and rentals.
CHAIR DUNLEAVY asked how much CBJ collects during the summer-
tourist season.
MR. BARTHOLOMEW detailed that Juneau receives 1-million cruise
ship passenger visitors and derives approximately $8 million in
sales taxes from spending activity, about 18 percent of the
total sales taxes collected year round.
4:41:52 PM
CHAIR DUNLEAVY noted that some villages, hotels and restaurants
are strictly open during the tourist season or offer discounts
during the off-season.
MR. SINGLETARY provided details on CBJ's sales-tax exemptions as
follows:
· 34 sales-tax exemptions.
· Most exemptions are fairly specific.
· Resale is the most common exemption for the state's
jurisdictions that only applies to the end consumer that
purchases from a retailer.
ƒExample: a commercial fisherman that sells their catch to
a processor, processor sells fish to a retailer and the
retailer to the end consumer, the only tax occurs at the
tail end to the end consumer.
· Government exemption for purchases by federal, state and
local entities.
· Nonprofit organizations that are 501(c)(3) or 501(c)(4).
· $12,000 tax cap on the first $12,000:
ƒSingle item, not a total invoice.
ƒExample: purchase of a vehicle where the first $12,000 is
taxed.
· FY16: exempt sales of $1.5 billion, approximately 60
percent of CBJ's overall reported sales.
4:43:57 PM
He addressed program administration as follows:
· Merchant registration:
ƒCBJ does not have a business license, but merchants are
required to register so that sales taxes collected can be
reported.
· Merchant education:
ƒCommon misconception, a sales tax is not an income tax,
but a remittance for tax collected from customers.
· Reporting and remitting collected sales tax:
ƒSales tax is considered a "trust tax" where merchants
collect on behalf of CBJ and hold the collected tax in
trust until remittance.
ƒSales taxes filed quarterly.
ƒMonthly or annual filings upon approved request.
ƒProcess 15,000 returns annually.
ƒFairly steep late fees and penalties are charged to
encourage on-time payments.
· Compliance and audit:
ƒCompliance: more informal where returns and reports are
reviewed to see trends or "red flags."
ƒAudit: full review of reported sales to review a
merchant's entire books.
ƒPrimary issue: exemptions that are improperly
interpreted, rarely do merchants fail to report overall
sales. Informal audits are conducted to focus on
exemptions.
· Enforcement actions:
ƒFailure to register:
· Merchant is forced to register with a demand for
returns.
ƒFailure to file:
· Most common issue.
· Typically address 500 merchants on a quarterly basis.
· Estimates can be prepared and billed to merchants that
fail to file.
ƒFailure to pay:
· Work with collections in the department of law to take
the best course of action to collect.
· Less than two percent of total revenue a year take
collection actions.
4:45:54 PM
CHAIR DUNLEAVY asked what the size and cost is for CBJ's
administration that is dedicated to sales taxes.
MR. SINGLETARY answered that five people work in the sales-tax
office, total cost is $830,000 for collecting $45 million in
sales tax, a little under 2-percent overhead. He added that
CBJ's treasury department handles payments and the law
department addresses collection cases.
CHAIR DUNLEAVY asked what percentage of CBJ's overall revenue is
derived from sales taxes.
MR. BARTHOLOMEW answered approximately 35 to 40 percent.
4:48:42 PM
CHAIR DUNLEAVY asked if a sole proprietor that offers piano
tutoring services has to register and pay a tax for their
service.
MR. SINGLETARY answered yes.
SENATOR WILSON asked how a building contractor is taxed
regarding their labor and materials.
MR. SINGLETARY explained that contractors have a specific
exemption. He detailed that a contractor exemption is tied to a
city building permit for a job where services or any materials
going into a job are exempt. He noted that a handyman-level
service to paint or fix a window would be taxable because
typically the activity does not have a building permit.
4:51:52 PM
MR. BARTHOLOMEW addressed public policy challenges that apply to
local and statewide sales tax programs:
1. Sales tax sensitivity to economic changes:
a) Occur faster than income taxes.
b) People stop spending when they get nervous or there is
uncertainty.
c) Alaskans and tourists stopped spending during the
2008-2009 financial crisis. CBJ lost $2.5 million of
revenue in 2009.
2. Sales tax rate is sensitive to buying elsewhere:
a) People buy online if the sales tax gets too
burdensome.
b) Younger demographics buy online.
3. Potential state sales tax uncertainties:
a) CBJ considered a sales tax exemption on food with a
sales tax increase to 6 percent in order to cover a
15-percent loss in revenue from the exemption. The
increase was tabled due to a concern that the addition
of a state-sales tax could make the overall sales tax
too high.
b) Concern about the 1-percent tax renewal vote in
October 2017 if there is the potential for an added
state-sales tax.
4:55:36 PM
MR. BARTHOLOMEW addressed a previous comment that collecting a
sales tax is administratively less expensive than an income tax.
He pointed out that the cost of a business's time and costs is
not taken into consideration. He noted that CBJ does not
reimburse businesses, but a $25 credit is provided.
He opined that an income tax on the state level will provide
diversification by capturing lost economic activity. He asserted
that a sales tax should be left at the local level for local
control rather than state control. He pointed out that a hundred
separate programs will have to be unified because businesses
would not be able to administer two separate tax programs. He
remarked that a sales tax is a more regressive approach versus
income tax, but communities have gone the sales-tax route
because it's a way for everyone to pay, including tourism.
He set forth that the biggest challenge is controlling the rate
that does not affect purchasing behavior. He said CBJ supports
the fact that the state needs to raise revenue or adjust
expenses. He asserted that Alaska's forefathers got it right by
saying sales tax should be the privy of local government and the
income tax should be the privy of state government.
4:59:44 PM
SENATOR EGAN asked for an explanation on the sales-tax exemption
on products exported from Juneau, like fish and beer.
MR. SINGLETARY specified that the exemption applies to products
that are ordered and consumed outside of Juneau.
SENATOR WILSON asked if CBJ knows what the sales tax percentages
are for goods versus services.
MR. SINGLETARY answered no.
MR. BARTHOLOMEW stated that CBJ will get back to the committee
and provide the tax percentage information.
SENATOR GIESSEL asked for an explanation of the cruise ship fee
that Juneau receives.
MR. BARTHOLOMEW specified that Juneau receives two fees totaling
$8 per passenger: port development fee and the local-marine
passenger fee. He added that as a cruise ship port-of-call,
Juneau also receives a statutory portion of the state's
passenger-fee program. He pointed out that what the passenger-
fee revenue can be used for is very restricted by federal law.
5:01:40 PM
SENATOR WILSON asked what CBJ's bed tax percent is.
MR. SINGLETARY answered that the bed tax is 7 percent on top of
the 5 percent sales tax, totally 12 percent for a hotel room.
CHAIR DUNLEAVY thanked Messrs. Bartholomew and Singletary for
assisting the committee in understanding the sales tax "on the
ground" in Juneau. He reiterated that the discussions in the
meeting were intended to be informational as the committee tries
to get an understanding of taxation. He opined that there are a
number of individuals that hope the state does not have to go
down the taxation road. He noted that Mr. Bartholomew expressed
his hope that a state-sales tax is not instituted, but he added
that there are people who also hope that state income and
property taxes are not instituted as well. He remarked that
there will be no easy solution to the solving of the problem. He
admitted that oil has been very good to Alaska, but billions of
dollars have evaporated with the recent price crash, coupled
with a prolonged situation with the oil price and Alaskan
production. He set forth that everyone is determined to get a
fiscal fix this year for Alaska looking out several years into
the future.
5:03:53 PM
There being no further business to come before the committee,
Chair Dunleavy adjourned the Senate State Affairs Committee at
5:03 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CBJ Talking points - Sales Tax Program.pdf |
SSTA 1/26/2017 3:30:00 PM |