HB 152-EDUCATION TAX  3:23:36 PM CHAIR CARRICK announced that the final order of business would be HOUSE BILL NO. 152, "An Act establishing an education tax on the income of individuals, partners, shareholders in S corporations, trusts, and estates; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." 3:24:22 PM REPRESENTATIVE GALVIN presented a brief overview of HB 152 Education Tax [included in the committee file]. She explained how and why she chose particular levers for this legislation. It is an income tax bill that proposes a head tax of $150. For wage earners above $150,000 there would be a 4 percent tax on those funds over $150,000. This proposed bill also closes a loophole on S-corporations that do not pay taxes since Alaska has no income tax. This bill would capture high-earning, non- resident workers with an additional 4 percent above the $150,000 threshold. She commented that Alaska's revenue stream is so unpredictable. REPRESENTATIVE GALVIN shared on slide 2, which outlines many models that could have been used. Income that could be included was presented on slide 3. 3:28:15 PM DAVID JIANG, Staff, Representative Alyse Galvin, Alaska State Legislature, on behalf of Representative Galvin, prime sponsor, explained that slide 3 shows the full and major sources of personal income in Alaska from 2018. He said most personal income comes from salaries and wages. REPRESENTATIVE GALVIN said that her goal was to make it simple to implement. She chose to use the existing federal tax forms. MR. JIANG continued the presentation on slide 4, "Let's Simplify - Build off the Federal Tax," sharing three options for identifying the income that will be subject to a state income tax, which are: adjusted gross income, federal taxable income and federal taxes due. REPRESENTATIVE GALVIN said that she chose the least complicated. She stated the options are at what threshold is the tax and what the exemptions are. MR. JIANG explained that it was selected to be Federal Adjusted Gross Income (AGI) which is option 1. The bill has a standard deduction of $150 for single filers and $300 for joint filers. As shown on slide 5, it includes a flat tax rate and a head tax. REPRESENTATIVE GALVIN stated that she knows there needs to be an amendment made. She said that every lever determines the amount of revenue. The $150,000 threshold limits the impact of the income tax to about 25 percent of Alaskans income earners. On Slide 6, changing the standard deduction to $75,000 would expand the impact. There are possible amendments including reducing the head tax and being able to pay for all the fiscal notes involved with a new tax division. Slide 5 provides a sense of one lever's impact. 3:34:36 PM REPRESENTATIVE ST. CLAIR asked, "Why is it labeled as an education tax?" REPRESENTATIVE GALVIN answered that it is labeled an education tax as one of the biggest expenses in the state's budget is education. It is intent language. REPRESENTATIVE ST. CLAIR said that his constituents don't want a tax. He asked how many S-Corporations there are in the state. REPRESENTATIVE GALVIN replied there is a significant number. REPRESENTATIVE ST. CLAIR, giving the example of a couple, asked, whether each person would pay $150. REPRESENTATIVE GALVIN replied that every person that earns a wage would put in $150. 3:36:50 PM REPRESENTATIVE HOLLAND mentioned an Institute of Social and Economic Research (ISER) report a month ago that shared a couple different income tax approaches. He asked how this bill compares to the options presented in the report. REPRESENTATIVE GALVIN answered that ISER showed one option that was a tiered progressive income tax. This bill has only one tier. She doesn't know if ISER modeled a high-earner tax. It was using data from 2023 where the average wage is more than $175,000 on the North Slope. She noted that 50 percent of workers are out-of-state workers. She stated that most workers are being taxed in their home state at more than 4 percent. REPRESENTATIVE HOLLAND asked about the implementation on how this might be turned on. One need is a change in effective date. He suggested a multi-year turn on: the head tax one year then the income tax of 4 percent the next year. REPRESENTATIVE GALVIN answered that she understands what Representative Holland is thinking. The head tax is easier to take off the first paycheck of the year. The 4 percent for the higher earners would involve the Department of Revenue (DOR) working with permanent fund dividend (PFD) to pay this tax. If the legislature doesn't put it into law soon, it will take two years to produce revenue. She said she is looking at revenue measures that get education funded. REPRESENTATIVE HOLLAND asked about the permanent fund connection. It has been proposed that the PFD could be used for tax liability in some ISER documents. He said reducing the amount of the PFD flowing to the federal government would be good. He asked whether there is a way for the PFD to not become federal income. REPRESENTATIVE GALVIN replied that the second part she doesn't know. Yes, Alaskans can use the PFD to pay taxes. She doesn't know if it will make it, so a person doesn't have to pay federal taxes on the PFD. She knows that once there was an energy check in 2001 that went to all PFD recipients and Alaskans didn't pay income tax on it. 3:44:34 PM REPRESENTATIVE MCCABE stated that he called it an education tax. Article 9 section 7 of the Constitution prohibits dedicated funds. He asked, "How can you market it as education funding if it just becomes legislative funds?" REPRESENTATIVE GALVIN replied that legally this provision can only be put in intent language. Most of Alaska's general funds are spent on education and health care. CHAIR CARRICK added that last year the marijuana tax was designated to education. REPRESENTATIVE MCCABE noted that under the proposed legislation, Alaska residents would pay 75 to 85 percent of the tax. He asked if it was a fair measure to tax out-of-state workers that don't use Alaska's education system. REPRESENTATIVE GALVIN said out-of-state workers are paying taxes in their states. She wants Alaskans to get these jobs through a strong educational system. It is not fair that non-Alaskans are getting the highest wage jobs. REPRESENTATIVE MCCABE stated that 25 percent of workers are from out-of-state, according to Trends magazine. He said that is because there aren't enough workers in the state. Many Alaska workers work out of state. He wondered about the reciprocity agreement between the states. 3:50:37 PM REPRESENTATIVE GALVIN replied that tax forms are written with boxes to check for paying taxes in other states. She said that if a person works in many states, it can be complicated. She said that 75 percent of Alaskans will pay with their first check. The low wage earners will not be affected as taxpayers would have to make $150,000 or more. 3:52:14 PM REPRESENTATIVE STORY said thanks to the sponsor for her presentation. In the past, Alaskans paid a $10 education tax. She asked for an explanation of how this bill would close the S- Corporation loophole. MR. JIENG stated currently, Alaska does not have a state income tax. In the case of S-Corporations, they are not taxed under the system. This bill will capture individuals, as well as the proprietors of S-Corporations. REPRESENTATIVE GALVIN added that S-Corporations would have to pay tax above $150,000. They are considered as individuals in this case. REPRESENTATIVE STORY asked if they pay federal taxes now and would pay state taxes under HB 152. REPRESENTATIVE GALVIN answered yes. 3:54:59 PM CHAIR CARRICK asked whether the sponsor knows the average income tax across the country. She would like to compare the tax to the Western states. REPRESENTATIVE GALVIN said it is much less here. She stated there is a concern if there is a tax, then people will leave the state; a lot of people moved to Alaska because there are no income tax and Alaskans "get paid to live here." MR. JIANG answered that he doesn't know the exact average of tax rates across the country. He said many states have an income tax. There are only seven states that don't have any income tax, including Alaska. REPRESENTATIVE GALVIN stated she will be sure to get the data to the committee. She shared a rate of 5.8 percent in Alaska in 2021. The next lowest rate is 7 percent in Wyoming and Tennessee. She quoted several additional rates for states. CHAIR CARRICK asked for follow-up on the following questions: The average income tax rate? The tax rates in the Western states? Do any Western states have a similar provision to dedicate to education? Is there another state that this legislation is emulating? REPRESENTATIVE GALVIN noted that a constitutional change would have to occur to dedicate it to education. Intent language has worked such as with the marijuana tax. CHAIR CARRICK clarified her request. REPRESENTATIVE GALVIN said she and her staff will do some research and get back to the committee. 4:00:43 PM REPRESENTATIVE VANCE asked whether the sponsor had considered the cost of living under the proposed tax structure. She remarked about the high cost of living on the road system. The spendable money left is less than other Western States. She asked how the bill sponsor came to the $150 head tax and $150,000 threshold. REPRESENTATIVE GALVIN said she appreciated the history of the $10 education tax. It was an effort made in the past to pitch into education. Whether or not $150 seems fair, especially for someone living in poverty, is the purview of this committee. She gave an example of Bethel and the high cost of living and limited job opportunities. She knows if Alaska doesn't fill the gap the state will be spiraling down. It is up to everyone to think through what threshold makes sense. She asked if the 4 percent of the total above the $150,000 threshold seems fair. The committee can change these numbers; she chose what she thought was fair and did not take food off the table. REPRESENTATIVE VANCE asked, "On your presentation were the estimates of revenue outdated?" REPRESENTATIVE GALVIN stated that the office has an ask into the Department of Revenue. MR. JIANG added, "How did we arrive at the head tax in a historically context?" The historical tax was taken out in 1980 and put into a CPI calculator. The amount ranged from $90 to $115. REPRESENTATIVE GALVIN said she appreciates what revenue would be captured if the threshold was changed to $100,000 from $150,000. There would be a drastically different number for revenue. 4: 07:09 PM REPRESENTATIVE HIMSCHOOT said it takes courage to file a bill like this, and whether the legislature likes it or not, this is an important conversation. She stated that $10 in 1980 is $40 today, according to Google. She asked how the sponsor calculated the $150. REPRESENTATIVE GALVIN said it had to pay for this whole new division. She stated that nobody wants a tax division, but the responsible thing needs to be done for Alaska to deliver services. This is an opportunity for every Alaskan to pitch in. She said this is a small head tax for services that Alaskans believe in and the state is constitutionally obligated to deliver. She wanted to make sure the bill covered the cost of implementation. Alaska is very fortunate to live off oil and gas revenue and the corpus of the PFD. She restated that she is open to the committee wrestling with the correct numbers. CHAIR CARRICK said thanks to the sponsor for bringing this forward. She will echo Representative Himschoot; this is a difficult bill to introduce. All legislators have constituents that don't want to pay taxes.