SB 92-CORP. INCOME TAX; OIL & GAS ENTITIES  3:31:47 PM CHAIR GIESSEL announced the consideration of SENATE BILL NO. 92 "An Act establishing an income tax on certain entities producing or transporting oil or gas in the state; and providing for an effective date." 3:31:59 PM CHAIR GIESSEL solicited a motion. 3:32:05 PM SENATOR WIELECHOWSKI moved to adopt the committee substitute (CS) for SB 92, work order 34-LS0540\L, as the working document. 3:32:15 PM CHAIR GIESSEL objected for purposes of discussion. 3:32:30 PM INTIMAYO HARBISON, Staff, Senator Cathy Giessel, Alaska State Legislature, Juneau, Alaska, presented the summary of changes from version N to version L of SB 92: [Original punctuation provided.] SB 92  Explanation of Changes  version N to version L Page 1, Lines 5-6: Strikes fund usage requirement of "energy and electrical grid projects or upgrades fund". Page 1, Lines 6-8: Conforming language related to qualified entities. Page 1, Lines 9-10: Adds new section for calculating taxable income. Page 1, Line 11: Creates new section (c) which clarifies aggregation language under this section. Page 1, Lines 11-14: Conforming changes related to taxable income. Page 2, Lines 1-4: Strikes the creation of the energy and electrical grid projects or upgrades fund. Page 2, Lines 5-9: Conforming changes related to qualified entities and adding limited liability company to the list of qualified entities. Page 2, Lines 11-16: Clarifies the definition of taxable income before deductions. Page 3, Lines 1-31: Strikes non-relevant tax sections from bill. Page 3, Lines 11-12: Adds new section (j) clarifying deductions that may be taken when calculating income under this chapter. Further clarifies deductions listed in under AS 43.20.031 (j). Page 4, Lines 1-27: Strikes non-relevant tax sections from bill. Page 4, Lines 30-31: Conforming language related to qualified entities. 3:34:31 PM CHAIR GIESSEL clarified that CSSB 92, work order 34-LS0540\L is before the committee. She pointed out that the explanation of changes is written to version N and is therefore inaccurate. She indicated that a corrected explanation of changes would be provided. MR. HARBISON clarified that the explanation of changes is written to version N to indicate the changes that were made from version N to version L. He suggested that considering the explanation of changes alongside version N would clear up any confusion regarding page numbers and line sections. 3:35:27 PM SENATOR DUNBAR asked whether representatives from the Department of Revenue (DOR) Tax Division were available for questions. CHAIR GIESSEL replied yes. She indicated that upcoming invited testimony may also provide answers to any questions committee members have. 3:36:19 PM SONJA KAWASAKI, Legal Counsel, Senate Majority Caucus, Alaska State Legislature, Juneau, Alaska, said she would provide a brief overview of the changes from SB 92 version N to L and would provide the reasons for significant changes. She said she would also answer any questions. MS. KAWASAKI directed attention to CSSB 92, Section 1. She explained that the deletion of "energy and electrical grid projects or upgrades fund" would allow the taxes collected as a result of SB 92 to flow into the general fund. Several technical and conforming changes follow. She directed attention to CSSB 92, page 1, lines 5-12 and explained that in SB 92 version N, "qualified" modified "taxable income." In CSSB 92 Version L, "qualified" modifies "entity." This change aligns with common vernacular and was recommended by the Department of Revenue (DOR). 3:37:30 PM MS. KAWASAKI directed attention to CSSB 92, Section 1, subsection b. She explained that this subsection adds a method for determining taxable income, which was not included in SB 92, version N. This change was made with the assistance of DOR and is modeled after current corporate income tax structure for oil and gas producing and pipeline transportation entities. She said that, when researching qualifying entities subject to SB 92, they discovered an existing federal deduction (passed under the Tax Cuts and Jobs Act of 2017 (TCJA)) would allow a 20 percent deduction from qualified business income. She explained that this is problematic, as state law incorporates (by reference) Internal Revenue Service (IRS) code. This would have automatically applied those credits and deductions to the tax under SB 92. She stated that CSSB 92, version L eliminates that possibility. MS. KAWASAKI said there is a potential concern related to the current operation of corporate income tax law for corporations in the oil and gas production industry and/or oil and gas transportation through pipeline industry. Those corporations will potentially have subsidiaries that are limited liability corporations (LLC) and/or S corporations (S Corp). Under current application of the law, DOR would consider those corporations unitary businesses and this income is already included in the corporate income tax. She explained that CSSB 92 (version L) contains language to ensure that - for those subsidiaries that may potentially meet the definition of entities subject to the new tax in SB 92 - the taxation remains connected to the associated corporation. 3:40:44 PM CHAIR GIESSEL asked where that is found in CSSB 92. MS. KAWASAKI clarified that this is found in CSSB 92 (version L), page 2, lines 3-4. She explained that this section initially referred only to AS 43.0.011, which applies to oil and gas corporations. The additional clause ensures that this would also apply to any entity that is a part of a unitary business with a corporation that pays tax under those provisions. She suggested checking with DOR to ensure the provision works as intended. She explained that this provides clarification regarding which area of tax code applies to those subsidiary entities. 3:41:47 PM SENATOR CLAMAN directed attention to CSSB 92, page 2, Section 1(c), and asked whether the practical effect is that these are C corporations rather than S corporations. 3:42:03 PM MS. KAWASAKI replied yes. She explained that this subsection excludes those corporations and their subsidiaries from taxation. 3:42:29 PM SENATOR CLAMAN asked for confirmation of his understanding that this is because C corporations are already paying the tax. 3:42:34 PM MS. KAWASAKI confirmed this understanding. 3:42:42 PM SENATOR HUGHES asked for confirmation of her understanding that the intention is to eliminate double taxation of C corporations. She also asked whether the tax would apply to S corporations before or after the 20 percent federal deduction. 3:43:45 PM MS. KAWASAKI confirmed that CSSB 92, Section 1(c) addresses the issue of double taxation. She said that there is an additional provision later in CSSB 92 that more explicitly prevents double taxation. She emphasized that double taxation was not intended. She asked Senator Hughes to repeat her second question. 3:44:29 PM SENATOR HUGHES recalled that federal law allows S corporations a 20 percent deduction. She asked whether the 9.4 percent corporate tax in CSSB 92 would be applied before or after that deduction. 3:44:50 PM MS. KAWASAKI clarified that the federal deduction for qualified business income (which was part of TCJA and was inadvertently incorporated, by reference, into SB 92, version N) was removed from CSSB 92, version L. She further clarified that the entities subject to CSSB 92 would not receive that 20 percent federal deduction. She shared her understanding that Congress is deliberating whether to extend that deduction beyond 2025. 3:45:34 PM SENATOR HUGHES asked for confirmation of her understanding that the 9.4 percent tax would be multiplied by the S corporation's income without the application of the 20 percent federal tax deduction. 3:45:57 PM MS. KAWASAKI explained that taxable income is determined using the same calculation that is used to determine corporate income tax. This change was suggested by DOR. She said she could not speak to the specifics of taxation but reiterated that CSSB 92 prevents the federal credits and deductions for these entities from also applying at the state level. She reiterated that she cannot speak to specifics of the taxation function. 3:47:05 PM MS. KAWASAKI continued to discuss the changes in CSSB 92, version L. She directed attention to CSSB 92, Section 1, subsection e. She explained that limited liability companies (LLC) were unintentionally omitted from the list of entities subject to the tax in SB 92. She briefly explained why the omission occurred and explained that subsequent discussions - along with DOR recommendations - revealed that LLCs needed to be explicitly included. 3:48:00 PM SENATOR KAWASAKI joined the meeting. MS. KAWASAKI said the next change involved the deletion of taxable income stipulations. She explained that SB 92, version N, included taxable income qualifiers intended to ensure that entities would not be able to give out gifts or bonuses and exclude them from taxable income. Discussions with DOR determined that the provision addressing the corporate income tax taxable income calculations allayed those concerns and the associated sections were deleted from version L. She directed attention to CSSB 92, page 3, Section 4(j). She said that this subsection addresses the potential for double taxation and offered a brief explanation of how this would function. In addition, SB 92, version N, Sections 4-8 were meant to inform specific areas of tax code; however, those sections were unrelated to the policy included in SB 92 and were therefore removed from the CS. 3:51:04 PM SENATOR DUNBAR asked how much revenue version L is estimated to raise in comparison to version N. 3:51:28 PM MS. KAWASAKI deferred the question. She said the changes from version N to L do not intentionally impact the level of tax revenue. 3:52:04 PM MICHAEL WILLIAMS, Corporate Tax Manager, Tax Division, Department of Revenue (DOR), Anchorage, Alaska, replied that [when drafting version L] DOR considered the original policy intent (in version N), which was to place a tax on entities performing the same type of work as corporations producing oil and gas in the state. He said that the revenue estimate remains the same for both versions. 3:52:48 PM SENATOR DUNBAR asked for confirmation of his understanding that the changes from version N to L, some of which are substantive, are not intended to change the estimated revenue raised by SB 92. 3:53:07 PM MS. WILKERSON replied that this is correct. 3:53:23 PM CHAIR GIESSEL removed her objection. She found no further objection and CSSB 92, work order work order 34-LS0540\L, was adopted. 3:53:37 PM CHAIR GIESSEL opened public testimony on SB 92. 3:54:12 PM WILLIAM HERMAN, representing self, Anchorage, Alaska, testified in support of SB 92. He said he supports taxing S corporations such as Hilcorp. He shared his understanding that Alaska is the only state that does not tax S corporations. He shared his understanding that DOR estimates that, if enacted, SB 92 would generate $200 million per year. He expressed frustration that the state provides subsidies for oil and gas corporations. He opined that if oil and gas corporations cannot become economically viable without subsidies, the State of Alaska needs to decrease its dependence on the oil and gas industry. He offered examples of potential solutions. 3:55:47 PM DOUG WOODBY, representing self, Juneau, Alaska, testified in support of SB 92. He said that SB 92 honors the Constitution of the State of Alaska, which tasks the legislature with ensuring Alaskans receive the maximum benefit from the state's natural resources. SB 92 does this by closing the tax loophole for S corporations. He opined that closing the loophole is fair and said that S corporations pay income taxes in every other state. He further opined that changing Alaska's tax code to reflect what is done in other states is common sense. He pointed out that S corporations can deduct state income taxes when filing federal tax returns. 3:56:50 PM PHILIP WIGHT, representing self, Ester, Alaska, testified in support of SB 92. He recalled the first meeting of Alaska's Constitutional Convention, in which E.L. "Bob" Bartlett expressed concerns about how the State of Alaska was managing the state's resources. He briefly quoted from Mr. Bartlett's keynote address and shared his belief that this challenge is one Alaska continues to face. He asserted that the political project of the State of Alaska was focused on ensuring that outside actors could not extract wealth without supporting the governmental services required for healthy, permanent communities. He said that Alaska is the only state that does not tax S corporations. 3:59:07 PM AURORA ROPH, representing self, Anchorage, Alaska, testified in support of SB 92. She stated that, during her lifetime, Alaska has struggled to pay for necessary services while corporations have made millions of dollars from Alaska's resources. She opined that closing the tax loophole for S corporations makes sense. She said that all other states have a similar income tax for S corporations. She added that she also supports using the tax revenue for energy infrastructure upgrades. She commented that SB 92 has bipartisan support and noted that this is rare. 4:00:10 PM DENNIS HULL, State Affairs Manager, Americans for Tax Reform, Arlington, Virginia, testified in opposition to SB 92. He sought to correct the misconception that all other states tax S corporations. He explained that several other states (e.g. Florida, Wyoming, and South Dakota) do not tax S corporations. Other states levy a very small tax (e.g. Nevada). Some states that levy a personal income tax exclude S corporations and other small businesses (e.g. Kansas). He said Americans for Tax Reform is finalizing data on this topic and intends to make it available in the coming week. He pointed out that Alaska's corporate tax rate is the fourth highest in the nation. In addition, Alaska has ten tax brackets, which is significantly more than other states. MR. HULL contrasted this with California, which has a high, flat tax rate for all corporations. He briefly discussed how the proposed tax in SB 92 compares to other states. He asserted that any progressive tax system punishes successful companies and opined that this phenomenon is especially pronounced in Alaska. He stated that SB 92 would place a burden on any relatively successful business in Alaska and added that, since statehood, corporations in Alaska have been on an uneven playing field when compared to other states. He briefly discussed the potential negative impact that overhauling the S corporation tax structure would have on future investments in the state. 4:02:42 PM REBECCA SIEGEL, representing self, Fairbanks, Alaska, testified in support of SB 92. She said she is a teacher in Fairbanks and briefly discussed how the State of Alaska's budget crisis impacts education. She opined that it is irresponsible not to close the S corporation tax loophole. She stated that the money generated by SB 92 could be used to fund education. She opined that this is a commonsense solution. She noted that the Constitution of the State of Alaska requires that the state's resources be used to benefit all Alaskans and opined that this requires taxing S corporations. She shared her understanding that the oil and gas industry is creating fewer jobs than in years past and opined that job creation is no longer a reasonable argument for limiting the taxes on the oil and gas industry. 4:04:52 PM CATHERINE ROCCHI, Energy Fellow, Alaska Public Interest Research Group (AKPIRG), Anchorage, Alaska, testified in support of SB 92. She stated that creating a tax break for S corporations was not a deliberate policy decision; rather, it was an accidental byproduct of eliminating Alaska's personal income tax in 1980. She briefly discussed how, in 2020, affiliated S corporations acquired all of BP's Alaska assets - resulting in the loss of millions of dollars of annual corporate income tax revenue for the State of Alaska. She encouraged committee members to consider closing the loophole as a way to recoup income tax revenues that the State of Alaska depended on for decades prior to 2020 (rather than considering it as a source of new revenue). Speaking on behalf of herself, she shared that she has discussed SB 92 with many people (including some Hilcorp employees). Each person has expressed shock that Hilcorp is not subject to a corporate income tax. 4:07:11 PM KEN GRIFFIN, representing self, Wasilla, Alaska, testified in opposition to SB 92. He asserted that SB 92 would effectively create a 9.4 percent state income tax, as corporations pass the cost to consumers. He briefly discussed how a state income tax would compare to the State of Alaska's budget deficit, which is estimated to increase in the coming years. He said that levying a state income tax and taking a portion of each Alaskan's Permanent Fund Dividend (PFD) would not cover the current budget deficit. He briefly discussed how the market functions and emphasized the high cost of renewable energy. He opined that the problem is not that the state cannot make money but how the state spends its money (namely, on increasing the size of government). He opined that if the state had focused on building a more efficient private sector, there would not be a budget deficit. He briefly discussed the legislature's budget process and implied that this process is ineffective. He asserted that increasing taxes would create a larger issue by driving Alaskans to relocate to other states. 4:09:35 PM CHAIR GIESSEL held public testimony on SB 92 open. 4:09:47 PM CHAIR GIESSEL held SB 92 in committee.