HB 367-TAX CREDITS FOR EDUCATIONAL CONTRIBUTIONS  9:09:17 AM CHAIR SEATON announced that the next order of business would be HOUSE BILL NO. 367, "An Act relating to tax credits for cash contributions by taxpayers that are accepted for certain educational purposes and facilities; and providing for an effective date." REPRESENTATIVE MUNOZ moved to adopt the committee substitute (CS) for HB 367, Version E, as the working document. 9:09:32 AM CHAIR SEATON objected for the purpose of discussion. 9:09:45 AM KENDRA KLOSTER, Staff to Representative Cathy Munoz, Alaska State Legislature, informed the committee Version E incorporates the amendment previously adopted, and also removes Sec. 4 of Version R by request from the Department of Revenue (DOR). She explained that according to DOR, the general rule in tax administration is that tax credits are not refundable, do not enjoy "carry-forward," and cannot be transferred or sold unless the privilege is written into the law. Further, the "default" interpretation is that a tax credit is only good to apply in the same tax year. Therefore, if the language in Sec. 4, Version R, is included in the bill, it is suggested that credit in these sections is "silent" and may be refunded, carried-forward, or transferred. 9:12:08 AM CHAIR SEATON confirmed that Sec. 4 does not appear in Version E, and asked for further changes, if any. 9:12:22 AM REPRESENTATIVE GARDNER asked whether Version E provides that taxpayers may sell, trade, transfer, or apply tax credits to subsequent years. MS. KLOSTER said no, and added that DOR's intent was to ensure consistency with other insurance tax credit law, and to avoid setting a precedent in statute. 9:13:41 AM REPRESENTATIVE BUCH asked for a brief summary of the bill. 9:14:07 AM MS. KLOSTER summarized that current law allows a 50 percent tax credit for the first $100,000 donation and an 100 percent tax credit for the second $100,000 donation. The proposed bill extends a 50 percent tax credit for over $200,000 in donations, adds a $25,000,000 cap, and allows donations to facilities and programs. 9:14:56 AM CHAIR SEATON removed his objection thus CSHB 367, Version E, was the working document before the committee. 9:15:15 AM REPRESENTATIVE P. WILSON questioned the zero fiscal note attached to the bill. She pointed out that as the proposed legislation allows entities tax credits against their charitable contributions, the state will collect less tax income, and the fiscal note should reflect this loss. 9:15:36 AM MS. KLOSTER directed attention to the fiscal note from DOR. REPRESENTATIVE P. WILSON asked for clarification of the fiscal note. MS. KLOSTER deferred to DOR. 9:16:14 AM ROBYNN WILSON, Income Audit Manager, Tax Division, Department of Revenue (DOR), informed the committee DOR provided a fiscal note dated 3/9/10. She directed attention to the analysis attached to the fiscal note and explained that fiscal notes are indeterminate on credit bills because the department has no way of knowing who may take advantage of the tax credits. The fiscal note indicated that for corporate application, the loss to state revenue may be approximately $200 million, if all corporate taxpayers take the maximum credit allowed by the proposed legislation. In response to Chair Seaton, she added that the $200 million estimate does not include losses from other taxes such as mining license taxes and fish business taxes. 9:18:43 AM REPRESENTATIVE P. WILSON heard corporations are enthusiastic about the bill, and estimated that the loss of income to the state could be $50,000,000. 9:20:11 AM REPRESENTATIVE GARDNER asked whether there is active participation within the existing tax credit structure. MS. WILSON said approximately 15 corporate taxpayers took advantage of the credit during the last fiscal year. Three corporations took advantage of the insurance premiums tax, one corporation for fisheries resource landing tax, and three corporations for fisheries business tax. No corporation taxpayers took advantage of the program for oil and gas production tax, nor for property tax. Ms. Wilson advised the current limit of $150,000 probably causes a corporation that is subject to all three taxes, to direct all of its credit under one tax. 9:22:08 AM REPRESENTATIVE GARDNER requested a list of the claims for the last three years, including the donations and the fiscal impact to the state. MS. WILSON responded in the last fiscal year the total claims for credits were approximately $2,000,000, based on total contributions of $3,000,000. However, that figure does not include possible contributions above the limit for tax credits. 9:23:17 AM CHAIR SEATON concluded $3,000,000 in contributions and $2,100,000 in credits claimed meant corporations took credits up to the current limit of $200,000, although more contributions could have been made, but not reported. MS. WILSON said that is correct, and added that contributions could have been over and above $3,000,000, but the tax return only indicated the $200,000 that generated the credit. 9:24:24 AM REPRESENTATIVE MUNOZ asked for the number of corporate taxpayers in the state. MS. WILSON answered that there are about fifteen thousand corporations, but only one-half pay income tax in the state. REPRESENTATIVE MUNOZ observed from 7,500 corporations, about 11 donors take advantage of the tax credit. MS. WILSON indicated yes, and added that some of these corporations may not be paying taxes due to losses or other reasons. 9:25:24 AM REPRESENTATIVE GARDNER asked whether all of the taxpayers who make donations to the University of Alaska (UA) also receive federal tax relief. MS. WILSON said yes, and continued to say contributions to UA would be subject to the federal charitable contribution deduction and therefore, also qualify for a state income tax benefit. 9:26:09 AM REPRESENTATIVE P. WILSON gave the example of a corporation with taxes of $100,000 that contributes $200,000 to charitable entities. She asked for the difference in income tax due between the example corporation and one with an equal tax liability that makes no charitable contributions. MS. WILSON advised that big corporate taxpayers are often doing business in multiple states and/or countries. If said corporation does 10 percent of its business in Alaska, the state would tax 10 percent of the corporation's federal taxable income. Thus, if a corporation contributes $500,000 to UA, it would deduct $500,000 from its federal tax liability, Alaska would receive 10 percent of the federal taxable income, and the corporation would receive a benefit of its apportioned charitable contributions. In response to Chair Seaton, she estimated that the corporate Alaska taxpayer in the example would receive a deduction for $50,000. However, under current statute, the state allows either the deduction for the charitable contribution, or the tax credit, but not both. Ms. Wilson concluded that for the state's purposes, said corporation would be allowed an $150,000 credit, which comes directly off the state income tax. 9:31:18 AM REPRESENTATIVE P. WILSON asked whether the deduction and the credit would be added together for a total of $200,000. MS. WILSON further explained that for state purposes, the corporation would receive the credit of $150,000, and she assumed the federal tax benefit would be approximately $175,000. 9:32:05 AM CHAIR SEATON confirmed that a corporation in Alaska that does not receive the credit can receive a $50,000 deduction, but not the $50,000 deduction and the $150,000 tax credit. MS. WILSON said correct. 9:32:39 AM REPRESENTATIVE P. WILSON re-stated her question as to the difference in taxes between a corporation that participates and one that does not, in order to determine the incentive for participation, and to determine the impact to the state in lost revenue. 9:33:50 AM REPRESENTATIVE MUNOZ estimated the corporate tax liability to the state in the example was 10 percent, or $50,000. MS. WILSON clarified that her reference was to apportionment in a multistate environment. She changed her example to that of a corporation operating only in Alaska, and said that an Alaskan corporation, at the top of the tax bracket, that makes a charitable contribution to UA could enjoy a 9.4 percent tax break. The corporation then would have a choice of whether to take the tax deduction or the proposed tax credit: a tax deduction of about $18,000, or a tax credit of $150,000. Ms. Wilson provided a personal tax liability example of the difference between a mortgage interest deduction and a childcare expense tax credit; in fact, it is "always a higher benefit to look at a credit, than a deduction." 9:36:11 AM CHAIR SEATON proposed the scenario of a corporation that contributed to the construction of a $10,000,000 vocational center. MS. WILSON advised the bill would provide a 50 percent rate on the incremental, additional contribution equal to a tax credit of $5,000,000, compared to a deduction that would equal about $940,000. CHAIR SEATON observed the benefit would result in a $10,000,000 building that a corporation could build for a $5,000,000 investment. 9:38:08 AM REPRESENTATIVE P. WILSON opined the difference between a liability of $940,000 and $4,000,000 would be an incentive for corporations. CHAIR SEATON affirmed that the proposed bill provides an incentive for corporations to make large contributions to educational institutions. In fact, a corporation could build a needed facility "from out of their corporate pocket, instead of the state bonding, or the state ... building the building for 100 percent.... Do we want to provide that kind of incentive ... for that kind of response from corporations?" 9:39:50 AM REPRESENTATIVE P. WILSON asked whether a group affiliated with a university, such as a foundation, could contribute to UA and pay "half of what they normally would pay." She again expressed concern about the possible loss of state revenue. 9:40:47 AM MS. WILSON expressed her understanding that the University of Alaska Foundation was a tax exempt organization. REPRESENTATIVE P. WILSON acknowledged the proposed legislation would be beneficial to universities; however, she questioned the impact of the legislation on the general fund. 9:41:49 AM REPRESENTATIVE GARDNER re-stated her interest in the impact of tax credits that have been granted under legislation in previous years. CHAIR SEATON pointed out that many contributions are limited by the $200,000 cap. He disagreed with a policy that allows taxpayers to direct where their taxes are credited, which is the effect of an 100 percent tax credit. Chair Seaton then asked for confirmation on whether a corporation that was currently receiving tax credits for the exploration and development of oil and gas, would qualify for additional credits under the proposed bill. 9:44:19 AM MS. WILSON clarified that the current statute provides for an overall credit maximum of $150,000. As most of the oil and gas related taxpayers are subject to income tax, production tax, and property tax, these corporations have a choice of where to apply the $150,000 tax credit. Most, for the sake of convenience, apply the tax credit to income tax. Further, the statutes do not direct how credits would be applied. 9:45:35 AM CHAIR SEATON called attention to page 3, lines 14-15, which read: (2) when combined with contributions that are the  basis for credits taken during the taxpayer's tax year under AS 21.89.075, AS 43.20.014, AS 43.55.019, AS 43.56.018, AS 43.65.018, AS 43.75.018, or AS 43.77.045, result in the total amount of credits  exceeding $25,000,000 [EXCEED $150,000]. MS. WILSON explained that the above section does not address credits, but provides that notwithstanding all of the taxes that apply to an entity, the maximum tax credit allowable is $150,000. 9:46:58 AM CHAIR SEATON noted that Version E of the bill raised the limit on tax credits to $25,000,000 and asked whether an oil company that receives $100,000,000 in oil production tax credits, would be allowed to receive additional tax credits for contributions to educational organizations. MS. WILSON began another example . . . 9:48:14 AM CHAIR SEATON returned attention to page 3, lines 14-17, and asked: Doesn't that mean that the total amount of credits that they can get from all of these combined is $25,000,000 for a year, and you can't take this education one ... when combined with the contributions for these others? 9:49:12 AM MS. WILSON, in response to Chair Seaton, agreed to provide the committee a written explanation of this section. She advised that these tax sections of the bill refer only to the education credits; for example, AS 21.89.070 would be the education tax credit applicable to the insurance tax. Thus the sections do not address any other sort of credit, such as exploration credits, but only establish a limit on education credits at $25,000,000. 9:50:13 AM CHAIR SEATON said a further explanation in writing was not necessary. 9:50:23 AM REPRESENTATIVE P. WILSON concluded that a petroleum corporation could apply other tax credits, and then contribute to an education entity and qualify for education tax credits of up to $25,000,000. MS. WILSON said yes, and added that a corporation with sufficient tax liability could apply other credits; in fact, the Alaska statute is largely silent with respect to the order of credits. An exception is the gas development credit, which must be applied first, due to carry-forward provisions. CHAIR SEATON requested that Ms. Wilson provide a memo regarding the order of credits and the effect of carry- forward provisions. 9:53:06 AM The committee took an at-ease from 9:53 a.m. to 9:54 a.m. 9:54:39 AM REPRESENTATIVE P. WILSON also requested advice from DOR on how to limit the scope of the tax credit provisions. 9:55:47 AM CHAIR SEATON further requested a spreadsheet depicting the effects of the bill on hypothetical taxpayers with a tax liability of $5,000,000. MS. WILSON expressed her understanding that the requested scenario depicts a $5,000,000 tax liability over and above the current $200,000. 9:56:29 AM REPRESENTATIVE SEATON modified the scenario to a maximum of $25,000,000. MS. WILSON clarified that the contribution of the hypothetical taxpayers would be $50,000,000, so that the tax credit is maximized, and the scenario addresses the maximum impact to state revenues. 9:56:56 AM REPRESENTATIVE MUNOZ spoke about the perception that 7,500 corporate taxpayers would take advantage of the proposed tax credits and opined that is not realistic, given that only 11 participate now. She expressed her belief that the committee should focus on whether the state should have a policy to encourage private investment into the infrastructure of the state. Representative Munoz said that although she was not opposed to the committee's discussion on the financial impact of the bill, she pointed out that the financial details of the bill are the purview of the House Finance Committee. 9:57:58 AM CHAIR SEATON stated that understanding the bill was necessary to make informed policy. 9:58:14 AM REPRESENTATIVE GARDNER requested a list of the participating taxpayers, the amounts of their claimed donations, and the tax impact to the state for the past three years. MS. WILSON, in response to Chair Seaton, affirmed that the names of the taxpayers cannot be disclosed and details of taxpayers' returns may not be provided. 9:59:41 AM REPRESENTATIVE GARDNER questioned whether someone could claim a tax credit for a donation to a non-profit without disclosure. 9:59:58 AM MS. WILSON confirmed that DOR cannot disclose that information, but she was unsure whether the recipient organization may. REPRESENTATIVE GARDNER limited her request to the total amount of donations made and claimed, and the tax benefits thereof. MS. WILSON agreed. 10:00:52 AM CHAIR SEATON stated that HB 367 was held over. 10:01:01 AM