HOUSE BILL NO. 397 "An Act relating to the seafood marketing assessment; and providing for an effective date." Co-Chair Hanley provided members with a spreadsheet detailing Education Credits claimed in FY 94 and FY 95 prepared by the Department of Revenue on HB 397 (Attachment 2). He noted that an amendment was provided by Representative Brown to include the Winn Brindle Scholarship in HB 397 (Attachment 3). 5 NEIL SLOTNICK, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW explained Amendment 1, Attachment 3. He observed that Amendment 1 corrects an oversight. The amendment would incorporate the Winn Brindle Scholarship into the Landing Tax credit. Co-Chair Hanley noted that Amendment 1 would make the credits equal. Mr. Slotnick noted that the two taxes have a compensatory tax doctrine. The legislation would eliminate arguments by tax payers of discrimination. Co-Chair Hanley asked when the Winn Brindle Scholarship was added. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE noted that the Winn Brindle Scholarship was added to the Fisheries Business Tax in 198. The credit against the Fisheries Business Tax for the Winn Brindle Scholarship was $446.0 thousand dollars in FY 95. He noted that $39 million dollars was collected for the Fisheries Business Tax. The tax credit is limited to 5 percent of liability. Co-Chair Hanley summarized that the revenue loss would be approximately $51.0 thousand dollars for the Education Credit and $80.0 thousand dollars for the Scholarship Fund. Representative Navarre asked if the calculation considers what percentage is available for deduction that the tax credit has not previously been used against. Mr. Bartholomew explained that each individual tax payer under the education credit is going to have a cap of $150.0 thousand dollars that can be taken against any of six taxes. The Division looked at which tax payers had contributed to the Education Credit under the corporate tax and the Fisheries Business Tax. He observed that there is not a lot of duplication. A new series of taxpayers will be eligible by adding the Education Credit to the Fish Landing Tax. Those that have already taken the maximum credit would not be affected. The first $100.0 thousand dollars is subject to the 50/50 split. The majority of tax payers who work in off shore fisheries are not based in Alaska. (Tape Change, HFC 96-44, Side 2) In response to a question by Representative Navarre, Mr. Bartholomew explained that businesses that are organized as taxable corporations would be subject to the corporate income tax. Companies not based in Alaska pay corporate income tax based on an apportionment. A formula based on the amount of wages, sales and property in Alaska is used to 6 allocate income and pay taxes. There are 4,000 corporations that are registered as S Corporations for tax purposes and are not subject to state or federal corporate income tax. Mr. Bartholomew explained that $7.0 million was collected in FY 95 for the Landing Tax. Seven thousand of this amount went to the Alaska Seafood Marketing Institute (ASMI). He observed that HB 397 would align the Fisheries Business Tax to the Fisheries Resource Landing Tax. Co-Chair Hanley summarized that after the reduction for the Alaska Seafood Marketing Institute the 50/50 split would be $3.15 million dollars each. All the credits come out of the $3.15 million dollars that goes to the State. If there is a million dollars worth of credits the State would receive $2.15 million dollars. Representative Brown noted that the State spends between $62.0 and $100.0 thousand dollars a year to administer the program. She suggested that the cost be spread to the municipalities which are receiving part of the benefit. She asked what the State would receive in offsetting revenue if local governments pick up their share of the administrative costs. Mr. Bartholomew replied that wording could be added to clarify that the State and local governments would share the amount less the allocated costs of administrating the tax program. The State would receive back the local government share of $100.0 thousand dollars. He noted that more than 90 percent of the shared taxes relate to fishery programs. Representative Brown stated that she would prefer to eliminate the credit. Co-Chair Hanley summarized that Representative Brown would like to not adopt the amendment and eliminate the education credit. Representative Brown added that the credits would have to be eliminated for the Fisheries Resource Landing Tax and the Fisheries Business Tax. Co-Chair Hanley noted that there would be a $596.6 thousand dollar decrease to the institutions that are receiving the credits and a $596.6 thousand dollar increase to the State. Mr. Slotnick noted that the Education Credit and/or the Winn Brindle Scholarship Credit could be retained as long as they are in or out of both the Fisheries Resource Landing Tax and the Fisheries Business Tax. Representative Martin asked if the share amount given to ASMI could be used to provide their state match. DWAYNE PEEPLES, ADMINISTRATIVE OFFICER, ALASKA SEAFOOD MARKETING INSTITUTE testified that ASMI receives three sources of revenues, assessments against the processors, assessments against fishermen and a federal grant matched by state general funds. He observed that currently the state 7 match is currently made with general fund dollars. He stated that these funds are program receipts and could be used for the federal match. He added that the ASMI Board of Directors is presenting a plan to phase out the state match over the next few years. He requested that ASMI's state match be held harmless in FY 96. He noted that the price of salmon is currently low. Representative Brown asked if the program would be revenue neutral if both the credits and administrative costs were taken off the top. Representative Grussendorf spoke in support of maintaining the Educational Tax Credit. Co-Chair Hanley observed that when the credit was allowed against the Fisheries Resource Landing Tax it was not understood that the Fisheries Business Tax needed to be treated equally. He stated that the credits could be continued in both programs with the administrative costs taken from both portions. Representative Navarre suggested that unless the State is able to choose which taxes the credit is applied against a shifting would occur from what the credit is counted against toward taxes that are not shared with municipalities. This would minimize the impact on municipalities. Representative Navarre suggested the Committee address all taxes collected in which the administrative costs are not charged. He observed that municipalities receive a significant benefit from taxes collected by the State. Co-Chair Hanley clarified that the corporate net income tax is a pure state revenue which is not shared. Representative Navarre observed that companies can take the credit against any tax they want. He suggested that municipalities would encourage businesses to take the tax against the corporate tax. Representative Navarre suggested that the House Finance Committee draft a bill to address the whole issue. He noted that HB 397 corrects an immediate legal problem. He spoke in support of passage of HB 397. Representative Austerman urged the Committee to pass HB 397 from Committee. He recommended that all taxes collected by the State for municipalities be addressed in separate legislation at another time. Representative Navarre MOVED to adopt Amendment 1. There being NO OBJECTION, it was so ordered. Representative Brown pointed out that a new fiscal note is 8 needed to show the negative impact on the General Fund. Co- Chair Hanley noted that a Department of Revenue fiscal note should show a negative $130.0 thousand dollar impact on the General Fund. Representative Navarre estimated that $130.0 thousand dollars is overstated. Representative Brown observed that use of the tax credit has increased. She expressed concern that the tax credit is unconstitutional because of the provision against public support for private education. She asked that the House Finance Committee consider legislation to require the administrative cost of all shared taxes be taken from both the state and local share. Representative Mulder asked for a legal opinion regarding the constitutionality of the Educational Tax Credit. Members discussed which taxes should be identified in a proposed House Finance Committee bill. Representative Navarre suggested that all shared taxes should have the administrative cost taken off the top before they are shared. He suggested that the amount could be graduated over a period of years. Mr. Bartholomew clarified that $130.0 thousand dollars is what it costs to administrate the sharing of the collected tax. Additional costs are associated with collection and processing. The total cost of administrating the tax programs would be more than $130.0 thousand dollars. Representative Navarre pointed out that some taxes collected by the state pass 100 percent back to municipalities. He added that the majority of the increase in tax credits were in Corporate Net Income and Insurance Premium Tax. He stressed that the impact of HB 397 would be negligible. Representative Navarre MOVED to report CSSSHB 397 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Co-Chair Hanley directed Mr. Bartholomew to provide the Committee with draft legislation which would take the administrative cost of share programs off the top of the collected tax before sharing. Representative Brown recommended that if the amount is significant the Committee consider a phase-in approach. Mr. Bartholomew observed that the cost of collection of the Fisheries Business Tax is several hundred thousand dollars. He stated that the Division would prepare a spread sheet listing options for the Committee. Mr. Bartholomew noted that the Community Development Quota 9 (CDQ) is the only other credit allowed. Co-Chair Hanley asked that a spreadsheet be developed to show CDQ's. He also asked that the spreadsheet identify which taxes are shared.