HOUSE BILL NO. 490 "An Act relating to insurance premium taxes." JAMES HORNADAY, STAFF, REPRESENTATIVE PETE KOTT testified in support of HB 490. He explained that Representative Kott sponsored the legislation by request. The legislation exempts premiums paid by employers who participate in the Public Employees' Retirement System (PERS) or in the Teachers' Retirement System (TRS) and premiums paid under contracts purchased under AS 39.30 from the tax levied on insurers in AS 21.09.310. He maintained that the legislation would encourage participation in these programs and assist individual employees. REPRESENTATIVE JOE RYAN addressed section 3. He noted that the state of Alaska charges a 2.7 percent yearly premium tax. No premiums are written in Alaska with a value of $100 hundred thousand dollars or more. There are approximately 12,000 premiums written offshore. Insurance polices are written for $500 million to several billion dollars with premiums as high as $200 million dollars a year. The principle is put into a trust for the beneficiary at the death of the policyholder. This is considered a gift. The 55 percent state tax is not applicable on the trust. He noted that the legislation would allow Alaska to be competitive by reducing the premium tax on policies greater than $100 thousand dollars a year to one-tenth of one percent. He noted that offshore jurisdictions have no premium tax. JERRY REINWAND, LOBBYIST, BLUE CROSS BLUE SHIELD, JUNEAU explained in response to a question by Representative Kelly, that the basic question is whether public entities should be subject to the tax. He noted that the state of Washington passed legislation in 1994, which raised their tax to 2 percent. The retaliatory tax was implemented in response to the state of Washington's tax. The state of Alaska exempted itself from the tax. The statute remained silent in regards to the University of Alaska. He believes that the University is a state entity and is covered by the exemption. He questioned if school districts and municipalities would fall under the law. He noted that there would be a loss in revenue from the repeal of the retaliatory tax. He noted that Blue Cross is the only company that is subject to the retaliatory tax, since it is the only company that sells insurance in the state of Washington and the state of Alaska. He estimated that the loss in income would be $250 thousand dollars. Co-Chair Therriault expressed concern that another state's legislature is impacting the premiums charged in the state of Alaska. Mr. Reinwand noted that there is a question in regards to the state's taxing authority and taxing of political subdivisions. Representative Martin asked if the law should be repealed. Representative Ryan noted that there are no Alaskan based health insurance companies. Representative Davies referred to page 2, line 16. He questioned if other taxation issues would be affected by the change from section to chapter. Co-Chair Therriault noted that both the retaliatory and premium taxes would be affected. He stated that he would offer an amendment to make reference specifically to the retaliatory section AS 21.09.027. Representative Ryan noted that New York Life recently sold NYLCare. New York Life is considering opening a full owned subsidiary in Alaska to sell life insurance. Co-Chair Therriault noted that section 3 pertains to the retaliatory tax. He observed that there are municipalities and school districts that would benefit from sections 1 and 2. ED LINGUIST, ANCHORAGE SCHOOL DISTRICT, ANCHORAGE spoke in support of the legislation. He noted that the District is paying the retaliatory tax. Each employee pays approximately $120 dollars a year. He observed that state employees do not have to pay the tax. BARBARA HUFF TUCKNESS, TEAMSTERS UNION spoke in support of HB 490. She noted that teamster members working for the Anchorage School District would be impacted by the legislation. In response to a question by Representative Martin, Ms. Huff explained that the tax is charged based on the company's place of domicile. MARIANNE BURKE, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT spoke in support of the legislation. She observed that there is an exemption for the state of Alaska and insurance purchased under Title 9. She observed that there are differing attorney general decisions regarding whom is covered under Title 9. Some governmental entities and political subdivisions are paying premium tax. The premium tax is 2.7 percent charged on the gross. She stressed that it is difficult to enforce. An attempt has been made to identify who would qualify. Some political subdivisions cannot afford to belong to PERS. She noted that the state of Washington changed the tax on companies headquartered in that state. As a result the premiums collected under Washington law was higher. The retaliatory tax was created to protect health insurance companies headquarter in Alaska. She noted that there are no health insurance companies domiciled in Alaska. Premiums collected in the state of Alaska were approximately $1 million dollars in 1995. Blue Cross is the only company affected since it is the only carrier domiciled in the state of Washington that is doing business in Alaska. She noted that Aetna is domiciled in the state of Connecticut. Blue Cross is at a competitive disadvantage. She urged the Committee to identify the definition of political subdivision. Co-Chair Therriault questioned if the retaliatory tax should be repealed. Ms. Burke noted that if a company was domiciled in Alaska that the retaliatory tax may need to be revisited. In response to a question by Representative Martin, Ms. Burke stated that any change would have to be initiated by the state of Alaska. She emphasized that the "playing field" is uneven and stated that the appropriate place to address the problem is in the Alaskan legislature. Representative Mulder asked the fiscal cost of sections 1 and 3. Ms. Burke noted that the fiscal impact for sections 1 and 3 is unknown. The 2.65 million-dollar fiscal note only pertains to section 2. She explained that some governmental entities are being taxed that were not intended to be taxed. She suggested that the tax be evenly applied. She pointed out that there is no data to quantify the amount of retaliatory tax being collected on school districts, municipalities, REAA's and other political subdivisions. The fiscal note is based on attached assumptions. (Tape Change, HFC 98 - 153, Side 2) Ms. Burke explained that the retaliatory tax was first collected in 1996. Blue Cross filed for a refund based on the ambiguity of the law. The refund is still pending. Representative Davies questioned if political subdivision needs to be clarified. Ms. Burke observed that political subdivision is defined in AS 01.10.060. However, it includes municipalities but not boroughs and school districts. Case law has held that boroughs and school districts are political subdivisions. Ms. Burke noted that it is questionable if the Public Employees Retirement System (PERS) is a political subdivision. Representative Davies asked if employers that participate in PERS and TRS would be exempt under this section. Ms. Burke expressed concern that their exemption would lead other entities to request exemptions. She noted that there are governmental entities that are not included under PERS and TRS. In response to a question by Representative Davies, Ms. Burke noted that AS 39.30 is the statute that exempts the state of Alaska from collecting premium tax on itself. Representative Davies questioned if the intent is to exempt political subdivisions. Ms. Burke suggested that political subdivisions include a city, municipality, borough, public school district, Rural Education Attendance Area (REAA), public school, university or community college. Representative Davies noted that "municipality" is defined under AS 29.71.800 as a political subdivision incorporated under state law. Co-Chair Therriault suggested that the Committee not try to distinguish between the municipality of Anchorage and the Parking Authority in regards to the exemption. He thought that the retaliatory tax should be repealed. He emphasized that the decision of charging a premium tax on political subdivisions and the definition of political subdivision should be held for further discussion. He noted that sections 1 and 3, which would reduce tax on life insurance policies could be positive for the state of Alaska. Co-Chair Therriault proposed that section 2 be deleted and a new section be added to repeal AS 21.09.270. Representative Davies suggested that the retaliatory tax in section 2 would be beneficial if an Alaskan insurance business were in operation. Co-Chair Therriault noted that the retaliatory tax has been in existence since 1966. There have been no Alaskan insurance companies during this time. In response to a question by Co-Chair Therriault, Ms. Burke explained that sections 1 and 3 would attract policies written in the state of Alaska. The insurance companies do not have to be domiciled in Alaska. Representative Davies noted that Blue Cross has already paid the retaliatory tax. Ms. Burke observed that Blue Cross is one of the largest insurance writers for municipalities, boroughs, and school districts. She observed that the state of Alaska pays and collects the tax for these political subdivisions. Co-Chair Therriault noted that other private businesses and individuals are also paying the retaliatory tax. He questioned the cost to the State of repealing the tax. Ms. Burke observed that Blue Cross pays approximately $1 million dollars a year. She observed that Blue Cross requested the legislation. The Division of Insurance agrees that the retaliatory tax is unfair. Co-Chair Therriault MOVED to delete section 2 and add a section repealing AS 21.09.270. There being NO OBJECTION, it was so ordered. He noted that there would be a revised fiscal note. Representative Mulder MOVED to report CSHB 490 (FIN) out of Committee with the accompanying fiscal note. Co-Chair Therriault clarified that the immediate effective date would remain. There being NO OBJECTION, it was so ordered. CSHB 490 (FIN) was REPORTED out of Committee with "no recommendation" and with a fiscal impact note by the Department of Commerce and Economic Development.