HOUSE BILL NO. 293 An Act levying and collecting a state sales and use tax; and providing for an effective date. BRUCE JOHNSON, UTAH STATE TAX COMMISSIONER, observed that he is the Co-Chair of the Implementing Group of the Streamlined State Sales Tax group and provided information on the issue. He stated that whether a sales tax was adopted was an individual state policy, but encouraged the streamlined sales tax system. He discussed his experience advising businesses on local sales tax provisions. He gave the example of a sales tax provision in New York State that made a single item either taxed or exempt at the discretion of a retailer. He explained that the streamlined sales tax system unified state definitions, making regulations consistent throughout the country. He expressed his belief that the streamlined system was beneficial. He speculated that the number of returns filed would be reduced, and that software services would be available to help states. He also maintained that the system was beneficial to local retailers, since they were otherwise at a disadvantage to retailers outside the state selling electronically. He maintained that this system created a level playing field for local merchants. He also stated that the system would ensure that the tax would remain a viable revenue source in the future. He concluded that the streamlined sales tax was the best system to choose. Representative Kerttula asked whether he had experienced other states, which had never had a sales tax, but rather a number of non-uniform taxes across the state. Mr. Johnson noted that Colorado, Alabama and Arizona have local administration of sales tax, where local governments collect their own tax and in some cases the tax base is not the same as for the state. He has also practiced in Colorado, which had different exemptions at a state and municipal level. He stressed that while the local governments maintained local rule, since they believed it was superior, that it was a difficult situation for businesses. He felt that this led to the Supreme Court's ruling, which required physical presences in a state before a sales tax could be collected. He stated that there was no state with situations exactly like Alaska, but noted other states were working with the problem. He reiterated the benefits of the system. Representative Kerttula asked whether the exemptions or their definitions must be uniform among the states. Mr. Johnson clarified that a state may choose their own exemptions, but that the definitions of exemptions would be uniform. Mr. Persily asked whether, under the streamlined program, there would be prohibition in a municipality against an excise tax, such as bed tax, car rental tax. Mr. Johnson stated that there would not be. He noted that in Utah, the state retained the right for excise taxes. Co-Chair Williams asked what was required to pass the system into law. Mr. Johnson noted that the system would come into effect when ten states were participating, but would still be voluntary for merchandisers that did not have a physical presence in the state. For it to be mandatory, Congress would have to take action. Co-Chair Williams asked how exemptions were decided. Mr. Johnson responded that Utah made the minimum conforming decisions, keeping in place their previous exemptions, but fine-tuning the system to be in conformation with the unified definitions. He pointed out that Alaska faced a more daunting task. He concluded that the intent was not for a uniform task, but to make the tax uniformly convenient. Representative Hawker asked for clarification that the statewide sales tax system did not have dominion over local decisions. Mr. Persily confirmed that the system did not prohibit existing or new excise taxes in municipalities. He pointed out that if a municipality desired to tax an item that was exempt statewide, they would simply adopt an excise tax. Vice-Chair Meyer asked whether a bed or car rental tax would be left up to municipalities. Mr. Persily pointed out that those cities with current excise taxes, but that under the bill, the State would also implement its use tax in addition to those taxes. Vice-Chair Meyer clarified if the State could implement a statewide excise tax. Mr. Persily confirmed that this was true. Co-Chair Williams called a Committee Recess at 2:01 PM. TAPE HFC 03 - 93, Side A  Co-Chair Williams reconvened the meeting at 9:30 PM. JOHN MACKINNON, DEPUTY COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES provided information on the motor fuel tax provision of HB 293. The current .08-cent a gallon would be raised to .20 cents per gallon. The current .08-cent per gallon tax raises approximately $29 million dollars a year. The increase would generate an additional $41 million dollars. He noted that the total raised by the highway user fee would be approximately $70 million. The Department of Transportation and Public Facilities currently spends $60 million in highway maintenance and an additional $50 million in federal match for highway construction, which all comes from the General Fund. He noted that 38 states would still have a higher fuel tax than Alaska. The national average is about .20 cents per gallon. KEVIN RITCHIE, ALASKA MUNICIPAL LEAGUE provided information. He noted that a group of municipal officials had met with the Governor and offered suggestions, which were subsequently acted upon to lesson the impact on municipalities. He stated that the rewritten bill was then reviewed, and a few concerns were raised. The first objection was to the exemption of sales tax on marine and motor fuel. He pointed out that currently municipalities tax marine and motor fuel, equaling millions of dollars for municipalities. He stated that the exemption was problematic. The second issue is the concern raised by the cap. He explained that a number of municipalities had a variety of caps, put in place to encourage local business in that particular community. He noted that there was talk of considering a lower cap, which was then broadened. He noted that in car sales, the amount of sales tax might effect where cars are purchased. JOANNE ROOMSBERG, JUNEAU SALES TAX ADMINISTRATOR, JUNEAU, spoke in response to a question by Representative Hawker. She explained that presently Juneau has a fuel flowage fee that is charged at the municipal airport. Aviation fuel is exempt from the city's general sales tax. She stated her understanding that the bill would allow Juneau to continue to implement a fuel excise tax. Mr. Ritchie pointed out that Tom Boedeker was the Committee Chair in the working group that had raised concern about the effect on fuel taxes. In response to a question by Representative Berkowitz, Ms. Roomsberg stated that a non-resident exemption card could be purchased for a cost of $20 dollars. The card is good for a year. This allows the purchase of items that would be used and consumed outside of the city and borough of Juneau. It would not qualify for items that would be used or consumed in Juneau, such as a car rental or hotel room. Tangible personal property can be brought into the city for work or service, such as service on a car. Co-Chair Harris asked about the position of communities in support of a statewide sales tax. He asked what kind of relief was necessary to garner acceptance from municipalities. Mr. Ritchie referred to testimony in Senate Finance, revolving around conflicts foreseen by municipalities. He pointed out that at this time not all of the conflicts were apparent. He noted that even in cases when communities were not in favor, they had suggestions for making it workable. Co-Chair Harris asked whether the Alaska Municipal League foresaw a "roadblock" to working with the sales tax. Mr. Ritchie maintained that they did not have a history of blocking legislation. Co-Chair Harris observed that it would be helpful for the Municipal League to help gather support for the tax. Mr. Ritchie pointed out that the organization was committed to helping meet the budget gap. He stated that the Board had directed him to work with the Legislature to resolve issues surrounding the tax. Representative Berkowitz asked if the Administration had reviewed other states with overlapping taxes. Mr. Ritchie observed that Alaska was unique in its taxation, as the only state with a municipal power to tax sales without a state sales tax. Representative Kerttula asked about the level of drop in revenue sharing. Mr. Ritchie responded that in the past three years it had remained level, and now it had gone down by 25%. Municipalities received $40 million in 1986 as compared to the current $20 million. Representative Kerttula asked how many municipalities had raised their sales tax in the last couple of years. Mr. Ritchie thought that three or four municipalities had raised their sales tax including Dillingham, and Seward. Representative Kerttula asked how many communities were at the cap for property tax, with a fairly high sales tax as well. Mr. Ritchie observed that there is a statutory cap of 30 mils. Different communities have revenue caps. Petersburg has a 10-mil property cap, which they are at. Juneau has a cap of 12 mils, and is currently at 11 mils. In response to a question by Representative Kerttula, Mr. Ritchie noted that the state assessor could provide a list of property tax caps. Representative Kerttula asked about the range of exemptions. The city and borough of Juneau has 37 exemptions. Mr. Ritchie referred to a list of exemptions provided in 1999, which lays out most of the exemptions. Representative Kerttula asked if there had been a study on the impacts on Juneau of a tax such as that contained in the Committee Substitute. Ms. Roomsberg stated that Juneau has the difference in the exemptions and the tax base, which would make it difficult to evaluate the tax impact. She noted that several aspects of the tax must be more clearly defined before a more comprehensive study could occur: the exemptions, incidents and tax base. Vice-Chair Meyer asked how to rate the three major sources of revenue, which are before the Legislature: sales tax, [capping the] permanent fund dividend, and income tax. He observed that a sales tax and a state income tax would take disposable income out of the economy, but pointed out that capping permanent fund dividend would also keep money out of the economy. He questioned Anchorage's position. Mr. Ritchie referred to a poll by the Southeast Alaska Municipal and Business Conference and noted that, as of 2:30 on 5/14/03, eight municipalities were in favor and 48 were opposed to the proposed sales tax. Members were asked to list the least objectionable revenue stream: 30 permanent fund earnings, 25 income tax, and 2 sales. Representative Hawker asked if municipal revenue sharing would be increased or decreased as a result of the bill. Mr. Ritchie noted that the bill allows the state to appropriate 6 cents of the gas tax increase to road revenue sharing, which would raise revenue sharing by approximately $18 million. He observed that this year's reduction to revenue sharing was $7 - $8 million. Representative Hawker concluded that the legislation would increase revenue sharing by a multiple of the current reduction. He asked the level of property tax caps in communities relying solely on property tax. Mr. Ritchie thought that those communities relying solely on property tax had rates of 18 to 20 percent. Juneau is at 11.5 - 12 mils. ROD PECK, PRESIDENT ALASKA TRAVEL INDUSTRY ASSOCIATION testified in support of the bill. He stated that his organization represented small businesses in Alaska. He stated that tourists spent 1.8 billion on visitor related activities. His industry recognizes the fiscal gap challenges that the legislature faces, but faces its own challenges. He observed that there was a reduction of visitors to the state. He anticipated a further drop of 10 20 percent drop in visitors. He suggested that a revitalized marketing program would turn around the trend. He stated support of the bill, if amended to include a tourism tax revenues to bolster the existing state marketing program. He presented the committee with amendment language, which would identify tourism tax revenue by tracking industries contributing to a marketing program. Vice-Chair Meyer asked how much revenue was estimated as a result of the amendment. Mr. Peck observed that their research indicates that, of the $1.8 billion, they can identify $920 million in activities over an annualized period. Vice-Chair Meyer observed that the car rental tax bill contained a clause to reappropriate funds to the tourism industry. Mr. Peck stated that his industry was opposed to targeted taxes, and believed that this was the fairest tax since it was industry wide. Representative Kerttula asked about the nature of the contract with Alaska Travel Industry Association (ATIA). Mr. Peck observed that ATIA is in the third year of a three-year plan that would continue into perpetuity. They have a $10 million budget, of which $4 million was in contribution from the state and $6 million is from matching private funds. The budget in year one and two was $8.5 and $7 million, with a greater percentage coming from the state. Representative Hawker observed that the proposed amendment would deprive the State of the tax from an entire sector of the economy. Mr. Peck stated that this was not true, since the industry generates $1.8 billion. He stated that the amendment targets segments of activities in the area of $900 million. Representative Hawker summarized that the proposal by ATIA would deprive the state of revenue from a sub sector of the economy, which would benefit solely from revenues collected from within it. Mr. Peck pointed out that not all gift shops would contribute due to a definition of seasonality, but acknowledged the conclusion. Representative Hawker asked if the amendment was acceptable to the industry, and questioned why they had not formed a trade association and self- assessed for the same efforts. Representative Berkowitz speculated that problems attendant to tourism marketing also impeded work in this area. Mr. Peck confirmed that it was difficult to reach industry consensus. In response to a question by Representative Kerttula, Mr. Peck confirmed that there were a variety of excise taxes in the industry. Co-Chair Williams stated that a committee substitute would be available at the next Committee meeting. HB 293 was heard and HELD in Committee for further consideration.