HB 169 - WELFARE TO WORK TAX CREDITS Number 0963 CHAIRMAN BUNDE announced the next item on the agenda was HB 169, "An Act relating to welfare to work tax credits under the Alaska Net Income Tax Act; and providing for an effective date." Number 0967 JIM NORDLUND, Director, Division of Public Assistance, Department of Health and Social Services, stated that his division has a large responsibility to do in finding work opportunities for 4,000 individuals in the upcoming year. The division sees HB 169 as one of several tools which can be used to give employers the incentive to hire welfare recipients. This piece of legislation has had input from the Department of Revenue (DOR), Department of Law (DOL) and the Department of Administration. MR. NORDLUND explained that HB 169 targets welfare recipients and disadvantaged workers which include disabled persons receiving vocational rehabilitation, veterans receiving public assistance and ex-felons who are in low income families. The bill would assist recipients in finding work opportunities. The Anchorage Chamber of Commerce, the Alaska Chamber of Commerce, large and small employers have been approached about this type of legislation and those groups were all supportive of a tax credit. They see HB 169 as a measure which would provide some incentive for them to hire recipients. Number 1069 MR. NORDLUND commented that HB 169 piggybacks on the federal tax credit bill. This will assist employers with the administrative burden of applying for the credit. It is a relatively simple procedure to extend the credit that they would be getting on their federal income tax and apply it to their state income tax. He said HB 169 will have some state treasury costs, but it will yield greater benefits in terms of getting welfare recipients employed and off public assistance. Number 1118 JOSEPH FRIEDMAN, Director, Trade Dollar Exchange, testified next via teleconference from Anchorage. He was in support of HB 169 as it is an excellent opportunity to provide corporations with a tax credit and an incentive to participate in welfare to work issues. He said the Trade Dollar Exchange is a private industry initiative to involve small businesses in welfare to work programs. The Trade Dollar Exchange uses a system of bartering under the Tax Equity and Fiscal Responsibility Act of 1982. This act essentially says that if a business trades or barters, the income on their tax returns is tax deductible when spent on business expenses. Coupled with the federal work opportunities tax credit, this would provide a tremendous opportunity for the exchange to encourage businesses to be involved in hiring people going from welfare to work. He stated that there is a large number of workers who do not have the skills to compete at the current level of participation in the job market. He proposed an amendment which would provide a disregard for the Trade Dollar Exchange currency as it affects the earned income status for people receiving a cash benefit through the department. Number 1258 ANGELA SALERNO, Executive Director, National Association of Social Workers of Alaska (NASW), said that she was formerly employed as a job developer. She worked in the private sector for a company that contracted for Job Training Partnership Act dollars (JTPA) and, as a result, has some experience in the use of tax incentives as a way to assist candidates seeking work. This will help people get off welfare and into a work situation. The company used the Targeted Job Tax Credit, the federal tax credit. As a job developer it was advantageous for her to walk into an employer's office and state that not only is the candidate well-trained, but here is a tangible financial incentive. This incentive often shifted the balance for the employers because the candidate did not always appear to be the best candidate. She felt this would be the case for many of the people who need to placed into work situation. These people may have less experience, a checkered job history or something else. This incentive might be the needed impetus for that employer to hire this employee. MS. SALERNO explained that the employee would need to be on the job for a full six months before the employer received this incentive. This type of incentive will work. It is one of the few things that the state is doing to actually help welfare recipients find work. Number 1361 REPRESENTATIVE VEZEY asked if the state was subsidizing the cost of having an employee. He stated that this is not a substitute for creating jobs. Employers are not going to manufacture jobs in order to get 15 percent of what they spend. Number 1396 MS. SALERNO agreed and said HB 169 doesn't address this issue at all. This bill is going at the problem from a different angle. A financial incentive is another way to shift the balance to someone who may have a deficit in their ability find work. Number 1433 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, stated that the bigger spectrum was taken into consideration when developing the welfare to work tax credit. There are four or five bills in the legislature this year to try to do what Representative Vezey suggested, creating new jobs. He mentioned HB 63 and another small business tax credit as attempts to create these new jobs. Other bills tried to look at the other angle, HB 169 was meant to be one of many tools. Number 1487 MR. BARTHOLOMEW stated that the potential loss would be $1 million based on trying to put an estimated 880 people to work. The other component of HB 169 is that the state adopts the federal work incentive bill. This bill repeals the federal program in order to adopt a state program. Under the current tax, if an employee is hired in another state, employers can get tax credits off the Alaska tax. Business apportion their credit to their state taxes. This bill, HB 169, takes out that provision and no longer recognizes the federal credit. If a business hired someone in Alaska, they would get a federal tax credit as well as a state credit. Number 1557 CHAIRMAN BUNDE asked him to speculate on the net gain, what is the cost to keep 880 people on welfare. Number 1563 MR. BARTHOLOMEW answered that Mr. Nordlund's division looked at this in their 1998 budget. Some of the budget adjustments reflected trying to take people off the welfare rolls. The sense from the DOR standpoint is that it would be a net financial gain to the state. Number 1581 REPRESENTATIVE VEZEY repeated that HB 169 does not provide any new jobs. The bill provides a tax credit of $1,000 to $1,500 to provide an incentive to hire someone over someone else who might be better qualified. He asked if it would force that more competent person onto welfare. Number 1601 MR. BARTHOLOMEW stated that if this was the only bill, then this would be a potential scenario. There are development bills which project a small amount of job growth in Alaska and HB 169 fits into that projection. The state has made this an objective and it is a federal government mandate to reduce the welfare roles. This bill would give someone who is on welfare an advantage. Whether or not this advantage would be the final crux that beats out someone who hasn't been on welfare is a tough issue to call. He felt that this bill would help people who are disadvantaged. There has been a policy decision to move these people off welfare, the time that they can remain on welfare has been shortened. This bill suggests that the state needs to do something to help those people. He felt there could be a small possibility that it would harm other people looking for work who are not on welfare. Number 1664 CHAIRMAN BUNDE commented that it wouldn't be a welfare affirmative action program. Number 1668 REPRESENTATIVE KEMPLEN mentioned that HB 169 deals with the social issue of moving people off of welfare into the work place. He referred to a conference last week which dealt with welfare reform. One of the issues raised was turnover in entry level positions in the number of businesses located in the state. Welfare recipients need to learn basic skills. The purpose of welfare reform is to give those people who are on welfare those basic skills. Businesses need to have an incentive to bring those people into the workforce. Businesses will invest time in teaching these people how to be a good employee. This bill gives businesses some incentive to spend a little bit of extra time with these employees. REPRESENTATIVE KEMPLEN asked how the 880 figure was derived. Number 1782 MR. BARTHOLOMEW said that in discussions with the Department of Health and Social Services and the Department of Labor they did not have a good method of estimating an exact number. The tax credit only applies to tax paying corporations, a large number of employers don't pay taxes because of the size of their business. The tax code is only structured to tax a small percentage of businesses in Alaska. The DOR looked at how many businesses claimed the federal credit and what percentage of employees were hired. The DOR then backed these numbers and made them applicable to Alaska. Economic models were developed with an estimated range of 500 to 1,000 people who could be hired as a result of this incentive. No one had a comfort level of what this exact number should be. The 880 figure is a rough estimate. Number 1856 MR. BARTHOLOMEW explained that for wages, the credit is up to $1,000 with a $500 incentive if training is provided. The total tax incentive is $1,500. The DOR looked at what the federal credit provided and a discussion was held on how much of an incentive should the state be willing to provide to bring people into work. This involved a decision about what amount of treasury money the state would be willing to lose for someone who might obtain a job anyway. It also involved the idea that if you provide too big of an incentive, the balance is inappropriately tipped. The financial incentive started out smaller and as discussions were held the amount increased. The average firm on the federal credit was getting a $378 credit. The state will be providing a much bigger incentive than the federal program. Number 1920 REPRESENTATIVE KEMPLEN mentioned that one of the comments at the conference was that businesses felt the $1,500 wasn't enough of an incentive. Number 1967 PAM LaBOLLE, President, Alaska Chamber of Commerce, stated that her organization is supportive of this legislation. They feel that it doesn't create jobs, but member employers feel that there is a great deal of turnover and a related cost of bringing someone in with very little job experience. Given the opportunity to hire someone with experience over someone who doesn't, the business will chose the person with the experience so this incentive will not take a job away from a more qualified applicant. She wasn't sure how many businesses would qualify for the tax credit, but the bottom line is that HB 169 provides a credit for the extra effort of training someone who doesn't have any experience. She stated business' concerns over the education system in Alaska. TAPE 97-43, SIDE A Number 0000 REPRESENTATIVE GREEN asked if there would be merit in having a business develop a five year plan to avoid the large turnover. Number 0036 MS. LaBOLLE answered that these employers with the large turnover have struggled with how to reduce training costs. At the conference mentioned by Representative Kemplen, businesses mentioned a $2,500 per employee training cost with a 60 percent turnover. Number 0085 REPRESENTATIVE GREEN suggested that if just a small fraction was added to the wage, then that $2,500 would be stretched over a long period and turnover would be reduced. Number 0098 MS. LaBOLLE answered that it is the nature of the type of employee that causes the turnover. Number 0130 REPRESENTATIVE VEZEY asked the average wage or pay scale. He said that all the information he has seen indicates that our welfare payment is far above any entry level wage. He wondered how the state was going to get people to take an entry level job. Number 0185 MS. LaBOLLE felt that welfare recipients were not going to have a choice. The welfare program is going to disappear from under these recipients and then they will have to work. Number 0202 REPRESENTATIVE VEZEY asked why the state would need to pay an incentive to employers. Number 0216 MS. LaBOLLE clarified that the incentive would go to the employer. The state is trying to find places to put people who must come off the welfare rolls. The bill encourages businesses to consider those people. Number 0266 REPRESENTATIVE VEZEY stated that if those people are forced to go out into the job market, then why does the state need to pay the employer an incentive to hire them. Number 0291 MS. LaBOLLE answered that some businesses say this labor pool is not that large because of the job turnover. There isn't an abundance of people in that labor pool. Number 0314 REPRESENTATIVE VEZEY responded that we haven't kicked people off of welfare yet. Number 0317 MS. LaBOLLE answered that this labor pool will not be large, even when welfare is cut. Businesses expect that people who come off welfare will go into these basic, entry level positions. REPRESENTATIVE VEZEY stated that this was his point. He questioned why the state needed to pay businesses to hire someone they are looking to hire. Number 0339 CHAIRMAN BUNDE announced that this was the first time this bill was heard and it would be held for the committee's consideration.