HB 68-CORPORATE INCOME TAX  3:24:53 PM CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 68, "An Act relating to the computation of the tax on the taxable income of a corporation derived from sources within the state." 3:25:05 PM REPRESENTATIVE SHELLEY HUGHES, Alaska State Legislature, speaking as the bill sponsor, remarked that this bill is overdue since corporate tax rates were set in 1981. She related that Alaska levies corporate income tax on corporations doing business in Alaska. The tax is a graduated tax, which means it increases incrementally based on the amount reported income. She explained the corporate income tax rate schedule is broken into ten levels, with the top level taxed at the highest rate, 9.4 percent, on federal taxable income of $90,000 or more, based on gross income minus allowable deductions. REPRESENTATIVE HUGHES characterized HB 68 as a rational way to get cash back into the hands of Alaskans, which would create a stronger economy and, in turn, would also enhance overall taxes in the long run. REPRESENTATIVE HUGHES reiterated the corporate income tax was established in 1981 and this bill will adjust the incremental brackets based on the consumer price index. She offered her belief the rate changes are fair, since the proposed changes would incentivize all industries. She stated that the tax is limited to approximately 5,000 C corporations and would not apply to the 25,000 limited liability corporations (LLCs) and limited liability partnerships (LLPs) or to the 30,000 S corporations. She referred to a memo in members' packets entitled "Legislative Research Services, Research Brief" [from Susan Haymes, Legislative Analyst dated February 5, 2013]. This document refers to the companion bill, but applies to HB 68, she said. She then referred to the current tax schedule on page 3 of the document which shows that most companies who filed earn less than $10,000. She concluded that this would point to numerous small businesses in the state. The other bulk of filers represent middle-sized businesses, she stated. In short, this bill would create relief for the small and medium-sized businesses. 3:28:39 PM REPRESENTATIVE HUGHES explained that the S corporation and LLCs were established in the 1980s so Alaska has numerous pre-1980 small and medium-sized businesses that still fall under older rules. This bill also would affect larger businesses in Alaska and the Lower 48, but the tax does not apply to any out of state income. She related that under the bill, the current income bracket for over $90,000 would be increased to $222,000 or more at a 9.4 percent tax rate. Essentially, the bill expands the brackets structure, she said. Under the current structure, a large company making $550,000 would pay $47,700 in taxes, but under HB 68 would pay under $42,000 in taxes or approximately $6,000 less. Further, a smaller company making $40,000 would pay $1,250 in corporate income taxes, but under HB 68 would pay approximately half the taxes or $650. She concluded this bill would reduce the corporate taxes. She noted that she has received letters of support from the State Chamber of Commerce, and the Matanuska-Susitna Business Alliance. 3:31:00 PM CHAIR OLSON remarked this bill has a zero fiscal note. GINGER BLAISDELL, Staff, Representative Shelley Hughes, Alaska State Legislature, on behalf of Representative Hughes, reported the Juneau Chamber of Commerce and the Wasilla Chamber of Commerce have also sent letters of support. 3:31:47 PM REPRESENTATIVE MILLETT said she finds the corporate tax structure with 10 tier brackets as too complex. She recalled the two or three-tier brackets other states have in place, which she suggested might be easier. She related the National Conference of State Legislatures (NCSL) suggested this type of structure could be burdensome to businesses. REPRESENTATIVE HUGHES answered she held discussions with the sponsor of the companion bill and the goal was to make a simple change and not create a whole new system at this time. She deferred to the Department of Revenue to respond. 3:33:33 PM REPRESENTATIVE REINBOLD remarked that anything the legislature can do to move from the 50th spot and become a friendlier place to do business is welcome. She asked which types of industries would be affected by the bill. REPRESENTATIVE HUGHES answered that the change would affect a broad spectrum of businesses and any long-time business might be from any industry. 3:34:17 PM REPRESENTATIVE REINBOLD asked who assesses the corporate income taxes. Speaking from her own personal experience, she said she has observed the person rings up zero when she pays in cash at a nail salon. She asked whether this type of potential activity is a state or federal issue. She further asked if this type of business would typically be a C Corporation. REPRESENTATIVE REINBOLD answered that the tax division has investigators. CHAIR OLSON related the department would be testifying later on. 3:35:25 PM REPRESENTATIVE REINBOLD related her understanding that someone else would bear the burden if the taxes were not collected. REPRESENTATIVE HUGHES said she is a conservative and believes that lower taxes strengthen the economy and increases the amount of incoming taxes by growing businesses. In terms of the overall budget, she suggested that $3.8 million less in revenue is a small amount, but the legislature would need to review it. She offered her belief this would be doable. 3:36:34 PM REPRESENTATIVE HERRON asked whether the department could respond to whether any unintended consequence would result from the changes in the bill. REPRESENTATIVE JOSEPHSON referred to the zero fiscal notes, which he assumed meant the program change wouldn't cost anything to administer. Still, he noted it would represent a loss of revenue. He asked for further clarification. CHAIR OLSON related the fiscal note would measure the direct cost. 3:38:01 PM REPRESENTATIVE JOSEPHSON acknowledged that 1981 was a long time ago and he could see the need for some adjustment. He referred to page 2 of the document entitled "Legislative Research Services, Research Brief" that read, "Under the proposed structure, a higher percentage of companies fall under the three lowest tax brackets;, however, overall the tax liability would be more evenly distributed through the middle tax brackets than it is under the current tax structure." He asked whether the effect is that the middle tax bracket wouldn't be any greater, but due to the sum collected it ultimately would be greater. REPRESENTATIVE HUGHES acknowledged that was her interpretation. REPRESENTATIVE JOSEPHSON asked whether the middle tax bracket should create a concern - the businesses between a mom and pop store and ExxonMobil Corporation. REPRESENTATIVE HUGHES related it is graduated so the lowest tax bracket would see the greater benefits in percentages. She offered her belief that it is reasonable and the businesses would be better off under the bill than under the current structure. CHAIR OLSON remarked that ExxonMobil Corporation is paying significant taxes. 3:39:48 PM JOHANNA BALES, Deputy Director, Tax Division, Anchorage Office, Department of Revenue (DOR), introduced herself. ROBYNN WILSON, Income Audit Manager, Tax Division, Administrative Services Division, Department of Revenue (DOR), introduced herself. 3:40:29 PM REPRESENTATIVE JOSEPHSON asked whether the DOR's fiscal note reflects the cost of administering the tax changes is zero, even though the program would incur a loss of $3.8 million under the bill. MS. BALES answered yes; that is correct. She said it will not cost the department any more if the tax brackets change. 3:41:28 PM REPRESENTATIVE MILLETT asked whether the C corporations are taxed differently than oil and gas taxes. MS. BALES answered that the tax rate for oil and gas corporations and other non-oil and gas corporations are the same, but the calculation of the taxable income would differ between oil and gas companies and other non-oil and gas corporation. This bill would treat all C corporations the same. 3:42:11 PM REPRESENTATIVE SADDLER asked about the net effect of HB 68 on the oil industry. MS. BALES answered that $3.8 million in revenue encompasses all C corporations. She pointed out the DOR has approximately 27 oil and gas C corporations that file in the state. Under this bill, the maximum benefit to a single corporation would be $5,828. With the 27 oil and gas filers, the maximum benefit to all oil and gas corporations under the bill would represent approximately $157,000 in tax savings. She concluded that the majority of the savings will go to non-oil and gas corporations under the bill. 3:43:19 PM REPRESENTATIVE REINBOLD asked for an explanation of the C corporations. She further asked what type of businesses typically would apply and who would investigate any potential local tax fraud. MS. BALES answered that all companies can be assessed as chapter C corporations. She explained that the designation for C corporations is found within the Internal Revenue Code (IRS). Thus businesses operating as C corporations in Alaska would be taxed in Alaska. The other types of corporations, such as S corporations, limited liability corporations (LLCs) and limited liability partnerships (LLPs) are taxed differently federally. Therefore the S corporations, LLCs and LLPs are taxed differently in Alaska. For example, with S corporations the income earned is distributed to the individual shareholders and reported on their individual income tax returns. The reason S corporations aren't taxed in Alaska, is because Alaska does not impose an individual income tax. She reiterated any industry or company that sets up itself as a corporation can be a C corporation or an S corporation depending upon how the corporation wishes to be treated under federal law. Additional limitations apply, such that the S corporations are limited to no more than a hundred shareholders. Thus small businesses generally tend to be S corporations since they don't have to pay the Alaska corporate income tax; however, many older C corporations are companies that have been around for a long time, such as mom and pop restaurants, airlines, construction companies, retailers, and tourism companies and are subject to Alaska's corporate income tax. 3:45:51 PM REPRESENTATIVE REINBOLD reiterated her earlier question of who would investigate local tax fraud and why the division doesn't use fewer brackets. MS. BALES related that neither bill sponsor discussed collapsing the brackets into fewer tax brackets. She said she thinks it is a point well taken. She responded that the division investigates tax fraud through audits and also by the DOR's criminal investigation unit. Thus the DOR would investigate if the department receives tips or anyone has concerns that people aren't properly reporting income they have earned. 3:46:58 PM REPRESENTATIVE REINBOLD suggested perhaps she should have called DOR instead of the IRS for the few times she has been suspicious [that someone was not reporting income.] MS. BALES asked for clarification on whether the total purchase was not rung up or she wasn't charged an additional sales tax. REPRESENTATIVE REINBOLD reiterated her earlier scenario in which she had her nails done at a nail salon and was charged $40. She handed the clerk $40 in cash, but the sale was rung up as zero and she also did not receive a receipt. In several instances when this happened it raised an alarm and while she isn't specifically accusing someone, she related when this happened she called the IRS. She wondered if the IRS is the appropriate agency to report this type of activity or if someone in the state should be notified. MS. BALES responded that the DOR would appreciate a call and would determine if the company is subject to corporate income taxes. She indicated that if the company is not a C corporation it would not be subject to corporate income taxes, but the division could also refer the case to IRS since it sounds as though the person could be trying to avoid individual income taxes. She reiterated the department's interest and noted a local sales tax could also apply. She understood Anchorage does not have a sales tax, but some jurisdictions throughout the state do impose one. 3:48:46 PM CHAIR OLSON related a question on behalf Representative Herron. He asked whether there might be any unintended consequences. MS. BALES answered that the department does not see any unintended consequences or potential loopholes with the changes in HB 68. She characterized this bill as being pretty straight forward. 3:49:08 PM REPRESENTATIVE MILLETT asked whether the DOR has a preference for ten brackets or for using fewer brackets, such as three or four that some other states use. MS. BALES answered that the DOR does not have a preference. The department's corporate income tax is set up using ten brackets. She said that changing the number of tax brackets really doesn't create any additional work. She viewed it as being a preference for legislators or businesses. The department doesn't view the current corporate income tax bracketing as creating any concern. 3:50:04 PM REPRESENTATIVE MILLETT understood that it doesn't create a burden for the department, but she asked whether it would it be easier for the taxpayer. MS. BALES related she did not think it created any burden for businesses either. She reported that so many automated tax preparation services calculate the taxes for businesses. She suggested that some software companies would need to change their programs under the current bill or if the tax brackets were also collapsed to three brackets. She did not see the 10 tax brackets as creating any issue, but she could also understand if [the legislature] would like to make changes from the current corporate income tax brackets. 3:51:11 PM REPRESENTATIVE MILLETT asked why businesses don't change from C corporations to S corporations and avoid Alaska's corporate income taxes. MS. BALES answered that the department has also pondered this. She related her understanding that when these C corporations were initially established, the top individual income rates in Alaska were at 55 percent, which was greater than the top corporate income tax rates at the time. The department has concluded that the businesses initially incorporated as C corporations since the rates were less and they would pay less corporate income taxes. She surmised that to change the articles of incorporation will often involve fees for attorneys or accountants. The department has contemplated that at any given time these small C corporations with less than a hundred shareholders could easily convert to S corporations and not pay any Alaska corporate income tax at all. 3:52:36 PM CHAIR OLSON asked whether switching the current corporate income tax structure to three brackets would generate a fiscal note. MS. BALES answered no; that the DOR could easily convert to less tax brackets. 3:53:20 PM CHAIR OLSON, after first determining no one else wished to testify, [the Chair treated the public testimony as being closed.] 3:53:45 PM REPRESENTATIVE REINBOLD moved to report HB 68 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, HB 68 was reported from the House Labor and Commerce Standing Committee. 3:54:15 PM The committee took a brief at-ease from 3:54 p.m. to 3:59 p.m.