HB 37-INCOME TAX; PERMANENT FUND; EARNINGS RES.  4:00:15 PM CHAIR KREISS-TOMKINS announced that the next order of business would be HOUSE BILL NO. 37, "An Act relating to deposits into the dividend fund; relating to income of and appropriations from the earnings reserve account; relating to the taxation of income of individuals, partners, shareholders in S corporations, trusts, and estates; relating to a payment against the individual income tax from the permanent fund dividend disbursement; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." [Before the committee was CSHB 37(W&M).] 4:00:38 PM REPRESENTATIVE WOOL, Alaska State Legislature, prime sponsor, introduced HB 37. He stated that the legislation includes two primary components: a permanent fund dividend (PFD) formula rewrite and a revenue component in the form of an income tax. He said the bill was designed to help improve the states fiscal situation by providing revenue and implementing a sustainable dividend formula. He turned attention to a PowerPoint presentation, titled House Bill 37: Income Tax and POMV Allocation Towards a Sustainable Fiscal Solution [hard copy included in the committee packet]. He began on slide 2, titled Where We Are, which read as follows [original punctuation provided]: After oil prices collapsed in late 2014, Alaska needed  to accomplish four things in order to establish a  sustainable budget: 1.Major budget cuts (mostly implemented 2015-2018). 2.Structured use of Permanent Fund earnings (SB26 passed for FY2019). 3.Revised Permanent Fund Dividend formula that works with new POMV and our fiscal reality. (Formulas were passed by both the House and Senate in separate versions of SB26, but neither survived the conference committee. Other formulas have been since proposed in several bills.) 4.New revenues to fill any remaining gap. Thus far, only #1 and #2 have been accomplished. My  proposal resolves the rest. 4:02:41 PM REPRESENTATIVE WOOL continued to slide 3, titled 2021 Committee Process Told the Story, which read as follows [original punctuation provided]: Revenue declines, beginning in 2014 Budget cuts and major draw-down of savings Introduction of POMV as a central revenue feature Ongoing structural deficits Lack of resolution of the Dividend question Alaskans pay the lowest state and local taxes among the 50 states   Once a consensus is reached that we need additional  revenue, new questions emerge: Pros and Cons of Income Tax vs. Sales Tax vs. Other How much revenue to raise / how large should the dividend be? Structural and technical details of the bill 4:03:44 PM REPRESENTATIVE WOOL turned to slide 4, which featured a graph of the unrestricted general fund (UGF) budget and revenue from FY 12 to FY 23. He noted that the bars represented the budget, and the curve represented revenue. 4:04:00 PM KEN ALPER, Staff, Representative Adam Wool, Alaska State Legislature, on behalf of Representative Wool, prime sponsor, pointed out that deficit years were indicated by the presence of white space behind the bars (budget), or when spending was higher than revenue. He stated that FY 14 through FY 18 had multi-billion-dollar deficits, which were resolved through the use of savings. Further, he noted that the dark blue portion represented the percent of market value (POMV) draw that began in FY 19. 4:04:34 PM REPRESENTATIVE WOOL advanced to slide 5, which pictured a graph of state savings. He highlighted the depletion of the statutory budget reserve (SBR) and the drainage of the constitutional budget reserve (CBR). He reiterated that the savings accounts were built up and then drained to balance the budget. REPRESENTATIVE WOOL proceeded to slide 6, titled The Situation Last Year, which read as follows [original punctuation provided]: When HB37 was introduced in 2021, the forecasts were  that the next several budgets could be approximately  balanced with a relatively small ($500 or less)  Permanent Fund Dividend.  HB37 made two major changes to balance Alaska's budget  for the foreseeable future and form the centerpiece of  a sustainable fiscal plan: 1.Restructuring the annual dividend formula to set future dividends to about $1,000-$1,200 per Alaskan 2.New broad-based revenues raising approximately $500 million The two pieces are dependent on each other: if higher dividends are desired, revenues would similarly need to be higher. REPRESENTATIVE WOOL noted that a higher PFD would require more revenue; however, he emphasized that the legislation would not link the two provisions or make them mutually exclusive. 4:05:53 PM CHAIR KREISS-TOMKINS inquired about the current status of the Higher Education Fund. REPRESENTATIVE WOOL recalled that last year, the Higher Education fund was paid out to the recipients per statute and then swept into the CBR. This year, he said, those same scholarships were put into the general fund as a budget item. He noted that the sweepability of the fund is currently being litigated. If deemed unsweepable, it would return to an existing fund and if it is deemed sweepable, the amount of approximately $400 million would remain in the CBR. CHAIR KREISS-TOMKINS suggested that assuming theres an interested plaintiff, there could be a lawsuit filed for conceivably every fund that the administration deemed sweepable. MR. ALPER, returning to slide 5, noted that the graph had not been updated to reflect 2022 figures. He pointed out that the orange bar, which represented the Higher Education Fund, will theoretically be swept into the CBR, meaning the orange portion would be gone and the light blue portion (representing the CBR) would increase unless the lawsuit goes in favor of the plaintiffs. 4:07:51 PM REPRESENTATIVE WOOL resumed the presentation on slide 7, titled What is Different Since Last Year? which read as follows [original punctuation provided]: Three major changes have distorted the short-term  budget discussion:  1.Record FY2021 Permanent Fund earnings increased the end-year fund balance to $82 billion. The forecast a year ago was $66 billion. This increases expected POMV draws substantially, by $150 million this year (from $3.21b to $3.36b) increasing to $830 million in FY2028 (from $3.51b to $4.34b) 2.Oil prices have reached the highest levels since the 2014 crash, increasing forecasted FY23 unrestricted petroleum revenue by $1,160 million(from $0.92b to $2.08b) 3.Much of the latest round of federal COVID funding can be used for "revenue replacement" rather than just for direct pandemic impact; that's about another $1,000 million of available one-time funding 4:09:25 PM REPRESENTATIVE WOOL turned to slide 8, which featured a graphic of the governors 10-year plan, which includes a 50/50 dividend and still results in deficits starting in FY 24. He turned to slide 9, which read as follows [original punctuation provided]: So, do we still need revenue? Probably.  2.Legislative Finance implies that the governor's 10- year plan is undercounted by $200 to $400 million / year 3.Beyond that, base education funding hasn't been increased in 7 years. The capital budget is also highly constrained for years 4.Markets can crash. Oil prices can go down 5.Once a major tax bill passes, it will likely take about 18 months to begin collecting revenue REPRESENTATIVE WOOL noted that even the Legislative Finance Divisions (LFDs) budget, which used different assumptions than the governors budget, increases the deficit going forward. He reminded the committee that the market performed well this year, which may not happen in the future. He reported that Callan predicts 6.2 percent [inflation rate] going forward. 4:11:27 PM REPRESENTATIVE WOOL advanced to slide 10, which featured two graphs. The graph on the left depicted a historical view of Alaska North Slope oil production, indicating that the peak was in 1988 at about $2 million barrels per day. The graph on the right highlighted the 2021 Fall forecast from the Department of Natural Resources (DNR). The overall projection indicates that oil production will be relatively flat over the next 10 years at approximately 500,000 barrels per day. He added that the price prediction is $71. He opined that going forward, the state needs revenue. He further acknowledged that if a major piece of legislation passes, it would take 18 months to start collecting revenue. He continued to slide 11, positing that Alaska has diversified its economy but not its revenue. He recalled that in the 1970s, 1980s, and mid-1990s, GDP tracked oil and gas; however, as the economy started to modernize with the development of additional sectors, such as healthcare, tourism, transportation, and financial services, oil and gas made up a much smaller portion of GDP, which was on the rise. He shared his belief that revenue should track GDP. 4:14:46 PM REPRESENTATIVE WOOL progressed to slide 12, which featured a graph that detailed the sectors with the largest growth in the last twenty years. Slide 13 addressed Alaskas tax burden in comparison to other states. He emphasized that Alaska is the lowest at 5.8 percent, followed by Wyoming and Tennessee at 7.0 percent. He noted that if the PFD, at $1,606 in 2019, was included as a negative tax, Alaskas effective state and local tax rate would be about 1.7 percent. 4:15:27 PM REPRESENTATIVE WOOL turned to slide 14, explaining that if Alaska were to bring in an additional $700 million in new and increased taxes, it would still have the second lowest tax rate in the country. He noted that the proposed legislation would bring in approximately $500 million in tax revenue. CHAIR KREISS-TOMKINS, referring to the graph on slide 14, sought to confirm that New Hampshire was the second lowest state after Alaska in terms of per-capita taxation. MR. ALPER confirmed that New Hampshire was the second lowest. He reported that similar to Alaska, New Hampshire does not have a state sales tax; additionally, New Hampshire has a partial state income tax and a fair amount of state property tax and local taxation. 4:16:12 PM REPRESENTATIVE WOOL resumed the presentation on slide 15, which provided a comparison of sales versus income tax. An analysis by the Institute of Social and Economic Research (ISER), found that Alaskans making less than $100,000 per year would pay less under an income tax than with a sales tax. He continued to slide 16, which analyzed who would pay an income tax. He reported that 55 percent of Alaskans make under $50,000 per year. He further addressed the claim that if an income tax were implemented, not many people would pay it. An analysis of the number of tax filers in Alaska indicates that 87 percent of the adult population in Alaska would pay an income tax. 4:19:15 PM REPRESENTATIVE WOOL highlighted the details of the bill on slide 18. He stated that the legislation would replace the current dividend formula with a new formula based on 10 percent of the annual POMV draw plus 30 percent of oil and gas royalties. He reasoned that it makes sense to structure it in such a way because Alaskas economy is heavy reliant on oil; therefore, if oil were to increase, the dividend amount would also increase and vice versa. He expressed concern that if oil were to precipitously drop and the state was obligated to pay out a large PFD, it wouldnt be possible. He reiterated that the proposed legislation would tie slightly over half of the PFD to oil revenue. He reported that per current forecasts, the dividend will grow to $1,400 - $1,500 by 2030. 4:20:59 PM REPRESENTATIVE WOOL advanced to slide 19, titled Permanent Fund Changes, which read as follows: Future dividends are tied to both our accumulated  savings (the permanent fund itself) as well as the  health of the industry (oil royalties)  Other Permanent Fund changes in the bill  Repeals the statutory 50% "corpus" deposit of royalties from leases signed after 1979 O The 25% constitutional requirement remains: 25% of all royalties, bonus payments, etc. will continue to be deposited. O The additional 25% is approximately $75 million in FY2023; this amount would remain in the general fund available for appropriation Repeals the "Amerada Hess" set-aside, where the annual earnings on a specific $420 million settlement from the early 1990s are excluded from the POMV and dividend calculations O About $27 million / year currently goes to the Capital Income Fund CHAIR KREISS-TOMKINS asked whether the bill sponsor had encountered any opposition to moving Amerada Hess off the books. REPRESENTATIVE WOOL answered no. MR. ALPER observed that its slightly controversial because the original court case from 1990, which set aside that money, involved a jury pool that looks much different than Alaskas present population. He noted that a built-in sunset provides that eventually, when enough of those people have passed, this thing will go away in another 20 or 30 years. He added that for simplicity's sake, this provision was included in the bill. 4:22:26 PM REPRESENTATIVE STORY asked whether deferred maintenance is included in Amerada Hess. MR. ALPER explained that the $27 million per year that comes out of the $420 million settlement goes to the Capital Income Fund, which has been a funding source for deferred maintenance over the last several budget cycles. In past years, he said, it financed capital projects of interest to the Co-Chairs of the Finance Committees. 4:23:23 PM REPRESENTATIVE WOOL resumed the presentation on slide 20, titled Income Tax, which read as follows [original punctuation provided]: Flat rate 2.5% tax based on federal "Adjusted Gross  Income" (AGI)  Metric that is the most widely used among states with income taxes Includes all income Alaska-source: wages, self employment, earnings of partnerships and S-corps, capital gains, retirement, etc. "Adjustments" to income (i.e. non-taxed items) include retirement contributions, student loan interest, and alimony payments. So-called "itemized" deductions, like mortgage interest, are taken after AGI and would therefore be taxed "Standard Deduction" tied to federal code: First  $12,550 (single), $18,800 (head of household), and  $25,100 (joint) is not taxed  PFD payments are also non-taxable income Largely eliminates the tax burden on lower-income Alaskans and provides a form of "means testing" for the dividend REPRESENTATIVE WOOL turned to slide 21, titled Revenue and Impacts," which read as follows [original punctuation provided]: The LB&A Committee in 2020 hired the Institute on Taxation and Economic Policy (ITEP) last fall, to look at several different "flat rate" income tax options The original bill (2.5%, $10k/$20k standard deduction) was "Option 2" The consultant estimated $581 million annual revenue (Fiscal note: $580 million) The amended bill, with a higher standard deduction, is estimated at $545 million REPRESENTATIVE WOOL proceeded to slide 22, titled Even after paying a tax, most Alaskans would still receive a dividend, which read as follows [original punctuation provided]: The forecasted FY2023 POMV draw is about $3.36 billion A dividend based on 10% of that plus 30% of oil royalties would be a $774 million appropriation, working out to roughly a $1,148 dividend per person For the majority of Alaskans, their tax burden will  be less than their dividend, meaning they will still  receive a net payment from the state REPRESENTATIVE WOOL, referencing the chart on slide 22 that analyzed the tax liability for different household types and income levels, pointed out that a single parent with one kid who makes $25,000 or less would pay a tax of $98 and retain a dividend of $2,198. A married couple making $50,000 would owe a tax of $565, retaining $1,731 net dividend. He noted that the bill would allow people to check a box when filing for the PFD, which would allow their tax to be taken out of their PFD. Finally, a married couple with two kids making $200,000 would owe $4,258 in taxes, retaining $334 net dividend. 4:27:21 PM REPRESENTATIVE WOOL concluded on slide 23, which read as follows [original punctuation provided]: A $2,500 dividend, as proposed by the governor, is  risky and unaffordable.  A $500 dividend, which is what we can afford without  taxes or major budget cuts, is too low to be  acceptable to most Alaskans.  A moderate tax bill, such as the one I introduced, is  the cleanest way to resolve the entire fiscal deficit.  The two pieces are roughly equal in size and impact: Adds approximately $600 million / year in new revenue o$545 million in tax revenue plus $75 million in additional UGF royalties Clarifies and reduces the state's commitment to PFDs New dividend payment would be about $774 million in FY2023 Budget would be balanced at any oil price greater than about $50 / bbl This enables us to afford the dividend into the future  while maintaining a stable state budget CHAIR KREISS-TOMKINS sought to confirm that Representative Wool had indicated that a $500 PFD is too low. REPRESENTATIVE WOOL confirmed that he believes a dividend of $500 is too low. Additionally, he opined that new revenue is necessary. He reiterated that the bill would not link the proposed income tax to the PFD. He said the PFD would be a budget item, similar to education, public safety, and corrections. He explained that an income tax would track GDP; therefore, if Amazon were to move to Anchorage creating 20,000 new jobs, the state would receive extra revenue to cover the increased need for roads, schools, and public health, for example. Additionally, he pointed out that the governor is taking a flat budget and adding 1.5 percent for inflation while LFD is adding 2.5 percent for inflation plus several additional factors. He opined that there are other needs aside from a flat budget, such as the base student allocation (BSA), K-12 education, Medicaid costs, medical costs, the capital budget, defined benefits, and deferred maintenance needs. He believed that building up the budget wouldnt be a bad thing, as long as a larger revenue portfolio that included a broad-based tax was part of it. 4:30:44 PM REPRESENTATIVE STORY recalled from an earlier presentation that businesses would invest more if a stable fiscal plan was implemented, which is critical to the future of this state, she opined. Additionally, she highlighted the benefit of an increased capital budget and $600 million in revenue if this bill were to pass. She believed the proposed measure would provide assurances to the quality of life in Alaska. She thanked the bill sponsor. REPRESENTATIVE WOOL acknowledged that a balanced fiscal plan would bring stability and predictability that would, in turn, attract business and people to the state. MR. ALPER highlighted an oddity in the fiscal note due to a miscommunication about the effective date with the Department of Revenue (DOR). He said if there is a desire to move this bill, the sponsor would be highly amenable to correcting the retroactive nature of the effective date and make it take effect in the future. 4:33:39 PM REPRESENTATIVE VANCE directed attention to slide 14, which references [House Bill 115], the income tax bill from 2017. She asked whether CSHB 37(W&M) is similar to that piece of legislation and how it differs. REPRESENTATIVE WOOL explained that House Bill 115 implemented a progressive tax whereas the current bill proposes a flat tax of 2.5 percent. MR. ALPER noted that much of the technical language in CSHB 37(W&M) is similar to House Bill 115; however, the tax rates and the structure of the tax is much different.  4:35:06 PM REPRESENTATIVE EASTMAN inquired about the concept behind slide 14. He asked, Are we talking about when something is taken and then used for government, spent by government, goes to a government program, for example? REPRESENTATIVE WOOL answered yes, moneys that are paid by an individual to a governing body to be used for schools, police, roads, etcetera. 4:35:54 PM REPRESENTATIVE EASTMAN recalled hearing discussions around the capitol building about the oil belonging to the people. He asked what the graph on slide 14 would look like if it were adjusted for the oil being taken from the people and then given to government, for example. REPRESENTATIVE WOOL said he did not have that data. He opined that if the oil belongs to the people, there are other considerations to think about, such as the tax paid by the oil companies. He said he would follow up with his response after analyzing the numbers. REPRESENTATIVE EASTMAN said he would be interested in seeing that. REPRESENTATIVE WOOL in closing, acknowledged that people want stability and predictability. He pointed out that the state budget has been cut by 20 percent for the past five years and expressed concern that more is being spent on prisons and cops than on schools. He believed that if going forward, revenue increased and the budget stabilized, investments in education would ultimately lower the cost of corrections and public safety. He expressed his hope that in the future, Alaska would have an educated working class who could help build up the GDP. 4:38:25 PM CHAIR KREISS-TOMKINS announced that CSHB 37(W&M) would be held over.