HB 37-INCOME TAX; PERMANENT FUND; EARNINGS RES.  12:34:18 PM CHAIR SPOHNHOLZ announced that the final 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." 12:34:58 PM REPRESENTATIVE ADAM WOOL, Alaska State Legislature, prime sponsor, introduced HB 37. He paraphrased the sponsor statement [included in the committee packet], which read in its entirety as follows [original punctuation provided]: House Bill 37 resolves Alaska's fiscal challenges and balances the budget. For six years, facing severely declining revenues and massive budget shortfalls, Alaska has managed to delay a permanent fiscal solution through budget cuts and drawing down over $16 billion in savings. Now, these savings are gone and there is limited room for additional major cuts without substantially harming core state functions. Alaska is the only state without a broad-based tax on its residents and Alaskans pay the lowest overall state and local taxes in the U.S. Forty-five states have a state sales tax, and forty-three have some form of an income tax. Since 1980 we have been uniquely fortunate, with ample oil and gas revenues able to fund ongoing government operations, endow various savings funds, and build the Permanent Fund so that it can now play a substantial role in our state's revenue. Since its recent peak in 2012, oil revenue is down 90%. Even with major new projects our revenue forecasts are not encouraging. Current petroleum revenue is as low as it has been since 1978. Nobody wants to implement a tax on Alaskans, but we are out of time and out of options. As we take this step towards new revenue, it is essential to also resolve the issue of the dividend. For the Alaskan people to trust and accept a new tax, we must ensure that any new revenues are used for essential services and are not used to simply transfer these funds to others through increased PFDs. HB37 does both things. HB37 adds a flat rate 2.5% income tax based on federal Adjusted Gross Income. There is a "standard deduction" of non-taxable income, of $10,000 for individuals and $20,000 for joint filers, which reduces the burden on the lowest income Alaskans. The tax will raise about $600 million per year, with nonresident workers paying about 10% of the total. The bill also establishes an 80/20 split of the annual "Percent of Market Value" draw from the Permanent Fund, with 20% of each year's funding designated for the PFD. That would provide, initially, a dividend of about $1,000 that would steadily grow in years to come. Alaskans, as part of the PFD application process, would be able to assign some or all of their dividend towards the tax. This would mean, in practice, that most Alaskans would not pay any tax out of pocket. For example, a family of 4 making $100,000/ year would retain about $2,000 in PFDs after paying the tax. If the same family made $200,000 their tax and dividends would balance each other and they would pay nothing. It is time to have an honest conversation about how Alaska will fund its operations into the future. HB37 can be the key component to get us there. Thank you for your consideration. 12:38:11 PM The committee took a brief at-ease. 12:38:51 PM REPRESENTATIVE WOOL resumed his introductory statement. He reiterated that the dividend was created to share the wealth of the oil economy; however, he believed its purpose has morphed into fulfilling "other functions," such as providing cash to individuals in cash-strapped economies. He stated that the proposed legislation would establish a dividend that is 20 percent of the POMV draw, equating to approximately $1,000 per person. He explained that the bill would institute a small flat income tax of 2.5 percent; further, it would allow for a standard deduction of non-taxable income - $10,000 for individuals and $20,000 for joint filers, which would reduce the burden on the lowest-income Alaskans. He shared, for example, that if someone only incurred $10,000, he/she would be exempt and entitled to a full PFD. He noted that as income level increases, more is taken out of the PFD, and the higher earners would have to pay to the State of Alaska. He referenced a chart in the presentation (slide 24), indicating that a single person making $50,000 would receive a $960 dividend and owe a tax of $975, thus owing a total of $15 [he/she would not receive a dividend, as it would go towards the tax owed]. He continued to explain that a married couple making $100,000 would receive a dividend of $1,920 and pay 1,950 in tax, thus owing $30 to the state. A married couple with two children would receive a dividend of $3,840 and pay $1,900 in tax, thus retaining $1,940, which essentially equates to two PFD checks. 12:42:56 PM KEN ALPER, Staff, Representative Adam Wool, Alaska State Legislature, introduced a PowerPoint presentation, titled "House Bill 37" [hard copy included in the committee packet], on behalf of Representative Wool, prime sponsor. He began on slide 2, explaining that HB 37 consists of two core components, which together, would balance the budget for the foreseeable future. The first key component is an individual income tax of 2.5 percent of federal Adjusted Gross Income (AGI). The first $10,000 of income ($20,000 for joint filer) would be exempted from the tax. The PFD income would also be tax exempt. The second component is a restructuring of the annual POMV draw from the permanent fund, so that 20 percent of the draw would be designated to pay PFDs. He continued to slide 3, which recapped process of events that lead up to the present scenario. Slide 3 read as follows [original punctuation provided]: • Revenue declines, beginning in 2014 • Budget cuts • 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 technical details of the bill 12:45:40 PM MR. ALPER turned to slide 4, which featured a model of UGF spending and revenue since statehood in nominal dollars. Slide 5 displayed the same model per capita and adjusted for inflation. The graph indicated that the current budget has decreased to approximately 1970's levels, which was before the oil boom. Slide 5 provided a focused look at the last 10 years, showing the dramatic drop in revenue that coincided with the crash in oil prices, which was partially compensated by POMV draws. He noted that agency spending has maintained flat while statewide spending is down dramatically with the reduction in payments to the pension system. The capital budget has dropped by over 90 percent and the dividend has fluctuated. 12:48:41 PM MR. ALPER advanced to slide 7, emphasizing that permanent fund earnings would make up to roughly two-thirds of Unrestricted General Fund (UGF) revenue in the foreseeable future. Slide 8 indicated that even with higher oil revenue in the spring forecast, the governor's 10-year plan shows large ongoing shortfalls of approximately $300-400 million. Slide 9 highlighted the three main assumptions in the 10-year plan that, if not met, would impact these future-year shortfalls: oil prices steadily increasing towards $71/bbl in 2030; three more years of likely unobtainable operating budget cuts and ongoing minimal capital budgets; the governor's proposed change to a 50/50 POMV split beginning in FY 23, yielding dividends of around $2,400. 12:50:57 PM MR. ALPER continued to slide 10, which illustrated that Alaska's current revenue structure hasn't kept pace with its changing economy. He opined that some form of broad-based tax would be the most efficient way to fund the state based on its growing economy. Slide 11 provided a model from LFD that showed a lack of new revenue depleting the ERA by FY 29. Slide 12 weighed the pros and cons of a sales tax versus an income tax, indicating that a sales tax tends to disproportionately impact lower income households, while the effective tax rates are much higher at the top 20 percent of income rates for an income tax. Slide 13 relayed that the great majority (81.5 percent) pay less with an income tax versus a sales tax. He noted that only those making more than $100,000 would pay more under an income tax versus a sales tax. 12:57:04 PM MR. ALPER turned to slide 14, which listed several reasons an income tax might be preferable in Alaska. Slide 14 read as follows [original punctuation provided]: • A sales tax tends to be regressive; as incomes increase people use more of their earnings for savings, investment and out-of-state travel. A flat rate tax on income might be a better counterbalance to dividend cuts which has the most impact on low-income Alaskans and children. • Sales taxes are relied on by ~105 municipalities each with different rules. Adding a state tax introduces a lot of questions: Does the state take over statewide collection? Do we force caps on local rates, unified, exemption rules, transaction caps, etc. • Regional price disparities, which are a relatively unique Alaska phenomenon, would disproportionately hurt rural residents. • Our history with sales tax legislation included aggressive exemption seeking by various interest groups. 12:57:38 PM CHAIR SPOHNHOLZ announced that HB 37 was held over.