HB 202-PERMANENT FUND DIVIDEND; ROYALTIES  HB 37-INCOME TAX; PERMANENT FUND; EARNINGS RES.  [Contains discussion of SJR 6 and SJR 7.] 12:31:01 PM CHAIR SPOHNHOLZ announced that the final order of business would be HOUSE BILL NO. 202, "An Act relating to the Alaska permanent fund; relating to dividends for state residents; relating to the use of certain state income; and providing for an effective date." and 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." 12:31:31 PM CHAIR SPOHNHOLZ opened public testimony on HB 202 and HB 37. 12:32:00 PM BERT HOUGHTALING stated his strong opposition to HB 202 and HB 37. Instead, he advocated for the passage of SJR 6, which he believed would resolve the issues pertaining to the dividend. He explained that his opposition to the proposed legislation revolved around the removal of the statutory dividend formula. He opined that the bills would "take away from the children of Alaska by taxing every single one of them." 12:33:31 PM CRIS EICHENLAUB opined that Alaska is "grossly" mismanaging its resources as the largest state with the most resources and the smallest population. He characterized the permanent fund dividend (PFD) as the "best bang for our buck," adding his belief that the people should have the first call on all revenue [decisions]. 12:35:45 PM SHERRY EICHENLAUB stated her opposition to HB 202 and HB 37 and aligned herself with the comments from the two previous testifiers. 12:36:16 PM KATIE BOTZ stated her opposition to HB 202 and support for HB 37. She shared her belief that an income tax would help close the fiscal gap. Additionally, she advocated for a "50/50 share of the PFD." 12:37:06 PM ADAM HYKES, recalled an earlier statement from Mr. Alper regarding the repeal of the Amerada Hess settlement provision, which he interpreted as an indication that the bill wouldn't work without taking money that would have otherwise gone towards the PFD. He said, "In the case that's it's not always guaranteed in some years, then why is it reliable for you and not for us?" Further, he opposed the idea that the PFD is a negative tax. He shared his belief that Alaskans want the legislature to spend less and fix the budget. He opined that rushing the implementation of a new tax and depending on the permanent fund to fill the gaps in the budget are both fiscally irresponsible. He concluded that as a stakeholder in Alaska, he did not give [the legislature] permission to take his children's inheritance. He stated his opposition to HB 202 and HB 37. 12:39:33 PM MIKE COONS emphasized that whether wealthy or poor, people should be able to spend the PFD on whatever they want. He stated his full opposition to both bills and added that he supports SJR 6 and SJR 7. He suggested that the legislature has no intention of working with Alaskans or the governor on a solution. 12:41:44 PM CLIFF GROH expressed that the state needs a comprehensive strategy that looks beyond the next fiscal year to address Alaska's deep structural deficit. He opined that the strategy needs to include a revised PFD formula that is sustainable; protection for the permanent fund against overspending; and new revenues to help pay for public services. He believed that HB 202 goes too far to balance the budget (indisc.) of the dividend to avoid collecting taxes from high earners in Alaska, some of whom are nonresidents. He advocated for a sustainable dividend formula in addition to broad-based taxes, preferably an income tax. 12:43:55 PM BARBARA TYNDALL stated her opposition to HB 37, which she characterized as a plan to rob the people of Alaska and give their money to special interests because the legislature and administration had failed to live within their means. Additionally, she believed HB 202 would "exacerbate the manipulation by the legislature for the fund's original intent and make it a political football rather than a market-driven process." She argued that HB 202 would cut the people out of the process almost entirely. She urged a "no" vote on HB 202 and HB 37. 12:45:18 PM ANDRA RICE shared that she relies on a full PFD for her heating oil and doesn't want it taken away from her grandchildren. She said she loves Alaska, adding that the dividend belongs to the people, as does their income. She reiterated her opposition to both HB 202 and HB 37. 12:46:44 PM MELISSA GUDOBBA stated that she believed the legislature is trying to "bamboozle" and "hoodwink" Alaskans. She argued that if people are willing to give up their liberties for temporary securities, then they don't deserve either. She believed that growing the government when revenues are high and not being able to pay for those programs when revenue is low is irresponsible. She concluded by stating her opposition to HB 202 and HB 37. 12:48:49 PM JAMES SQUYRES [Due to technical difficulties, the majority of Mr. Squyres' testimony is indiscernible throughout.] 12:51:21 PM GARY MCDONALD urged the legislators to listen to the previous testifiers. He said, "Mr. Wool is trying to pull the wool over your eyes if he gets both bills." 12:52:07 PM ROBERT COELTER stated his opposition to HB 202 and HB 37 as a taxpayer and proponent of small government. He believed that HB 37 would enlarge government by taking people's money to increase government spending. Further, he opined that HB 202 would make government larger. 12:53:36 PM THOMAS BELLANICH stated his opposition to HB 202 and HB 37. He opined that children should not be taxed, because they are the future. Further, that if a tax were to be implemented, it should be a wage tax, as opposed to an income tax. He emphasized that many rely on the dividend for clothing, heating, food, and hunting, and that taking it away would be wrong. He reiterated his belief that a wage tax is preferable, as it would allow the state to tax nonresidents. 12:55:45 PM JEAN HOLT stated her opposition to HB 202 and HB 37. She believed both bills would eliminate Alaskans' ability to receive their share of mineral rights through the PFD. She advocated for SJR 6 and SJR 7. 12:56:58 PM RENEE WELLINGTON expressed her opposition to HB 202 and HB 37, especially after the difficult year Alaska has faced. She opposed implementing an income tax to "grow" government and reducing the PFD. She urged the legislature to listen to Alaskans and stop catering to special interest groups. 12:58:32 PM LAURA BONNER said she's pleased to see a proposal that would change the outdated PFD formula, which no longer works. She opined that HB 37 is more sustainable for future generations, while still providing a dividend. She pointed out that in the future, oil royalties may decrease; therefore, she opined that HB 202 would not be the best solution. She believed HB 37 would offer a new source of revenue, which is desperately needed to provide services. She concluded that an income tax wouldn't be popular, but it's necessary. 1:00:00 PM DAVE JOHNSON disclosed that he has worked in Prudhoe Bay for over 20 years, adding that over 50 percent of his nonresident coworkers do not pay taxes. He stated his support for both HB 37 and HB 202. He pointed out that it's easy to "throw stones" at solutions. He emphasized the need to pick a solution, as the state is in a tough spot from drawing down its savings. 1:00:51 PM JOHN SONIN expressed his support for HB 37. Regarding HB 202, he said he was not as clear on how it would be implemented, but he is supportive. He shared his belief that future generations should be able to share in the "gifts" of the permanent fund. 1:03:08 PM JANET MCCABE stated her support for HB 202. She said adopting this bill would be a major step towards giving Alaska much needed fiscal stability. For years, she said, the legislature has disagreed about the percentage of POMV funds to use for dividends and the percentage to use for state services. HB 202 would solve that issue by drawing funds for the dividend by a totally separate source. Instead, the dividend would be a fixed percent of annual mineral revenues. She believed the resulting stability would benefit and strengthen Alaska's economy. Further, she emphasized the importance of passing HB 202 to protect the permanent fund and POMV revenue, which is now the state's primary source of income. She concluded that passing HB 202 this session would be an important and beneficial achievement. 1:04:50 PM ELEANOR ANDREWS stated her support for HB 202. She believed that without a fiscal plan that provides sustainable income from every source, Alaska would be worse off than it was before the discovery of oil. She indicated that HB 202 would provide an additional source of revenue. She pointed out that government- provided services that everyone enjoys would not be possible if the permanent fund ceased to exist. 1:06:19 PM PETER MICHALSKI said he agreed with the previous testifier's comments regarding HB 202. Additionally, he opined that HB 37 would maintain the dividend program while implementing a minimal tax. He believed HB 202 and HB 37 would put the legislature on the right track towards fulfilling the constitutional requirement of providing education, public safety, roads, and other services. 1:08:08 PM CHAIR SPOHNHOLZ closed public testimony on HB 37 and HB 202. [HB 37 was held over.] 1:08:33 PM The committee took an at-ease from 1:08 p.m. to 1:12 p.m. 1:12:39 PM CHAIR SPOHNHOLZ moved to adopt Amendment 1 to HB 202, labeled 32-LS0884\I.1, Nauman, 5/13/21, which read: Page 5, line 16: Delete "30" Insert "50" 1:12:49 PM REPRESENTATIVE STORY objected for the purpose of discussion. 1:12:53 PM CHAIR SPOHNHOLZ explained that Amendment 1 would increase the percentage of royalties the legislature may appropriate to the dividend fund from 30 percent to 50 percent, which would allow the dividend to remain tied to resource production while allowing more of the revenue to go towards Alaskans through dividends. She opined that the concept of the bill is intriguing; however, she said she had "heartburn" in regard to the proposed PFD formula and the corresponding amount in HB 202. She noted that as currently drafted, HB 202 would produce a dividend of $442 in FY 21, which she characterized as "low." Per ITEP, she reminded the committee that a PFD reduction would be the hardest on lower-income individuals and that 95 percent of Alaskans would be worse off with a PFD cut, as opposed to other forms of revenue. She added that the only people who are better off with a PFD reduction are those in the top 5 percent who make $228,000 a year or more. She reiterated that the proposed amendment would increase the percentage of royalties that would go to dividends and, if adopted, would produce a dividend of $763 in FY 21, which would provide more certainty. 1:14:43 PM REPRESENTATIVE STORY removed her objection. 1:14:46 PM REPRESENTATIVE JOSEPHSON objected. He said given that the current statutory dividend formula provides for a dividend of $3,400, Amendment 1 would be a marked decrease. Nonetheless, he reported that as it's currently written, the bill would have resulted in a dividend of $1,600 in the "productive" years of FY 08 through FY 12; therefore, he presumed that if Amendment 1 were to pass, the dividend would have increased to approximately $2,000 in those years. He asked why that is affordable. 1:15:54 PM CHAIR SPOHNHOLZ noted that she only possessed modeling from the Legislative Finance Division that dated back to FY 16. Further, she reported that in FY 18, 50 percent of royalties would produce a dividend of $1,008, which is significantly smaller than the figure referenced by Representative Josephson. REPRESENTATIVE JOSEPHSON clarified that he had referenced data from 2008, as opposed to 2018. CHAIR SPOHNHOLZ responded that she didn't have the information for that year. Further, she recalled that 2008 was a fairly high oil price environment, indicating that the state had more money at that point in time. She reiterated that in FY 21, Amendment 1 would yield a dividend of $763, which is still modest and much lower than the historic average of the dividend at approximately $1,100. REPRESENTATIVE JOSEPHSON indicated that he liked the spirit of generosity in which the amendment was proposed. However, he pointed out that in a world without COVID and AARPA funds, the proposal would cross into deficit spending without new revenue, which is concerning. CHAIR SPOHNHOLZ opined that Representative Josephson's statement would be true if the dividend were the only solution to the fiscal problem; however, she expressed her opposition to a "permanent fund only solution," adding that it would be "the most regressive thing that you could do." Further, she believed that for 95 percent of Alaskans, a "PFD only solution" would be worse than an income tax, as proposed by Representative Wool. She stated her belief that HB 37 is a practical measure, which would leverage the funding sustainability of the permanent fund and require Alaskans to chip in through an updated PFD formula while balancing the regressivity with an income tax. She reiterated her objection to the premise that the dividend is the only considerable solution to address Alaska's fiscal situation. She pointed out that if Amendment 1 to HB 202 were to pass, there are other bills that would complement the proposed legislation, such as income and oil tax revenue bills that could help while still keeping Alaska competitive and balance the budget while providing for a more reasonable dividend than what is currently proposed in the original draft of HB 202. 1:19:10 PM REPRESENTATIVE SCHRAGE requested that the bill sponsor speak to Amendment 1. 1:19:35 PM REPRESENTATIVE KELLY MERRICK, Alaska State Legislature, prime sponsor of HB 202, stated that the original intent of the legislation was to avoid overdrawing the POMV. She deferred to her staff, Ms. Teal, to explain the implications of Amendment 1. 1:20:09 PM TALLY TEAL, Staff, Representative Kelly Merrick, Alaska State Legislature, on behalf of Representative Merrick, prime sponsor of HB 202, said based on cursory modeling from the Legislative Finance Division, the budget reserves would increase before leveling off and the dividend amount would be slightly under $800. Most concerning, she said, is the $39 million overdraw from the earnings reserve account (ERA) in FY 23. She noted that modeling showed FY 23 as the only year in which the ERA would be overdrawn. 1:20:56 PM CHAIR SPOHNHOLZ stated that she wouldn't support an ERA overdraw, adding that other revenue measures could complement this legislation. 1:21:05 PM REPRESENTATIVE EASTMAN observed that Amendment 1 appeared to be talking about a cap. He asked whether the dividend was intended to be capped at "whatever amount that 50 percent of those categories of money is" and the legislature would not be able to appropriate more money to a dividend in a separate appropriation. CHAIR SPOHNHOLZ shared her belief that Representative Eastman may be speaking to the underlying bill, as Amendment 1 simply instructs the deletion of "30" and the insertion of "50" on page 5, line 16. REPRESENTATIVE EASTMAN asked whether "50" represents a cap and whether the intent was to increase the cap to 50 percent. CHAIR SPOHNHOLZ remarked. "I believe, Representative Eastman, that you understand that all bills and legislation are subject to appropriation by the legislature." REPRESENTATIVE EASTMAN said he is confused about what Amendment 1 is attempting to accomplish. He asked again whether it pertains to a cap or not. CHAIR SPOHNHOLZ responded, "We are talking about increasing the amount of funds that are available to the dividend, as proposed by HB 202." 1:22:29 PM REPRESENTATIVE WOOL conveyed that he shares some of the concerns that Representative Josephson expressed. He explained that he appreciated that the bill, in its original form, would not produce any overdraws. Further, he characterized 30 percent of royalties as sustainable and highlighted the surplus, which was forecasted in the fiscal modeling. He opined that increasing 30 to 50 would push up against the wall of that surplus and asked whether the price of oil and the budget would have to stay in narrow parameters to maintain sustainability. He emphasized that he was not opposed to a dividend of $700; however, he wanted to make sure that it would be affordable. CHAIR SPOHNHOLZ deferred the question to Conor Bell. 1:24:22 PM CONOR BELL, Fiscal Analyst, Legislative Finance Division, explained that the division's modeling assumes that any deficits are filled with the constitutional budget reserve (CBR) until the CBR reaches a minimal balance of $500 million, which is the recommended minimum balance for short-term cash flow purposes. He confirmed that based on the division's modeling, there would be an unplanned ERA draw of $9 million [if Amendment 1 were to pass]. He continued to note that there are alternative options, such as drawing the CBR below $500 million. Alternatively, different oil prices and revenue assumptions could produce different outcomes. 1:25:23 PM REPRESENTATIVE WOOL sought to confirm that above 30 percent, a CBR draw may be assumed, as opposed to a draw from the ERA. He concluded that to pay out a 50 percent royalty in FY 22, the CBR would have to be drawn down to $500 million. He asked whether that is correct. MR. BELL clarified that based on the Legislative Finance Division's modeling, there would be a $355 million deficit, which would be filled from the CBR, resulting in an ending balance of $544 million in the CBR. Additionally, in FY 23, a small ERA draw would be required, as the $97 million deficit would bring the CBR down to its minimum recommended balance of $500 million. 1:26:27 PM CHAIR SPOHNHOLZ acknowledged that [Amendment 1] would reduce the available revenue to pay for government and dividends; however, she strongly believed that a PFD of $442 would be too low. She characterized a dividend of that size as "bad policy" and "politically untenable," as the public would be angry. She opined that [HB 202] could be one piece of an overall fiscal plan. She added that she would be uncomfortable with a "permanent fund-only solution." She explained that she proposed Amendment 1 in an attempt to stay within constitutional limitations while creating a modest change to the dividend, which would be part of a broader discussion. 1:27:43 PM REPRESENTATIVE STORY sought to confirm that that there would be a $39 million overdraw of the ERA [if Amendment 1 were to pass]. She asked whether there would be [additional overdraws] in the following years. MS. TEAL responded that based on the modeling, that was the only year in which a deficit would need to be filled through some measure. She added that the proposal appeared to be sustainable in the outyears. REPRESENTATIVE STORY asked, "How many years did you roll out?" MS. TEAL shared her understanding that the Legislative Finance Division's fiscal model forecasts through FY 30 or FY 31. 1:28:47 PM REPRESENTATIVE SCHRAGE pointed out that there would still be 15 to 20 percent of the natural resource income going to the general fund. Provided Amendment 1 requires an additional revenue measure, he questioned why not have all the remaining natural resource income go to the PFD and backfill with a revenue measure? Further, he noted that [Amendment 1] would leave no funds available for a capital budget. He asked the sponsor of the proposed amendment to respond. CHAIR SPOHNHOLZ reiterated that the proposed legislation would seek to balance the budget using only the dividend. She acknowledged that a method for funding the capital budget had not been considered unless additional measures were enacted. She understood that this proposal is one piece of a broader conversation, such as geobonding or federal funding, and could not stand alone if the budget were to function. She relayed that she and Representative Merrick are in strong alignment on the notion of a robust capital budget, and she explained that she thought increasing [the cap] from 30 to 50 was a compromise. Nonetheless, she said she continues to be uncomfortable with a dividend that is less than $1,000. 1:30:53 PM REPRESENTATIVE MERRICK, in response to Representative Schrage's comments about constitutional requirements going to the permanent fund and the rest going to dividends, noted that the scenario in question was modeled by the Legislative Finance Division. She deferred to Ms. Teal. MS. TEAL deferred to Mr. Bell. 1:31:21 PM MR. BELL responded that if only 25 percent of royalties were to go the permanent fund's principal account, there would no longer be an ERA overdraw. However, there would still be deficits in FY 22 and FY 23, followed by a surplus in FY 24 based on the division's modeling. 1:32:06 PM REPRESENTATIVE JOSEPHSON asked Mr. Bell whether the small deficits in FY 22 and FY 23 are associated with the bill in its current form or Amendment 1. MR. BELL answered Amendment 1. REPRESENTATIVE JOSEPHSON sought to confirm that the $37 million in FY 23 was still being discussed. MR. BELL clarified that if the legislature were to forego paying the additional statutory royalties to the principal and instead pay only the constitutionally required 25 percent to the principal and 50 percent of total royalties to the PFD, then there would no longer be an ERA overdraw. 1:33:16 PM REPRESENTATIVE MERRICK shared her understanding of Representative Schrage's questions as "if [the legislature] paid the constitutional requirements to the permanent fund, then paid 100 percent of the other royalties." She asked Mr. Bell to comment. 1:33:42 PM MR. BELL responded that there would be larger deficits under the proposed scenario. He explained that if the constitutionally required 25 percent were paid to the principal and the entire remainder of royalties was allocated to the dividend, the FY 22 PFD would amount to $1,700 and there would be a deficit of $900 million. 1:34:18 PM REPRESENTATIVE WOOL asked Mr. Bell what budget numbers were used for his calculations. MR. BELL said [the division] had been working off of the governor's amended budget and the capital budget as outlined in the Office of Management & Budget's (OMB's) 10-year plan. He highlighted another assumption pertaining to permanent fund investment returns below the current fiscal year to date. 1:35:13 PM CHAIR SPOHNHOLZ [received confirmation that Representative Story had removed her objection to Amendment 1.] REPRESENTATIVE STORY recalled someone else had also objected. [It had been Representative Josephson.] CHAIR SPOHNHOLZ asked if there was any further objection. 1:35:19 PM REPRESENTATIVE EASTMAN objected. He said he believed that if Amendment 1 were to pass and legislators were to exceed the 50 percent threshold through multiple appropriation vehicles, a lawsuit would likely be engendered. CHAIR SPOHNHOLZ remarked, "I presume you mean the underlying bill could potentially create that same situation." REPRESENTATIVE EASTMAN replied, "Yeah, I'm trying to figure out how it doesn't, but I'm not seeing that." CHAIR SPOHNHOLZ clarified for the public that the amendment would only change "30" to "50." 1:36:30 PM A roll call vote was taken. Representatives Josephson, Story, and Spohnholz voted in favor of the adoption of Amendment 1. Representatives Wool, Schrage, and Eastman voted against it. Therefore, Amendment 1 failed by a vote of 3-3. 1:37:32 PM CHAIR SPOHNHOLZ invited further discussion on the underlying bill, HB 202. 1:37:41 PM REPRESENTATIVE JOSEPHSON shared one reason that he likes HB 202 is that it wouldn't suffocate government. He recalled that oil prices crashed around fall 2014; therefore, the legislature had been aware of this problem for seven years while generally lacking the courage to do something about it aside from the POMV. He opined that the proposed legislation is fiscally responsible because it wouldn't interfere with publicly requested services. He stated his intention to support moving the bill from committee if an objection were made. 1:39:03 PM REPRESENTATIVE SCHRAGE expressed his general agreement with most of the statements from the previous speaker. He believed that HB 202 would provide for services that the state depends on, such as roads and education, regardless of one's income bracket. Further, he appreciated that the proposed legislation would tie dividends to natural resource production. However, he expressed his concern that out-of-state workers come to work in Alaska while contributing nothing to the state, which he characterized as a "huge issue" that the legislature will have to reconcile at some point. Nonetheless, he conveyed his support for the bill. 1:40:21 PM REPRESENTATIVE WOOL stated his support for HB 202 and commended its sustainability. He indicated that he was comfortable with 30 percent going towards the dividend, which could always be added to in the future. 1:41:19 PM REPRESENTATIVE STORY said she would have preferred the bill if Amendment 1 had passed; nonetheless, she expressed her intent to support it. She reiterated that the legislation would not eliminate the potential of increasing the dividend through other mechanisms. 1:41:56 PM REPRESENTATIVE EASTMAN stated that normally, he doesn't favor holding bills longer than necessary, adding that he would like to vote the bill out of committee so that he could be a "no" vote and recommend that others do the same. However, he posited that because the proposed legislation is not trivial, as it recalculates the dividend and would reduce the current dividend by 87 percent, the committee should acquire more feedback from the public before advancing it to the next committee of referral. He said he would be a "no" vote because public testimony had been limited, characterizing it as "bad process." 1:42:51 PM CHAIR SPOHNHOLZ said she would allow the bill to move from committee; however, she emphasized that she does not support a dividend of $450. She shared a personal anecdote. She advised that a dividend of that size would be bad for 95 percent of Alaskans and only sufficient for those who earn upwards of $228,000 per year, which is only 5 percent of Alaskans. 1:45:23 PM REPRESENTATIVE WOOL moved to report HB 202 out of committee with individual recommendations. 1:45:35 PM REPRESENTATIVE EASTMAN objected. 1:45:37 PM A roll call vote was taken. Representatives Josephson, Schrage, Wool, and Story voted in favor of reporting HB 202 from committee. Representatives Eastman and Spohnholz voted against it. Therefore, HB 202 was reported out of the House Special Committee on Ways and Means by a vote of 4-2. [Although not stated on the record, the vote was voided due to a failure to mention the fiscal note.] 1:46:29 PM The committee took a brief at-ease. 1:46:43 PM REPRESENTATIVE WOOL moved to report HB 202 out of committee with individual recommendations and the accompanying fiscal notes. 1:46:56 PM REPRESENTATIVE EASTMAN maintained his objection. 1:46:58 PM A roll call vote was taken. Representatives Josephson, Schrage, Wool, and Story voted in favor of reporting HB 202 from committee. Representatives Eastman and Spohnholz voted against it. Therefore, HB 202 was reported out of the House Special Committee on Ways and Means by a vote of 4-2.