HB 142-STATE SALES AND USE TAX  7:01:06 PM VICE CHAIR MCCABE announced that the final order of business would be HOUSE BILL NO. 142, "An Act relating to a state sales and use tax; authorizing the Department of Revenue to enter into the Streamlined Sales and Use Tax Agreement; and providing for an effective date." 7:01:27 PM CHAIR CARPENTER, as prime sponsor, read the sponsor statement for HB 142 [included in the committee packet], which read as follows [original punctuation provided]: State leaders should naturally be motivated to grow Alaska's private economy. The prospect of jobs and opportunity would allow our children to stay in Alaska, would attract development that would bring infrastructure investment, and would make retiring here comfortable for all employeesnot just those who had government jobs. Inertia in the state Capitol, however, keeps the state legislature focusing on government growth without corresponding economic growth. We can change that with a long-term fiscal plan for the state that incentivizes such growth. The Alaska legislature has the opportunity this session to pass a package of bills and resolutions that will: Take the permanent fund dividend payment out of the annual budget process and require the PFD to be paid by the formula in law, • Place a limit on government spending in a manner that incentivizes economic growth, • Reform our state government management and budgeting practices, and • Promote economic growth with business tax cuts, make carbon credits available to Alaska resource developers, streamline regulations, make obtaining licenses easier. As part of a package of bills that includes all these structural reforms, we can institute a low rate, broad-based sales tax that will bring a small share of the ensuing economic activity to government, and further incentivize legislators to pursue economic growth. HB142 imposes a two-cent tax on all sales of goods and services purchased in Alaska and allows the legislature to share half of the tax revenue with certain municipalities that meet certain criteria, including low property taxes. According to the Tax Foundation, forty-five states and the District of Columbia collect statewide sales taxes. Local sales taxes are collected in 38 states. In some cases, they can rival or even exceed state rates. The five states with the highest average combined state and local sales tax rates are Louisiana (9.550 percent), Tennessee (9.548 percent), Arkansas (9.46 percent), Alabama (9.25 percent), and Oklahoma (8.98 percent). Sales tax rates differ by state, but sales tax bases also impact how much revenue is collected from a tax and how the tax affects the economy. HB142 is designed after the South Dakota system as the broadest-based tax in the nation. Broad-based systems keep rates low, keep compliance simple, and create as few economic distortions as possible. Except for the five states that have no sales tax, a two-cent statewide sales tax would maintain Alaska's ranking as the lowest state and locally combined sales tax rate in the nation. 7:04:52 PM CHAIR CARPENTER, in response to a question from Representative McKay as to whether the sponsor statement should state "two- cent," said that a two percent tax would be literally a two-cent per dollar tax. 7:05:27 PM KENDRA BROUSSARD, Staff, Representative Ben Carpenter, Alaska State Legislature, on behalf of Representative Carpenter, prime sponsor, provided the sectional analysis of HB 142 [included in the committee packet], which read as follows [original punctuation provided]: Section 1 HB 142 amends AS 28.10.021 to add sales and use taxes for vehicles. Section 2 HB 142 amends AS 43.05.240 (a) to add sales tax collectors to those who may file for grievance if their seller's permit or resale exemption certificate is revoked. Section 3 AS 43 is amended by adding a new chapter to institute a statewide sales tax of two percent of sale or lease of tangible property or services and a two percent use tax on tangible personal property. The use tax is applied to tangible personal property acquired outside of Alaska as the result of a transaction that would have been subject to the sales tax if it had occurred in Alaska. The use tax is also applied to tangible personal property that has been converted to a use that is subject to tax. The use tax is additionally applied to services in Alaska that would be subject to a sales tax if purchased in this state (remote purchases). HB 142 provides exemptions to the sales tax for sales that are exempt by federal law 26 USC (Internal Revenue Code): government, tax-exempt corporations, employee wages, interest on loans and deposits, stock dividends, financial services fees, insurance premiums, personal uses of property or between business partners, the sale, lease, or construction of real property. HB 142 provides tax credits for sales or use taxes paid to another state. HB 142 requires businesses to acquire a seller's permit before doing business in Alaska. HB 142 exempts resales from taxation. HB 142 allows the department of revenue to suspend or revoke a seller's permit if the person who holds the permit fails to comply with the provisions of this law. HB 142 requires the department of revenue to enter the Streamlines Sales and Use Tax Agreement, a multi-state agreement for processing of cross-state transactions. HB 142 allows for a municipal share. The legislature may appropriate half the revenue collected from this tax to municipalities. A municipality may receive an appropriation under this section if the municipality does not collect either: o Property taxes in excess of ten mills; or o An oil and gas production tax or gas pipeline property tax. Section 4 Contains conforming language. Section 5 Provides for a transition to allow the department of revenue to adopt regulations under the Administrative Procedures Act. Allows for services contracted before the effective date of the tax to be exempt from the tax. Allows for persons to apply for a seller's permit or a resale permit before the effective date of this act. Section 6 Provides an immediate effective date for Section 5. Section 7 Provides an effective date for the remainder of this act of January 1, 2025. 7:08:53 PM CHAIR CARPENTER expressed the understanding of the gravity of putting forward a bill instituting a sales tax. He advised that in order to move the state forward in the direction of pro economic growth in the non-oil, private sector economy, the state would need to start moving in this direction. He said that, as a compromise, he is presenting HB 142 as an option for a broad-based revenue source, tying the legislative budget decisions to economic activity in the state. He argued that people in the state work in the private sector economy, and this is critical to why Alaskans want to be in the state. He said a sales tax, or broad-based tax, which ties the economy to government spending is important. He stressed that HB 142 is not the only item being presented, rather, it is one component of a policy package intended to have a positive economic benefit to the state. 7:11:33 PM REPRESENTATIVE GRAY raised the concern of higher costs for expenses, like groceries, in rural Alaska. He stated that the average price of milk in Anchorage is $4.20, while it is $8.80 in Bethel; therefore, he deduced that if people in rural Alaska are paying twice as much for groceries, the tax would be twice as much. He expressed the understanding that, under the proposed tax program, those who can least afford the tax would be the ones paying most of it. 7:12:35 PM REPRESENTATIVE MCKAY advised Representative Gray that the tax would have to be based on population. He expressed the understanding that most people live on the Railbelt, while about a quarter of the population live in rural areas. Furthermore, he illustrated an example where 75 percent of the state's population live in the $4.50 per gallon of milk region while 25 percent live in the $16 per gallon of milk region. REPRESENTATIVE GRAY, interjected, expressing the belief that it is unfair for people in Bethel to pay more. 7:13:27 PM VICE CHAIR MCCABE, referring to the comment that the tax would not be fair for rural populations, questioned whether the concern is that the revenue generated would be less. REPRESENTATIVE GRAY clarified that rural residents would be paying a disproportionately high amount of tax compared to Anchorage residents. He asked if there is a way to implement the program without rural Alaskans paying a disproportionate amount of the tax. 7:14:14 PM CHAIR CARPENTER suggested that the legislature investigate ways to reduce the cost of a gallon of milk in rural Alaska. He suggested that modernizing transportation in the region would be a better solution. REPRESENTATIVE GRAY concurred. CHAIR CARPENTER said, "If there is a will there's a way." He suggested that the only way would be to grow the state's economy, as solutions to big problems do not come without a growing economy. He advised that a two-cent tax on an $8 gallon of milk would be 16 cents. He explained that if municipalities can share in the state revenue, then a portion of the state's tax would be distributed to these municipalities. He suggested that this could somewhat alleviate the higher cost of goods. 7:16:13 PM REPRESENTATIVE GROH inquired about the emphasis on boosting the economy and pointed out that HB 142 would apply a tax on commerce. He recounted an article regarding the complexity and resource-heavy process, and how this would impact small businesses. He asked if Representative Carpenter shared his concern that a sales tax would burden Alaska's small businesses. CHAIR CARPENTER responded that a business collecting sales tax and passing the tax onto the consumer would not be a business paying the tax, rather the consumer would be paying it. He argued that regardless of whether the policy is income tax or sales tax, the cost would be passed on to the consumer. REPRESENTATIVE GROH commented about the compliance cost, which he said is the actual cost of collecting the taxes. He acknowledged that a few cities in the state collect sales tax, but his community of Anchorage has never had such a tax. He asked Chair Carpenter if he would seek a sales tax compliance exemption for small and local businesses. CHAIR CARPENTER pointed out that Anchorage is currently struggling with finances. He said the concept of a sales tax that works in partnership with small businesses is not unattainable; it is a cost of doing business. He said he is not concerned about the business community being able to figure this out since larger corporations, for example, can figure out larger and more complex corporate income taxes. He said, if the state were going down the path to eliminating the permanent fund dividend as a way to continue funding state services, this would hurt small businesses more than the compliance cost of a sales tax. REPRESENTATIVE GROH suggested that an alternative to a sales tax would be a high-earner tax. He relayed that, according to the federal reserve, the median household income is $81,000. He asked how much an average household is expected to pay annually in sales taxes. CHAIR CARPENTER expressed uncertainty and stated he would follow up to the committee. REPRESENTATIVE GROH asked if each household would get a sales tax return showing how much it paid in sales taxes throughout the year. CHAIR CARPENTER expressed uncertainty. 7:20:11 PM REPRESENTATIVE ALLARD commented that, although Anchorage does not have sales tax, there is a 10-cent per gallon tax on fuel. 7:20:40 PM VICE CHAIR MCCABE said there are many cities in Alaska that have a sales tax, including Wasilla. For example, if the city needs to construct a new library, the city could put a question to the voters as to whether they approve an increase in sales taxes for a set period of time. Furthermore, he said Wasilla has zero debt, explaining that, despite not having outside traffic with tourists, for example, the sales tax in the city would work "fabulously." He expressed the understanding from the data presented from the fiscal policy working group, there are not enough high earners in Alaska to satisfy the amount of money the state needs; therefore, as regressive as it may seem, the only possibility is a broad-based sales tax. He asked if Chair Carpenter agrees with this statement. CHAIR CARPENTER answered that he has spent time looking at a sales tax and does not prefer an income tax. He commented that states with income taxes, or progressive income taxes, are not as competitive as states which have sales taxes. He advised that if the committee is going to make a good decision, it should have a conversation comparing the two types of taxes. 7:22:46 PM REPRESENTATIVE GROH referred to a study by the Institute of Social and Economic Research at the University of Alaska Anchorage, which showed that more than 70 percent of Alaskans would do better and pay less under an income tax over a sales tax. Furthermore, he suggested that if the legislature had passed an income tax in 2017, $700 million would have been generated. He questioned whether these factors have been considered in the decision of a sales tax, which focuses on nonresidents, versus an income tax, which focuses on high earners. CHAIR CARPENTER expressed uncertainty concerning the options. He said that the only thing before the committee right now is a sales tax; however, he suggested that it is more likely the permanent fund dividend will be taxed instead, and this would be the most regressive tax. He said that, if the options are either the most regressive tax or a less regressive tax, and he has political agreement to "pass the lesser of those two evils," then he would suggest passing the sales tax. 7:24:50 PM VICE CHAIR MCCABE announced that HB 142 was held over.