HB 156-INCOME TAX  6:08:00 PM CHAIR CARPENTER announced that the only order of business would be HOUSE BILL NO. 156, "An Act relating to the taxation of income of individuals, partners, shareholders in S corporations, trusts, and estates; repealing tax credits applied against the tax on individuals under the Alaska Net Income Tax Act; and providing for an effective date." 6:09:51 PM REPRESENTATIVE ALYSE GALVIN, Alaska State Legislature, prime sponsor of HB 156, presented a PowerPoint presentation, titled "HB 156: Income Tax." She began on slide 1 by mentioning she had originally intended to start the discussion with a broader look at the subject and putting the income tax "into context," but that she paired down her presentation to focus specifically on HB 156. She gave an overview of the presentation agenda on slide 2, which read as follows [original punctuation provided]: High Level Overview of HB 156 What it Does and What it Doesn't Do Why HB 156 Should be Considered A Broad-Based Revenue Source Should Be Part of a Sustainable Fiscal Plan An Income Tax is the best choice for a Broad-Based Revenue Source Income Tax Structure in General What income can be included What are the options for structuring an income tax Fiscal Impact of various income tax options HB 156 Details Implementation and Costs Public comments received Sectional Analysis Question and Answers 6:11:02 PM REPRESENTATIVE GALVIN provided an overview of what HB 156 does on slide 3, which read as follows [original punctuation provided]: Proposes a 2% income tax on high earning Alaskans (only applies to income above $200,000 per year), and a $20 head tax on all other Alaska wage and income earners. Is estimated to generate approximately $120M to $150M per year in revenue Provides a legislative vehicle to discuss the merits of A broad-based tax to raise revenue rather than more cuts to the PFD; An income tax rather than a sales tax; The options (levers) that can be adjusted with an income tax to best fit the Alaska economy and state revenue needs. Can function as a component of a sustainable fiscal plan, as a broad-based stabilizer of our currently unpredictable revenue stream based on oil prices. REPRESENTATIVE GALVIN misspoke and said that there would be a 20 percent head tax. CHAIR CARPENTER corrected for the record that it would be a $20 head tax. 6:12:33 PM REPRESENATIVE GALVIN continued on to speak about what HB 156 does not do on slide 4, which reads as follows [original punctuation provided]: Raise any revenue for the FY24 Budget year. Solve Alaska's fiscal crisis on its own. Significantly burden Alaska's economy. REPRESENTATIVE GALVIN suggested that a broad-based income source was an important part of a sustainable, long-term fiscal plan. 6:13:01 PM REPRESENTATIVE GALVIN recognized that [the state of Alaska] has approached a fiscal cliff and considered how HB 156 can offer a solution on slide 5, which read as follows [original punctuation provided]: Our long-term structural budget deficit can no longer be filled solely by draws from savings and/or PFD cuts. A broad-based revenue source should be considered as part of a sustainable fiscal plan. A broad-based revenue source will provide a stabilizing source of revenue, not dependent on volatile oil prices, and will grow with our economy. An Income tax has benefits over other broad-based tax options, such as a sales tax. 6:13:59 PM REPRESENTATIVE GALVIN moved to slide 6 and discussed the general agreement that was reached by many economic experts that broad- based revenue was needed in Alaska. She showcased this point by referencing the Thirty First Alaska State Legislature's Fiscal Policy Working Group's (FPWG) final report with text on slide 6, which read as follows [original punctuation provided]: The FPWG recommends the legislature consider additional annual revenues, working towards revenues on the order of $550-$775 million, as a part of a comprehensive solution. Though the FPWG was not able to make a specific recommendation for type of revenue, the FPWG generally recommends adoption of a broad-based revenue measure, in addition to other revenue measure, as a part of a comprehensive solution. 6:14:33 PM REPRESENTATIVE GALVIN reported that in the opinion of herself and many tax and economic experts "in Alaska, an income tax is preferable to a sales tax." She detailed the reasoning behind this opinion on slide 7, which read as follows [original punctuation provided]: There are several reasons an income tax should be preferable in Alaska 1. Sales taxes are more regressive than income taxes hitting poorer families hardest 2. Sales taxes creates complication with the over 100 municipalities with current local sales taxes. 3. Regional price disparities would disproportionally hurt rural residents if a sales tax is put in place. 4. The burden on non-residents is different: 1. Income tax: Visiting Workers tax on wages and earnings generally not subject to income tax in their resident state; 2. Sales tax: Tourists - placing a competitive disadvantage on tourist industry's marketing efforts. 6:15:23 PM REPRESENTATIVE GALVIN referred to a graph on slide 8 from an Institute on Taxation and Economic Policy (ITEP) study on the regressive nature of a sales tax. She described the visual, which showed how generating $500 million with a sales tax versus an income tax would impact tax payers based on their economic status. She recognized that the figures in the graph were slightly different than the ones purposed in HB 156, but the general idea of the visual remained the same, and she opined that from the figures in the graph "taking 212 percent from the poorest Alaskans affects their lives far more than taking an extra 2.8 percent from the highest earning Alaskans." 6:16:39 PM REPRESENTATIVE GALVIN explained the visuals on slide 9 and said there are many models for income taxes. Once a model has been chosen, she relayed that it can be further tweaked by changing the "gears" within the model depending on the desired function of the tax model. 6:17:03 PM REPRESENTATIVE GALVIN described the variety of income types that could be included in an income tax on slide 10, which read as follows [original punctuation provided]: Wages, salaries Retirement income IRA, pension, annuities, Social Security Business income Sole proprietorship, Partnerships (LLC, Limited partnerships, S-corporations) Investment income Capital gains, Dividends, Interest Other PFD, Unemployment, Farm 6:17:25 PM REPRESENTATIVE GALVIN reported that most states build their income tax off of the federal tax system to simplify the choices and the impact on taxpayers. Using a visual on slide 11, she explained the federal tax process and how it has been used to inform state income tax calculations. She gave three options for identifying income that are derived from the federal tax process and provided an explanation of each. The options were using the Adjusted Gross Income (AGI); using the Federal Taxable Income; or using the Federal Taxes Due. 6:18:33 PM REPRESENTATIVE GALVIN moved to slide 12 to show which structural options for an income tax she chose for HB 156. She started by explaining her decision to use the federal AGI, because that was what most states used. She explained that she went with a standard deduction model, because being able to set the deduction at a certain amount helped her create a proposal that would garner maximum support, both from the public and within the legislature, which she believed was an important part in the success of the bill. Between the choices of a flat tax rate or a graduated tax rate, she reported that HB 156 included a flat tax rate with an additional $20 head tax. She stated her belief that this combination of tax rate and head tax would create a heightened sense that all taxpayers were stakeholders in Alaska. 6:20:25 PM REPRESENTATIVE GALVIN returned to the topic of support for HB 156 on slide 13, which read as follows [original punctuation provided]: This version is responsive to what I'm hearing from other legislators In discussions with others in the building, it seems a lighter income tax take is needed to attain passage This lighter version would need to be paired with more revenue from other sources (e.g. Oil Tax Reform and/or greater PFD reduction) to create a sustainable fiscal plan (not my preferred outcome, but a compromise that could gain the votes needed to pass) 6:20:53 PM REPRESENTATIVE GALVIN continued to slide 14, which included a bar chart showing the current tax structure purposed in HB 156. She first explained the $20 per person head tax by stating that every person or family making less than $200,000 annually would pay only the $20 tax. She further explained that the flat rate of 2 percent would only be applied to taxpayers that have an income above $200,000, and only the amount above $200,000 would be taxed. The $20 head tax would also be applied to the total amount, and she referred to the bar chart to give specific examples. 6:22:01 PM REPRESENTATIVE GALVIN spoke about the technical provisions of HB 156 on slide 15, which read as follows [original punctuation provided] : Tax paid by nonresidents on income earned in the state Tax is paid by Alaska residents on all their income regardless of where earned A credit is given for income taxes paid to other states for income earned in that state(so no double taxing of income) Tax also applies to income earned by trusts and estates, not on their asset value Detailed provisions to establish what income is "from a source in the state" Employer withholding from wages with periodic payments from employers to the state Employers send employees annual wage statement similar to the federal W-2 Annual tax returns due same day as federal return Department of Revenue to establish regulations to provide further details Income tax exempted from general DOR requirement to file electronically Most state income tax payments are deductible from federal taxes for those who itemize; thus a portion of taxes paid will be saved due to reduced payments to the IRS 6:24:22 PM REPRESENTATIVE MCCABE referred to an earlier comment he believed Representative Galvin had made that "nonresident income tax would raise more money than a sales tax." REPRESENTATIVE GALVIN stated that she did not remember saying that, and it was not her intention to imply as such. REPRESENTATIVE MCCABE emphasized that taxing nonresidents would not create more revenue than a broad-based sales tax and referenced FPWG findings from the previous legislature. REPRESENTATIVE GALVIN reiterated that she had not intended to compare a sales tax and an income tax on nonresidents based on their revenue generation, but rather on their impact to taxpayers. She explained that Alaska residents who live in communities that already have a municipal sales tax would feel especially burdened by an additional statewide sales tax. In comparison, she shared her belief that nonresident workers would not feel as burdened by an income tax, as the proposed 2 percent was much lower than what they might experience in other states, and she added that a rate as low as this would not deter out-of- state workers from coming to Alaska. 6:26:41 PM CHAIR CARPENTER inferred that the revenue specifics of the bill would be addressed later in the presentation. REPRESENTATIVE GALVIN confirmed Chair Carpenter's statement. REPRESENTATIVE MCCABE referenced that HB 156 uses the federal AGI model and questioned whether the $200,000 deductible was based on individual or total household income. 6:27:05 PM REPRESENTATIVE GALVIN confirmed that it depends on how they file their federal tax returns. She stated that for most people it would be very simple. REPRESENTATIVE MCCABE posed a hypothetical situation in which a married couple each made $199,000 and sought confirmation that it would be better to file separately in this case. REPRESENTATIVE GALVIN agreed with Representative McCabe's assumption, and referred to an upcoming slide that discusses this as one area of HB 156 that will need a fix. 6:28:29 PM REPRESENTATIVE GRAY referred to a point made on slide 15 regarding credits for Alaskan residents who work outside of the state and pay income tax to that other state. He asked whether the income tax would be applied to all nonresident workers, no matter what. REPRESENTATIVE GALVIN repeated that no matter what, the Alaskan income tax would apply to nonresidents. 6:29:20 PM CHAIR CARPENTER clarified that it would apply assuming the nonresident made over $200,000. REPRESENTATIVE GALVIN replied yes. She shared her understanding that there are a couple of sectors where there may be exceptions but deferred to other experts for that information. 6:29:51 PM REPRESENTATIVE GALVIN continued with her presentation on slide 17, which read as follows [original punctuation provided]: 86% of Alaskans will have no paperwork associated with this tax They will just see a $20 reduction note on their first paycheck of the year The 14% who will pay the 2% tax will likely use the same tax preparation method they currently use for their federal taxes (i.e. Turbo Tax, CPA, etc.) Some taxpayers can choose to pay their income tax as a reduction of their PFD 6:31:06 PM REPRESENTATIVE GALVIN moved onto a discussion about possible amendments to HB 156, starting on slide 18, which read as follows [original punctuation provided]: The $200K deduction limits the impact of the income tax to about 14% of Alaska income earners A $50K standard deduction would limit the impact to 50% of Alaska income earners REPRESENTATIVE GALVIN additionally referred to a graphic on the slide that showed estimated revenue generated by the two different deduction limits and stated that if HB 156 was amended to use a $50,000 standard deduction instead, they could expect revenue of $240 million. 6:32:03 PM REPRESENTATIVE GALVIN explained adjusting the head tax as another possible amendment on slide 19, which read as follows [original punctuation provided]: The $20 per person head tax is estimated to raise approximately $10.5M If the head tax were $100 per person it would raise $52.5M The current bill makes the head tax in addition to the income tax; it could [be] a minimum paid only if you don't pay any income tax (i.e. your income is less than $200K) REPRESENTATIVE GALVIN suggested that raising the head tax may significantly affect lower-income households, but that she has heard opinions that $20 was not enough, and wanted the committee to have an idea of what changing the head tax could do to the estimated revenue. 6:32:56 PM REPRESENTATIVE GALVIN continued to slide 20 which showed a graphic categorizing the public comments she had received. She reported that the majority were in support of HB 156 and that it was "the will of the people" for Alaska to institute a state income tax based on the HB 156 model. 6:33:50 PM REPRESENTATIVE GALVIN concluded the presentation on slide 21, which read as follows [original punctuation provided]: A sustainable fiscal plan for Alaska should include a broad-based tax An income tax is preferable to a sales tax for a variety of reasons HB156 can serve as a useful component to a sustainable fiscal plan I am open to work with the House Ways and Means Committee to amend HB156 to fit the preferences of the committee members 6:34:38 PM REPRESENTATIVE GALVIN reported that she had an appendix of additional slides that provided further context to the issue of an income tax. For the sake of not repeating information that the committee may already have, she wrapped up her presentation and stated she was available for any questions. 6:35:11 PM CHAIR CARPENTER asked to go over the fiscal note before answering specific questions. REPRESENTATIVE GALVIN replied yes and offered a reading of the sectional analysis as well. CHAIR CARPENTER confirmed he would like to hear both. He asked if Mr. Spanos from the Department of Revenue (DOR) was available to explain the fiscal note. 6:35:53 PM The committee took a brief at-ease. 6:37:14 PM BRANDON SPANOS, Deputy Director, Tax Division, Division of Revenue (DOR), introduced himself for the record. CHAIR CARPENTER requested that Mr. Spanos go over the fiscal note for HB 156. MR. SPANOS reported that DOR estimates that revenue would be $120 million for FY25, the first full year of implementation. He revealed that there was a possibility that some of that revenue might be shifted to FY26 due to quarterly payment plans. Impact by household will vary widely, which he explained was due to the proportional nature of the proposed tax model. He also mentioned that some impact will be mitigated by the deduction of state taxes from federal taxes, which will affect taxpayers that chose to itemize their taxes. He explained that DOR based the HB 156 model on aggregated federal income data for Alaskan residents, and that they expect an income tax on non-residents will raise Alaska's AGI by approximately 5 percent. This was a net income estimate based on the total nonresident income minus the income of Alaskan earned elsewhere. He emphasized that the model does not account for population growth, inflation, or economic impacts from the income tax itself. He mentioned that the model was adjusted for the standard deduction and the Permanent Fund Dividend (PDF) exemption, and that although the bill projects that there will be changes in taxpayer behavior in regard to how families file, the model does not adjust for these changes. He moved on to discuss the cost of implementation, which he reported would be steep due to the robust nature of the proposed broad-based tax. There would be a 12-month minimum implementation process at an estimated cost of $9.5 million, which he said would include working with DOR's current outside contractor to add an income tax module to the existing tax revenue management system (TRMS). These modules would also include software to prevent identify theft in relation to filing tax returns, which he described as standard practice. He posited that there would be a low rate of scamming due to the high deductible of this model. After implementation, an estimated $2.25 million in support and maintenance would be required through FY 25 but would decrease to $1.5 million from FY 26 onward. He explained that implementing an income tax module would be a multi-year process, beginning with establishing a tax withholding system and DOR regulations surrounding the income tax by January 1, 2025. HB 156 would allow taxpayers to use their PFD to pay their income tax, necessitating the addition of interfacing capabilities between DOR's and the Permanent Fund Dividend Division's systems. He listed additional costs of implementation that were included in the fiscal note, such as travel for outreach to Alaskan businesses, and additional programming for integration with national tax services. He reported that the second phase would be DOR staff, in concert with the outside contractor, building the following: the tax return itself, the online filing component, examination modules, and communication between the existing accounting, imaging, and collection systems. He noted that there was an exemption for electronic filing in HB 156 and that DOR's imaging system allows processing of paper returns. The state has seen great success with online filing in the past, and he hoped they would be able to move towards more online filing with the new model, increasing taxpayer compliance. The legislation would create an annual tax starting January 2026, to be filed by April 2026. He spoke further on the return structure for the income tax and reported that HB 156 would generate 400,000 plus returns. Although only taxpayers with incomes over $200,000 would be taxed, he shared DOR's understanding that all residents and nonresidents would have a filing obligation as well for the purpose of reporting their incomes. In order to estimate costs for implementation, he reported that DOR communicated with tax administrators Montana and Vermont, due to their comparable population to Alaska. DOR used a per capita based adjustment of the number of staff those states utilize to come up with an estimate of staff needed for implementation in Alaska, and due to a list of factors, such as lack of experience and an anticipated high call volume, the department recommended that Alaska employ 70 people, which was the higher end of the estimate. These new staff would be split between the offices in Anchorage and Juneau, but he added that the department would continue to look for ways to increase automation and improve efficiency in administration. He reported that the state currently processes a much smaller number of paper returns than what they estimate for the new tax model, and this would require a larger staff in their imaging department. He explained the travel costs, which are for public education efforts and for training staff across the state in the tax management system. There will also be additional services costs, which he reported reflect internal core services, such as rent for additional office spaces and further costs for their contractor. He ended his analysis of the fiscal note with noting that it included a breakdown of the 70 employees DOR anticipates adding on. CHAIR CARPENTER questioned whether the state was required to use FAST as the contractors for the programming, or whether the process of including an income tax allow the project to go to an open bid. MR. SPANOS replied that since the state already has a contract with FAST they would only go to a public bid if the state was interested in looking into using a new program. He opined that staying with the current program and having FAST create a new module for the income tax would be more efficient than going to a completely new program for just the income tax. He referenced refenced that the program has been integrated across departments. He emphasized that although the state would be able to create a separate system for an income or sales tax, he believed it would be less efficient than staying with one program across the board. 6:51:22 PM REPRESENTATIVE MCCABE inquired about the 62,100 nonresident employees estimated to work in Alaska, and asked whether there would be staff specifically hired to manage those tax returns. He opined on the various taxes required to be filed by those taxpayers and guessed that they would require extra management. MR. SPANOS answered that DOR did not break down the cost between a resident or nonresident return. From an administrative perspective, he said "a return is a return." He referenced the breakdown between resident and nonresident in HB 156 as necessary to establish whether a state has the authority to tax someone. He did not believe that there was enough difference between a resident versus a nonresident return to make one cost more than the other, and offered the necessary information for calculating how much exactly processing just nonresident returns would be. REPRESENTATIVE MCCABE questioned whether the FAST program included tax filing reciprocity between states automatically. MR. SPANOS replied that many are done by the multi state tax commission, but they can also be processed state by state. He said the department already has reciprocal tax agreements for the state's corporate income tax, so they would continue to use the multi state tax commission or deal with each state separately. He added that they do not typically share returns with other states directly from their systems, but rather export a file share with the Internal Revenue Service (IRS) or other states. 6:55:15 PM REPRESENTATIVE TILTON referenced the portion of the fiscal note that budgeted money for integrating the Permanent Fund Dividend Division systems with the DOR tax systems to allow taxpayers to use their dividend to pay their income tax. She questioned whether this amount would also cover proposed changes to the PFD application or whether those would require a separate fiscal note. MR. SPANOS relayed that he had not discussed that particular issue with the division recently, but that he had discussed how it would be done with them in relation to previous iterations of this bill. He inferred that the large fiscal note Representative Tilton was referring to might be relating to moving the whole division. He assured the committee that the programming changes covered by the fiscal note for HB 156 would be quite small, as it would not require moving the entire division, but rather creating a way for the division to report to the DOR which taxpayers have decided to use their PFD for their income tax and facilitating the transfer of that money. He assumed that DOR would be absorbing as much of FAST contractor's costs themselves, but that there could be a possibility that the division would need to put some of their own funds towards that. REPRESENTATIVE TILTON stated that the bill she was referencing was not the bill about moving divisions that Mr. Spanos mentioned. She clarified that she was speaking about a bill that would allow PFD recipients to give their PFD back to the state's general fund. 6:58:25 PM REPRESENTATIVE GROH expressed how impressed he was by the content of HB 156. He said he was struck by a graphic in the presentation that stated, "Alaskans would pay less in an income tax over a sales tax," and asked for Representative Galvin's opinion on why many Alaskans seem to prefer a sales tax over an income tax when they would end up paying more. REPRESENTATIVE GALVIN hypothesized that it might be a lack of understanding and that taxpayers may be thinking of sales tax in the small, daily increments they pay and not be considering how much they spend in a full year. She referred the question to economist Gunnar Knapp, who would be able to speak more about common patterns of thinking around taxes. 7:01:01 PM CHAIR CARPENTER reminded the committee that they are speaking at large about a comprehensive fiscal plan and to keep revenue comparisons in mind. He stated that the estimated revenue from a previously proposed state sales tax was $900 million, while in comparison HB 156 would generate about $120 million. He inferred that these two options would have very different impacts due in part to the amount of revenue they are generating. REPRESENTATIVE GALVIN agreed that there was a large discrepancy between the two amounts of revenue generation and reiterated that changing the "levers" of the bill, such as implementing a 5 percent instead of a 2 percent tax, could get the revenue generation of HB 156 closer $900 million. She also posited that there could be confusion among the public about the differing fiscal plans that may be affecting their support of the legislation. CHAIR CARPENTER asked Mr. Knapp if he could provide insight on the tax behaviors of Alaskans as it pertains to the two different broad-based tax plans. 7:02z:45 PM GUNNAR KNAPP, Professor Emeritus of Economics, University of Alaska Anchorage, Institute of Social and Economic Research, replied that he did not know the answer to Representative Groh's earlier question. He confirmed that he had heard the sentiment about lower income taxpayers that even though they'd pay less in the income tax, would prefer a sales tax, presuming an income tax would be raising the same amount as a sales tax. However, he did not know where that idea comes from. REPRESENTATIVE GROH suggested that many Alaskans think that the alternative to a broad-based tax would be "painless budget cuts" and referenced discussions on the House Floor to support his claim that "this isn't the case." Another alternative he mentioned was the toll system currently in place across many of Alaska's highways. He asked Professor Knapp and Representative Galvin to discuss taxpayers' perceptions about alternatives to a state-wide income or sales tax. REPRESENTATIVE GALVIN replied that there may be a lack of awareness [from the public] on the size of the state's budget deficit. She inferred that there are also decisions waiting to be made within [the legislature] about how much money they want to dedicate to "filling the hole." The answer to this question, she said, depends on the direction [the legislature's] wants to go with the state and which services and issues will take priority. As far as options for creating revenue, she stated that most Alaskans did not understand how much of a hole oil and gas was filling. She provided a breakdown of the state's current revenue streams, stating that oil and gas made up a third, another third comes from the savings earned on the Permanent Fund, and last third was attributed to smaller state fees and taxes, such as licenses and the cigarette tax. She related that some Alaskans she had spoken to thought the tax on marijuana was going to solve the revenue issue, but she reported that it brought in only $50 million, much of which was held for specific purposes. She suggested that this amount was not sufficient to fix the "hundreds of millions" [budget deficit] that Alaska faces. She shared her belief that [Alaskans] have "a shared responsibility to come up with an answer." An income tax would create "a lot of stakeholders who understand that they put money from their hard-earned paycheck into [the state]," which she felt would force the government to have a higher accountability for the services they provide. She recognized that there are different ways that revenue could be generated, but reemphasized her belief that although a lot of revenue could be generated through a sales tax, it may not be the best way forward for the state due to its regressive nature. She noted the three biggest expenditures were the PFD, education, and health services and that building a bigger sense of ownership within the public of Alaska's spending decisions was crucial. 7:10:32 PM MR. KNAPP added that it was a broad question, but at the core of the issue there are government services that every state has to provide and there has to be a way to pay for them. The most common way to pay for those state services was with a broad- based income or sales tax, and he stated that almost every state besides Alaska has implemented one, if not both. He opined that Alaska has been fortune for the last 40 years to levels of oil and PFD revenue high enough to make a broad-based tax unnecessary. However, he reported that the current decline in oil revenue has made Alaska face the hard reality that paying for government services and PFD's that Alaskans have become accustomed to will require a new revenue source. Unless the state decided to cut the budget or the amount of the PFD, which he suggested was something the government was unable or unwilling to do, a broad-based tax was the only way to make up the loss in revenue. He agreed with Representative Galvin's sentiment that a broad-based tax increases citizen engagement in the government. 7:13:36 PM REPRESENTATIVE TILTON referred to slide 17 regarding the bill's promise of no additional paperwork for Alaskans by removing the $20 head tax from the taxpayer's first paycheck of the year. She posited that the burden to pay the first tax would then fall to the employer, and asked for clarification on how the process would work. REPRESENTATIVE GALVIN referred the question to Mr. Spanos due to its technical nature. 7:15:02 PM MR. SPANOS confirmed that there was a component in the bill to withhold the $20, so it would be the employer's responsibility to remit this tax. He added that in the case of a taxpayer with multiple jobs, an employer would have to rely on the employee to disclose if they have already received their first paycheck of the year from a different employer. He suggested that there would be two options for the DOR to regulate this. The regulation could require the employer to withhold the $20 head tax for every new employee and the taxpayer would need to file a return to get a refund if they had the $20 withheld from multiple jobs. Alternatively, the regulation could state that an employee would sign an affidavit upon being hired in which they disclose whether or not they have had the $20 withheld that year. He spoke on the benefits of each option, stating that the first regulation would generate more revenue and would be easier for the Tax Division to administer, and the second regulation would be less burden on the taxpayer, especially if they have multiple job changes during the year. REPRESENTATIVE TILTON questioned how tax disputes would be resolved between employers and employees. 7:17:29 PM REPRESENTATIVE GALVIN deferred the question to Alexi Painter. CHAIR CARPENTER asked Mr. Spanos if he could answer the question. 7:17:45 PM MR. SPANOS replied that the state has not dealt with this issue before, so it would require some brainstorming from the DOR. He reported that at the federal level, the dispute was handled by the employer. Employees fill out a W-4 form at the beginning of employment, which then dictates how much would be withheld, and an employee would bring any issues with too much or too little being withheld directly to their employer. He did not imagine the Tax Division getting involved in these disputes. REPRESENTATIVE TILTON redirected her question to disputes specific to the $20 reduction note on the paycheck, and in the case that an employee never has the $20 withheld, asked how the liability dispute would be addressed. 7:20:11 PM REPRESENTATIVE GALVIN deferred the question again to Mr. Painter but reiterated that her intention was to lessen the paperwork burden on the taxpayer and would be happy to work with the various state departments to make that happen. CHAIR CARPENTER interjected that it was an interesting question since there are many people who work multiple jobs, and questioned how disparate employers would discern whether they were the first to withhold the $20. 7:20:44 PM ALEXEI PAINTER, Director, Legislative Finance Division, added that there have been past bills that included head taxes that were implemented through the Department of Labor & Workforce Development (DLWD) since they already have the structure in place due to the unemployment tax. However, DLWD was not equipped to handle the same process for an income tax, and he suggested that splitting the model in HB 158 into two separate taxes would allow the head tax to be administered through the existing DLWD structure and then use the proposed structure in HB 158 to apply to the income tax. He said that there could be some efficiencies for employers from this course of action, since they already use the DLWD system for the unemployment tax. CHAIR CARPENTER sought to clarify whether the bill would implement two different taxes through two separate departments, DLWD and DOR, who would be responsible for identifying how the State would collect the money. MR. PAINTER explained that currently the bill puts all of the tax management on DOR. He said that he had suggested separating the head tax as an option the legislature could take to reduce the amount of work for employers. He added that an income tax would still create a filing obligation for individuals. 7:23:08 PM REPRESENTATIVE TILTON inquired about a potential fiscal note from DLWD if the tax was split up. MR. PAINTER answered yes; however, he was unsure whether the fiscal notes would show that involving DLWD would create enough efficiencies for there to be a net savings for the State. 7:24:01 PM REPRESENTATIVE MCCABE referred to Representative Galvin's earlier statement that she was proposing an income tax in part because she and others in the legislature feel that it was less regressive than a sales tax for lower income workers. However, he referenced the executive summary of the Institute of Social and Economic Research (ISER) report which stated that PFD cuts are more impactful to that population and that the effects of an income tax on all Alaskans would be more than a sales tax. He quoted directly from the ISER study to say that the difference in impact comes from tourists and nonresident workers paying up to 10 percent of all revenue from a sales tax versus 7 percent from an income tax. He posited that this information may be why Alaskans "instinctively know that a sales tax is actually less regressive than an income tax." CHAIR CARPENTER asked Representative McCabe to name the study and page numbers he was referencing for the public. REPRESENTATIVE MCCABE replied that the study was entitled "Short-run Economic Impacts of Alaska Fiscal Options" by Gunnar Knapp, Mathew Berman, and Mouhcine Guettabi from ISER on March 30, 2016. He reported he was referencing the executive summary on pages 1 and 2. 7:26:50 PM REPRESENTATIVE GALVIN asked for Mr. Knapp to speak more about this study and specifically how regressive an income tax was in comparison to PFD cuts. CHAIR CARPENTER asked Mr. Knapp to speak to the ISER study as one of the authors. 7:27:43 PM MR. KNAPP acknowledged that there are two separate issues. The first was comparing the different methods for filling the fiscal gap for how regressive they are. He explained that cutting the amount of a PFD was highly regressive because the amount taken away from a person's yearly income with a PFD cut would be a much higher percentage for a low-income individual than it would be for someone with a higher income. He stated that data shows that a sales tax would also be more regressive in comparison to an income tax. He suggested that the various forms of filling the fiscal gap will have different impacts on Alaskans, and who will be impacted was important to consider when coming up with the right balance of revenue measures. The second question relates to getting money out of non-residents, which he emphasized was an important but different question. He reported that the study accounted for sales and income taxes raise revenue from nonresidents, just in different ways. He explained that a sales tax would include revenue from tourists and nonresident workers, and an income tax would only collect revenue from non-resident workers. He shared that his study did suggest the state may get more revenue from non-residents through a sales tax. However, he opined that the most important factor should not be the amount that will be raised from non- residents, but rather what the tax burden will be on Alaskans. REPRESENTATIVE MCCABE referenced table 2.2 on page IIV of the report, which shows the difference in revenue generated from non-residents between a 2.5 percent income tax and a 3 percent sales tax, and he described this difference as huge. He emphasized that Alaskans instinctively understood that this amount is significant. He further implied that the focus on an income tax as the least regressive option may be overlooking the "high regressivity" of [reducing] PFDs. 7:33:46 PM CHAIR CARPENTER reminded members that they are talking about one particular bill and how it could be part of a larger fiscal plan. REPRESENTATIVE GALVIN responded by agreeing that PFD reductions are the most regressive thing the legislature could do, which is why she proposed an income tax that would minimize the need to reduce PFDs. She restated that the proposed model allowed for adjustments to be made by "pulling levers" to increase revenue if desired. As the bill stood, it included a $200,000 "floor" that she agreed may not make as much as the sales tax. She pointed out that the amount of revenue brought in by nonresidents does not affect the regressivity of a tax on Alaskans and referred to the remarks made by Knapp and Spanos. She reported that Alaskans have expressed that people who come out of state to work the highest paying jobs in Alaska should be contributing in some way. Putting the proper systems in place to ensure Alaskans are getting those jobs instead is her ultimate goal, but she stressed that in order to get there the state needs a stable fiscal plan that does not depend on the volatile prices of the oil industry. CHAIR CARPENTER asked the committee to consider whether their goal was to raise revenue or to promote economic growth. He stated that the regressivity of a tax was a good measure if the goal is revenue, but other measures should be looked at if the goal is economic growth. 7:37:50 PM REPRESENTATIVE GROH expressed "his excitement" over his interpretation of Representative McCabe's previous statement, suggesting that Representative McCabe would be joining his efforts in raising rail taxes in order to avoid cutting PFDs. REPRESENTATIVE MCCABE opined that Representative Groh's comment was uncalled for. REPRESENTATIVE GROH asked Representative Galvin and Professor Knapp to state their ideal role for HB 156 to play in an overall fiscal fix. He further requested that they give a concise explanation that would help the committee and the Alaskan public understand. 7:39:06 PM REPRESENTATIVE GALVIN shared that she views HB 156 as the starting point to consider a fiscal plan that includes looking at more factors than regressivity, raising revenue, having state-wide accountability for that revenue, and keeping Alaskans in Alaska without driving them further into poverty. MR. KNAPP agreed that this bill would be a starting point for the State to look at a broad-based tax as a way to generate revenue. He stated that as other forms of revenue prove to not be enough, the proposed income tax was a way for Alaskans to "start helping to pay for what they receive" from State government, which is the status quo in almost all other states. 7:41:17 PM CHAIR CARPENTER asked whether the information on slide 8 represented what the bill does. REPRESENTATIVE GALVIN replied no, the graphic on slide 8 did not represent the bill at all. Instead, she stated, it was a "broad stroke" comparison between two broad-base revenue measures and how each would impact Alaskans across various levels of income. CHAIR CARPENTER sought to confirm that Representative Galvin's explanation of slide 8 showed what an income tax would look like for all categories of earners. REPRESENTATIVE GALVIN said yes. She circled back to the topic of regressivity and gave an anecdotal example of a family of four that makes $31,000. In order for the state to raise $500 million, it would require a $2,400 overall cut to that family's PFDs, which she expressed was exceptionally regressive and why the state needed to look at other ways to raise that money. 7:43:07 PM REPRESENTATIVE ALLARD stated that a family of four making $31,000 would already on several state services and receiving aide in the form of food stamps. She inferred that a family in those circumstances would not be purchasing high priced items, like a car, which would incur a high sales tax, and then questioned whether a sales tax would actually be as regressive to lower income Alaskans as the graphic on slide 8 depicted. REPRESENTATIVE GALVIN replied that all families buy goods, and the sales tax would apply to all goods. She reiterated that it is relatively more of a burden to pay a sales tax to lower income families. REPRESENTATIVE ALLARD emphasized the use of the word "relatively." REPRESENTATIVE GALVIN said that all taxpayers would feel a burden from a sales tax, but a millionaire would feel that burden relatively less than a lower income person. REPRESENTATIVE ALLARD mentioned the nonresidents working in Alaska and posited that they are doing so because there are Alaskans who are unable or unwilling to do those jobs. She wondered whether imposing a tax on those out of state workers would "scare them off," leaving a hole in the job market Alaska is unable to fill. REPRESENTATIVE GALVIN responded by comparing tax rates across the country. She reported that Alaska would have a 5.8 percent combined state and local tax rate, and the state with the next lowest has 7 percent. She guessed that the low tax rate combined with the natural beauty of Alaska would be a selling point for sought after professionals like engineers. She emphasized that she wanted to see Alaskans in those jobs and that [the legislature] should work toward that. REPRESENTATIVE ALLARD opined that Alaskans have chosen to not take those jobs which is why they have to be filled by nonresidents and that making money was the appeal for those workers, as being in Barrow or Prudhoe Bay in the winter may not be "the dream gig." She expressed concern about the $200,000 deduction creating a situation where "the 20 percent" would pay for "the 80 percent" and that this would be discriminatory to high income earners. She included dual military families among those who may be impacted. She concluded that an income tax with this model would not be a sound fiscal plan. 7:47:26 PM REPRESENTATIVE GRAY quoted former Alaska Governor Jay Hammond's thoughts on the repeal of Alaska's income tax in the 1980's, which stated that removing the tax would severe the connection between "the citizens pocketbook" and the state's budget, reducing the total revenue and eliminating the primary "restraint on government spending". He suggested that heightened government spending had come to pass and asked how the proposed $20 head tax may work toward keeping state spending in check. REPRESENTATIVE GALVIN noted that there is not recent data on taxes to pull from in Alaska but referenced studies that have been done in other countries around the benefits of an income tax that aligned with the thoughts of Governor Hammond. She stressed that even if the state decided to choose another broad- based tax over an income tax, taxpayers are still going to be taxed, which she identified as a common misunderstanding. A family of four may spend thousands of dollars annually "buying stuff" all of which would be subject to a sales tax. In regard to the fiscal plan as a whole, she wanted the committee to question which [tax mechanisms] are going to keep Alaskans engaged in the process. If the legislature decides to use broad-based taxes as one of those mechanisms, she asked that they consider the close to 50 percent of Alaskan families make $50,000 or less and how different aspects of a tax will affect them. She reminded the committee that the $20 head tax would be enough to pay for implementing the tax plan set forth in HB 156 and the 2 percent tax would all be additional revenue. She emphasized that it is not a bill intended to "pick at people" but was what she believed to be an easily implemental plan that can start the discussion on how Alaskans will handle the shared fiscal responsibility. 7:51:18 PM MR. KNAPP added that Alaska used to have head tax dedicated to schools which was also deducted from first paycheck. He stated that Governor Hammond's idea that public contribution to the government increases the value of services they expect in exchange was still relevant today. He pointed out that every tax has flaws associated with it and the administration of the tax will dictate the economic impacts, but neither an income or a sales tax is "the ideal solution". Regardless of which tax was used, he emphasized the importance of thinking carefully about the "levers" within them. He reiterated that the essential difference between the two types of taxes will be who bears the most burden from the tax. He reinforced the idea that the tax model can be adjusted by maneuvering the "levers" within it to fit different standards. CHAIR CARPENTER asked Mr. Knapp to expand on how a person's income dictates who creates business and economic growth and who acts on their entrepreneurial spirit. MR. KNAPP spoke on the many different elements of economic growth. He mentioned that there are economic growth implications for both income taxes and sales taxes, and although there is an assumption that an income tax is bad for economic growth, the answer to that question is very complex. CHAIR CARPENTER commented that perhaps his question was too specific, as it had not been directly addressed. 7:56:11 PM REPRESENTATIVE TILTON referred to slide 10, which listed the various types of income that could be considered in an income tax and asked which income sources would be considered in HB 156. Additionally, she asked whether taxpayers that were getting income exclusively from sources other than employment would be required to pay the head tax. REPRESENTATIVE GALVIN replied that the income considered taxable was defined in the bill and listed several examples, including salaries, business ownership or partnership, and ownership of s- corp. She also noted a possible amendment to remove social security as taxable. She asked for clarification on Representative Tilton's second question. REPRESENTATIVE TILTON restated her question on the head tax by confirming that the head tax would be taken out of the first paycheck of actively working taxpayers, and then asking about folks whose income does not come from employment but is still considered taxable. She questioned whether these people would have to pay the $20 head tax and how the state would go about collecting it. REPRESENTATIVE GALVIN answered yes, they would need to pay the head tax. All taxpayers will still need to file their taxes, even when they are no longer receiving actual paychecks. She explained that there were several ways for the taxpayer to make the payment once they have filed their taxes. 8:00:02 PM REPRESENTATIVE MCKAY made comments on previous parts of the discussion, including how hirable Alaskans are and that the PFD was the current string between citizens and state spending. He continued by providing information from his experience in the oil industry in regard to the taxable incomes list on slide 10, and insisted it needed to be vetted. He expressed his particular concern with taxing s-corporations as all of the oil and gas operations in Cook Inlet are s-corporations. He quoted data from the Department of Natural Resources (DNR) to explain how much oil needed to be produced to provide for the state and how much money it costs to drill the oil wells for this production. He cautioned that further taxing these corporations could prevent them from continuing their work in Alaska, leading to huge losses of jobs and potentially running out of gas, and that the list of taxable income should be thoroughly vetted to avoid such unseen consequences. REPRESENTATIVE GALVIN agreed that including s-corporations on the list of taxable income was misleading, and she had to question herself in the making on HB 156 whether it would be closing the "s-loop." She answered that no, the income tax only applies to the owner of an s-corporation making income above $200,000. She further clarified that this bill would tax individuals and not corporations, and that the types of businesses listed were included because if the person who owns that business makes more than $200,000, the amount above $200,000 would be taxed at 2 percent. She assured the committee that she had asked the same questions about the implications of the bill because tax law is complicated, and the intent is not to scare people away from the state. She returned to Chair Carpenter's earlier question about economic growth and agreed that was very important and inferred that regressivity plays an important role in economic growth because consumption is a big economic driver. Taking money directly from the poorest Alaskans will impact consumption. She wrapped up her comments by mentioning Warren Buffet's theories on middle-income workers and how this bill can be one tool to help reach the goal of a vibrant economy with Alaskans all prospering. 8:06:24 PM CHAIR CARPENTER announced that HB 156 would be held over.