SB 112-TAX ON REAA RESIDENTS    CHAIR GARY STEVENS announced SB 112 to be up for consideration and asked for a motion to adopt the committee substitute (CS). SENATOR BERT STEDMAN motioned to adopt the \F version CS for SB 112 as the working document. There being no objection, it was so ordered. CHAIR GARY STEVENS asked Mr. Harlamert to come forward. 1:36:56 PM CHUCK HARLAMERT, Department of Revenue (DOR), explained the following changes made in the \F version CS: · Section 1 is new. Page 1, lines 8-9 puts in place the requirements for a physical address on the permanent fund dividend. The change is necessary to enforce the type of tax that is based on where a person resides in the state. · Section 2, page 1, line 13 is a technical change to specify that individuals 21 years of age or older on January 1 of the tax year would be subject to the tax. · Page 2, line 7 changes the date by which the tax must be paid from November 1 of the subsequent calendar year to January 15 of the subsequent calendar year. · Page 2, line 13 change comports with more traditional withholding practices and requires withholding on employee paychecks and limits the withholding to the lesser of 10 percent of the taxpayer's gross earnings or one-half of the tax per pay period. · Page 2, lines 17-23 add subsection (c)(1)-(3) to give guidance to employers for withholding. It holds employers harmless for not withholding if the employee demonstrates prior withholding, previous payment, or that the 21-year age threshold isn't met. · Page 2, line 28 recognizes that an employee might have more tax withheld than is due and that a refund may be claimed from the state. 1:43:29 PM SENATOR STEDMAN said he was curious how work derived from natural resource extraction might be handled. MR. HARLAMERT explained the bill doesn't direct non-employee compensation arrangements and the state would prefer not to impose a withholding requirement where none previously exists. For instance, fishing boat owners don't have a federal withholding requirement for crewmembers and the state wouldn't want to impose a state tax because it would be more efficient to deal directly with crewmembers. CHAIR GARY STEVENS restated that it is the individual's responsibility rather than the employer's responsibility. MR. HARLAMERT said that's correct. 1:44:59 PM SENATOR JOHNNY ELLIS asked for a restatement of the age requirement. MR. HARLAMERT explained the bill taxes any individual living in the specified areas that are 21 years of age or older on the first of the year. SENATOR ELLIS questioned why age 21 is used rather than age 18. MR. HARLAMERT said that's the way the bill is written. SENATOR ELLIS referenced page 2, line 10 and asked if non- monetary compensation would be considered. MR. HARLAMERT replied that section relates to an individual that has not had the tax withheld by an employer so the individual would pay the tax directly to the state. SENATOR ELLIS pressed for an explanation of "other compensation" and whether it might include monetary and non-monetary compensation. MR. HARLAMERT opined it was simply necessary language. SENATOR ELLIS asked if compensation includes benefit beyond salary. MR. HARLAMERT said he interprets that to be taxable compensation and not benefits. CHAIR GARY STEVENS asked if employers could ever be held accountable for an employee's tax obligation. MR. HARLAMERT replied the normal mechanism in the personal income tax field and the best practice from DOR's standpoint is to impose a withholding requirement on the employer. If the employer doesn't withhold, then the employer should be held liable. Furthermore, if the employer withholds and then fails to pay the state then the employer should be held personally liable. It's not perfectly clear in SB 112, but that appears to be the intent. CHAIR GARY STEVENS remarked the employer would have to maintain an accounting system to show that all employees have had the tax withheld, have previously paid the tax, or aren't subject to the tax by virtue of age. MR. HARLAMERT replied that's essentially true. 1:50:57 PM SENATOR CON BUNDE, sponsor, reemphasized the psychological and fiscal issues associated with SB 112. The fiscal issue is that residents of organized, home rule and first class cities make a local contribution for the operation of their schools while residents of the 19 REAAs in the state make no local contribution for schools. The Department of Revenue indicates that the unorganized areas of the state have over $500 million in earned income yet the schools operate on state funding alone. The proposed contribution amounts to about $35 per month to support schools. That is not onerous and people of modest means living in organized areas do pay to fund schools. The other issue is philosophical; you value and take better care of the things you help pay for, he asserted. 1:53:35 PM SENATOR ELLIS asked why he decided to use age 21 rather than 18. SENATOR BUNDE said he wanted to make sure that individuals were well out of high school before becoming obligated to pay the tax. SENATOR ELLIS noted that the bill makes it clear that it's not constitutional to dedicate funds so the money coming from the REAAs wouldn't necessarily go back to the same areas for education funding. Therefore, he questioned whether the sponsor intended for the tax to supplant or supplement existing general fund money that goes for education. SENATOR BUNDE replied it should not supplant current funds, rather it should add to current funds. Certainly he agrees with the prohibition regarding dedicating funds, but it is possible to indicate legislative intent and put up a moral fence. Although the money generated with the proposed tax might not go to the specific district that raised the money, it would add to the general fund support of the basic per student dollar and consequentially be of benefit to the population that raised the money. SENATOR ELLIS acknowledged that if this were to come to fruition it would be an overall gain for state education. He mentioned that when money is raised for schools in Anchorage it goes directly to Anchorage schools, but money raised in a rural area wouldn't necessarily improve schools in the particular area. There's a difference between local effort going to the local schools and local effort going to the state treasury. SENATOR BUNDE replied the point is valid, but the REAAs have been state sustained for a number of years and as a consequence have been using money that could have gone to organized areas. He opined it would be a long time before they catch up. SENATOR ELLIS remarked it should be remembered that most of the natural resources in the state come from rural areas and all residents share those common property resources and the value derived from them. SENATOR BUNDE replied the resources in the state aren't equally distributed, but according to the constitution, they are held in trust for all Alaskans so the argument is moot. 1:58:30 PM CHAIR GARY STEVENS asked for a comment on the argument that rural areas shouldn't have to pay a head tax because the federal government sends PL874 money to pay for education in those areas. SENATOR BUNDE replied he doesn't consider that a local contribution. Furthermore, Anchorage receives PL874 money and the funds are passed through to the state. Surely rural areas would object if Anchorage were to keep those substantial funds. CHAIR GARY STEVENS summarized saying that a head tax doesn't jeopardize PL874 funds in any way. SENATOR BUNDE agreed. SENATOR STEADMAN questioned whether it's legal to impose a tax according to address. SENATOR BUNDE replied legislative legal hasn't indicated there is any constitutional problem. The constitution requires people living in organized areas to make a local contribution so this proposal is obviously legal. SENATOR STEDMAN asked for verification that people living in unorganized areas that have already volunteered to pay tax to support schools wouldn't be subjected to this tax. SENATOR BUNDE said that's correct; no one would be double taxed. There were no further questions. 2:01:58 PM CHAIR GARY STEVENS asked Senator Bunde if he had summary comments. SENATOR BUNDE said this is a fairness issue and will provide opportunity for those who would like to make a local contribution, but don't want another layer of government imposed. SENATOR ELLIS asked if passing this tax would stop the push for mandatory boroughs because that seems to be what Dick Schultz expects. SENATOR BUNDE suggested Mr. Schultz is correct that passage might dampen the arguments in the political arena, but this Legislature certainly can't bind a future Legislature. SENATOR ELLIS asked if that means that he would make no guarantee that the drive for mandatory borough formation would stop if this were to pass. SENATOR BUNDE replied there is no way he could make such a guarantee in good faith. 2:04:47 PM CHAIR GARY STEVENS noted the bill had a Finance Committee referral then asked for a motion. SENATOR STEDMAN motioned to report CSSB 112(CRA) and attached fiscal notes from committee with individual recommendations. 2:05:20 PM SENATOR ELLIS objected and said his objection stems from the fact that he wasn't comfortable that the issue had been thoroughly vetted. 2:05:54 PM CHAIR GARY STEVENS stated that he inadvertently overlooked someone that wanted to provide testimony. MR. KALENKA said that although he is the President of Alaska for Efficient Government today he was speaking for himself. It is his practice to advocate against taxes, but he is very much in favor or user taxes. If you use a service, then you assume an obligation to pay for that service. He suggested school children do get a Permanent Fund Dividend, which could be used to pay for educational services. 2:09:19 PM CHAIR GARY STEVENS asked Senator Ellis if he maintained his objection to moving SB 112. SENATOR ELLIS said he did. CHAIR GARY STEVENS asked for a roll call vote. The motion to move prevailed 3 to 1 with Senators Stedman, Wagoner and Chair Gary Stevens voting yea and Senator Ellis voting nay. CSSB 112(CRA), \F version, and attached fiscal notes moved from committee with individual recommendations.