CS FOR HOUSE BILL NO. 271(FIN)(efd am) "An Act levying and providing for the collection and administration of excise taxes on the rental of passenger and recreational vehicles usable on highways and vehicular ways; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this bill, relating to a "personal and recreational vehicle rental tax", "imposes a ten-percent State tax on rental or lease of passenger vehicles and a three-percent State tax on lease or rental of recreational vehicles. Commercial vehicles and farm equipment are exempt and vehicles leased for more than 90 consecutive days are also exempt." KRIS KNAUSS, Staff to Representative Pete Kott, testified that this bill was introduced at the request of the Governor with the intent to generate approximately $6 million in revenue with a ten percent tax on rental cars and three percent tax on recreational vehicles (RVs). He remarked that with over 1.6 million visitors to Alaska, the Administration determined "it would be good to get something back from the tourism industry." He informed that approximately 100 businesses would be impacted and that government employees conducting government business would be exempt from the tax. He noted an amendment adopted by the House of Representatives changed the effective date from July 2003 to January 2004. LARRY PERSILY, Deputy Commissioner, Department of Revenue, testified he was available to answer questions. Amendment #1: This amendment deletes the following language from page 1 line 14 and page 2 lines 1 - 3 in Section 1. Sec. 43.52.030. Levy of recreational vehicle rental tax. There is imposed an excise tax on the charge for the lease or rental of a recreational vehicle in this state if the lease or rental of the recreational vehicle does not exceed a period of 90 consecutive days. Senator Bunde moved for adoption. Co-Chair Wilken objected for an explanation. Senator Bunde remarked that the majority of RV rentals occur within the Municipality of Anchorage, which already imposes an eight- percent tax. He calculated that another three-percent tax would "undoubtedly be burdensome on the industry". He informed that because of the current eight percent tax, customers are renting RVs in Canada for travel in Alaska. Senator Bunde reported that an RV typically rents for $200 per day or $4,200 for a two-week rental. He calculated the current eight percent tax for this rental is $338 and the proposed additional tax would be $126, totaling $464 total tax. Co-Chair Wilken expressed these figures are "compelling" and that business should not be directed to Whitehouse, Yukon Territory. He removed his objection to the adoption of the amendment. Co-Chair Green objected. A roll call was taken on the motion. IN FAVOR: Senator Taylor, Senator Bunde, and Co-Chair Wilken OPPOSED: Senator Hoffman, Senator Olson, Senator B. Stevens, and Co-Chair Green The motion FAILED (3-4) The amendment FAILED to be adopted. Amendment #2: This amendment changes the proposed tax rate on rental cars from ten percent to seven percent on page 1 line 12 of Section 1. Senator Bunde moved for adoption. Co-Chair Wilken objected for an explanation. Senator Taylor relayed the national average is approximately 5.9 percent. He commented that although "everything costs more in Alaska" "nearly doubling the tax is probably not appropriate". He surmised that collecting a seven percent tax would generate revenue from this source without becoming burdensome to the industry. He added that some rental car companies are "economically stressed". Senator Taylor estimated he pays a higher taxation rate when renting vehicles in Seattle, Washington and that he definitely pays a higher rate in the State of Hawaii. Senator Bunde pointed out that many airports impose drop-off and pick-up fees separate from the tax. Co-Chair Wilken directed attention to a chart compiled by the Montana Department of Revenue and provided by Representative Kott titled, "Table 2, Rental Car Tax, State-by-State Comparison" [copy on file.] This chart, Co-Chair Wilken pointed out, indicates the State of Illinois levies the highest rental car tax combination in the nation at 31.7 percent, the State of Washington levies the th sixth highest tax at 21.5 percent, and Alaska ranks 47at approximately six percent. Co-Chair Wilken maintained his objection to the adoption of the amendment. GARY ZIMMERMAN, General Manager, Avis Rental Car of Alaska, testified via teleconference from an offnet location to challenge the six percent total rental car tax in Alaska. He cited the eight percent Municipality of Anchorage tax as well as a ten-percent of gross fee paid to the State as an airport concession fee, which is passed along to the consumer. He stated that rental agreements currently list the total tax paid by the lessee at 18 percent. This legislation, he calculated, plus a proposed statewide sales tax would make the total rental car tax 30 percent. He expressed this would be detrimental to business operations in Alaska. He spoke to the seasonality of the visitor industry in Alaska that does not occur in other states. Co-Chair Wilken requested Mr. Persily reconcile the witness's testimony with the information contained in the aforementioned chart. Mr. Persily explained that the chart does not include airport concession fees or municipal car rental taxes. He stated the chart reflects the highest sales tax six percent levied in Sitka for rental cars in Alaska. He agreed that the total current tax for car rentals in Anchorage is 18 percent. He noted that the airport concession fee could be avoided by renting vehicles off site. Senator Bunde directed attention to the column on the chart titled "state sales tax" and suggested that if a seven percent State sales tax were imposed, Alaska would be equal to the highest tax. Mr. Persily informed that several states impose a flat fee per rental, rather than a tax percentage. He stated that the chart calculated the flat fee as a percentage of the average $50 daily car rental rate, and therefore varies based on the actual price of each car rental. Senator Taylor recalled discussions on other tax proposals, such as a tax on pull tab operations where it was debated whether the State should exercise exclusive taxation authority. He suggested an alternative amendment to Amendment #2 to limit tax authority on car rentals to the State. Co-Chair Wilken requested the witness continue with testimony on the legislation. Mr. Zimmerman reported the car rental agencies operating in Anchorage and Fairbanks currently pay over $4.5 million to the State in the form of a percentage of revenues. In addition, he estimated $1.5 million is paid to the Division of Motor Vehicles in the form of vehicle registration and another $.25 million for "coveted parking spaces" at the two airports. He challenged the assertion that the car rental industry or its customers do not contribute to the State economy. He opined that the proposal is a "very targeted tax" and that "a certain fairness issue is at state". Mr. Zimmerman found it "inconceivable" that a customer renting an RV at $200 per day would pay less tax than a customer renting a car for $70 per day. He furthered those travelers who rent cars would stay at hotels and pay local bed taxes, as opposed to travelers who rent RVs and do not stay at hotels. He noted Senator Bunde's comments regarding the burden of the proposed tax on the RV rental industry and stressed that the burden would also exist for the car rental industry. He compared the percentage of the total vehicle rental charges on a two-week RV rental to that of a two-week car rental. Mr. Zimmerman described the impacts, informing that 90 percent of transactions involve credit cards, in which the bank collects a percentage of the total charge. He stated that the rental companies therefore pay an amount equal to a portion of the tax to the bank, thus increasing operating expenses. He pointed out that this bill contains no provisions to help offset that cost to the car rental and motor home rental businesses. Mr. Zimmerman cautioned that the vehicle rental industry is "facing very bleak market conditions", noting that deplanements in Anchorage has only increased four percent in the past six years. In Fairbanks, he furthered, the number of deplanements has been unchanged in the past six years and in the current year, Juneau and Kenai are experiencing decreased numbers of deplanements over the previous year. He stated that the situation is not expected to improve and relayed general concerns relating to tourism as well as the "general business climate" Mr. Zimmerman addressed discussions held amongst members of the car rental industry several years prior about developing an offsite rental facility in Anchorage. However, he stated that customers would have to pay for construction of such a facility through a "pass through fee". He expressed that the proposed tax in this bill is poorly timed, given the current economic situation. BOB DINDINGER, President and Chief Executive Officer, Alaska Travel Adventures, testified via teleconference from an offnet location about RV rental facilities located in Anchorage, Skagway and Seattle. He informed that the bulk of this business has been primarily in European travelers but has not fared well in recent years due to travel conditions. He agreed with Senator Bunde that a "major shift" of business has occurred from Anchorage to Whitehouse, Yukon Territory, caused by the passage of the Municipality of Anchorage rental tax. Mr. Dindinger also explained that it is more economical for travelers to fly from Germany to Whitehorse and tour Alaska, returning to Whitehorse to return to Germany. Mr. Dindinger stated that four of his competitors have gone out of business and he listed the changing numbers of rentals in Whitehorse and in Alaska. He furthered that his company has downsized its fleet. He expressed concern that a State tax would provide an additional disincentive for renting RVs in Alaska. TERRY PARKS, Dollar Rental Car, testified via teleconference from an offnet location about the negative impacts on the industry since the events of September 11, 2001 and the more recent outbreaks of the Severe Acute Respiratory Syndrome (SARS). He stated that national rate reductions, despite no changes to fixed costs, have also impacted the Alaska businesses. He spoke to the difficulty in keeping employees employed and the need to increase the fleet. Mr. Park assured that he was willing to contribute to the State and to pay taxes, as he attributed this as a responsibility. Mr. Parks noted the cruise industries are owned outside of the United States and although they pay port fees, they pay no State taxes. He asserted that the cruise industry earnings are spend by the companies and it employees out of State, in comparison to locally owned business in which the earnings are reinvested in Alaska. Mr. Parks emphasized the burden on rental industries to collect the funds and process the taxes, reiterating that the companies are not reimbursed for the additional credit card transaction charges. He also pointed out that some computer systems do not account multiple taxes. ANDREW HALCRO, President, Alaska Rental Car, testified via teleconference from offnet location about the 100 employees of the company located in nine communities in Alaska. He spoke to the economic development at the Ted Stevens Anchorage International Airport and reminded that three years prior the State authorized the sale of bonds to finance the $230 million expansion. He relayed that the car rental industry was not included in this process and identified problems with the project. As a result, he stated that the car rental industry formed a consortium to design and propose the construction of a four-story parking garage with two stories occupied by rental companies and financed by the rental industry. Mr. Halcro calculated a State tax coupled with existing taxes and fees would total 28 percent. He estimated the proposed parking garage would cost $40 million and would require a customer facility charge of approximately $3.50 per day for each rental agreement. The market, he stressed could not support this combination and therefore the parking garage project would not be constructed. He warned that the consequence of not proceeding with the private parking facility would be the rental industry and customers would be "at the mercy of the State at an airport that is now $150 million over budget and really no solution in sight." Mr. Halcro also spoke to the fairness issue, telling the co-chair that a Fairbanks resident traveling to Anchorage and renting a car for one day would pay a 20 percent State tax, plus an 8 percent local tax. He compared this to a traveler from out of State renting an RV, impacting the parks, highways and other State infrastructure, and paying only three percent in tax. He suggested that if the intent is to generate revenue from those who impact roadways and the State's infrastructure, the proposed tax should be implemented equally to all vehicle rentals. SFC 03 # 106, Side B 11:26 AM Mr. Halcro contended that the RV industry concern the business would "bleed" to Canada is no different than his concern that business would be lost to taxi cabs, shuttle buses and car rentals located away from airports. Mr. Halcro expressed he understood the State's fiscal gap and as a result the car rental industry should "take full responsibility and my customers to take full responsibility in getting the State on a straight and narrow." He stated that in the previous year, the car rental businesses located at the Ted Stevens Anchorage International Airport paid over $3.7 million in direct taxes to the Department of Transportation and Public Facilities. Mr. Halcro told of recent purchase of land in Fairbanks by his company off airport property and the intention to construct a state of the art service facility. He stated that a new tax would be factored into any capital investment decisions. Senator Olson asked former State Representative Halcro's opinion on Amendment #2. It was determined Mr. Halcro had disconnected from the teleconference network. Senator Bunde speculated on Mr. Halcro's position surmising that, "seven percent is better than ten percent." A roll call was taken on the motion to adopt Amendment #2. IN FAVOR: Senator Olson, Senator Bunde and Senator Hoffman OPPOSED: Senator B. Stevens, Senator Taylor, Co-Chair Green and Co- Chair Wilken The motion FAILED (3-4) The amendment FAILED to be adopted. Amendment #3: This conceptual amendment limits authority to levy a tax on car rentals to the State; clarifying that airport authorities and municipalities are not authorized to impose such a tax. Senator Taylor moved for adoption and stated that varying tax rates and user fees exist in Anchorage and Fairbanks and subsequently this legislation would impact communities differently. He clarified this amendment provides that municipalities would be precluded from imposing taxes and fees on car rental businesses. Senator Taylor spoke to various taxes imposed on alcohol and the confusion it creates. He talked about different taxing entities that do not communicate with each other and the eventual situation whereby a business could no longer operate due to excessive taxation. He characterized this amendment as a policy call. He suggested that more revenue could be generated for the State and that in some communities the overall tax rate would be reduced. Senator B. Stevens moved to amend the amendment to include cruise ship destinations. It was established that the amendment includes all communities, local governments and taxing authorities. Mr. Persily asked if this would abolish those existing taxes currently imposed by local governments and airport authorities or instead "freeze" the current taxes. Senator Taylor answered that all taxes would be eliminated, thus granting the State sole authority to impose taxes on vehicle rentals. Mr. Persily noted the Municipality of Anchorage would lose approximately $4.5 million in revenues beginning at the effective date of this bill. He asked if the intent is to also eliminate airport concession fees paid to the Department of Transportation and Public Facilities. Senator Taylor responded that State-imposed fees would not be affected. He remarked that revenues collected by airport authorities are deposited to the State general fund, although the legislature always "chooses" to appropriate the funds to the authorities. Co-Chair Wilken maintained his objection to the adoption of the amendment. A roll call was taken on the motion. IN FAVOR: Senator Taylor and Senator Hoffman OPPOSED: Senator B. Stevens, Senator Bunde, Senator Olson, Co-Chair Green and Co-Chair Wilken The motion FAILED (2-5) The amendment FAILED to be adopted. Senator Taylor offered a motion to report the bill from Committee with individual recommendations and new fiscal note. There was no objection and CS HB 271 (FIN)(efd am) MOVED from Committee with a $96,500 fiscal noted dated 5/20/03 from the Department of Revenue. AT EASE 11:36 AM / 11:43 AM