SENATE BILL NO. 15 "An Act relating to the tax on policy year premiums for life insurance policies; relating to single and group life insurance policies; and relating to other types of insurance policies that insure the life of one or more individuals." 9:33:09 AM SENATOR JOHN COGHILL, SPONSOR, explained that the legislation would install eight-tenths of a percent instead of one-tenth of one percent on policies that exceeded $100,000. He stated that the issue was broad to his attention as he was dealing with some trust legislation for estate planning. He remarked that the bill came by way of request, dealing with some of the people that were involved in state planning. GERMAN BAQUERO, STAFF, SENATOR COGHILL, remarked that the legislation would only affects the tax collected on life insurance policies that exceed $100,000 by changing the tax from one-tenth of a percent to 0.08 percent. The legislation also added an applicability that would affect all future life insurance policies from December 31, 2015. He shared that there was a zero fiscal note that was from the Division of Insurance. He read from the second page of the fiscal note: The reduction in tax is expected to have a negligible fiscal impact on the Division, as the amount of premium that is subject to this tax is very small. The potential increase as a result of additional premium sales is expected to negate any reduction in revenues, if not increase the tax revenues beyond what they previously. 9:38:16 AM Senator Coghill Alaska had been a main player in the trust investment strategy in the U.S. He remarked that other states had followed Alaska's strategy in trust investments. He felt that legislation would attract further investment by reducing the tax rate. Senator Olson wondered how the change affected the policy purchaser or the policy pay out recipient. Senator Coghill stated that legislation would have very little effect on the purchaser or recipient. Senator Olson surmised that the purchaser would not see an increase in the cost of the premium. He further wondered if there were consumer groups that would be affected by the change. Senator Coghill responded that the estate planning industry felt the legislation was a benefit to beneficiaries by the lower tax rate. Co-Chair MacKinnon looked at the South Dakota rates. She wondered how Alaska compared to all states. She remarked that the rate was reduced at the request of the insurance companies. Therefore the insurance companies benefitted from the change. She felt that Alaska could obtain addition policies that had been lost over some of the years. She wondered if Alaska wanted to be number one in the insurance industry. Senator Coghill deferred to Mr. Baquero. Mr. Baquero explained that the intent of the legislation was to remain competitive with the other states. 9:43:11 AM Co-Chair MacKinnon did not know if the lower taxes would be good for the state. She remarked that the policies were slightly reduced, but noted that the only people that advocated for the legislation were the insurance companies. Mr. Baquero replied there was no opposition for the legislation. There was only support from the insurance industry. Co-Chair MacKinnon noted that South Dakota taxed on annuities, but Alaska did not. She looked at insurance policies under $100,000, Alaska was taxing at two-tenths of a percent higher than South Dakota. She wondered why there was not a reduction on the under $100,000. Mr. Baquero replied that reducing the tax for under $100,000 was also a policy issue. Senator Coghill furthered that the issue was mostly related to estate planning in the trust industry. 9:46:38 AM LINDA HULBERT, SELF, FAIRBANKS (via teleconference), testified in support of the legislation. She felt that the insurance industry in Alaska should be competitive. MATTHEW BLATTMACHR, VICE-PRESIDENT, ALASKA TRUST COMPANY, ANCHORAGE (via teleconference), testified in support of the legislation. He remarked that the insurance companies may benefit from increased business, but the legislation also benefitted the consumer. He stated that the legislation was proposed to change the structure of the larger policies. Senator Olson wondered how to reduce the "frenzy" between Alaska and South Dakota. Mr. Blattmachr replied that it was a valid concern, which is why the state was only matching the rate in South Dakota. He furthered that it was possible that South Dakota may lower their tax structure, but shared that it was highly unlikely because their tax structure had been established for a number of years. Vice-Chair Micciche wondered if the bill required an annual review. Mr. Blattmachr responded that he did not know if there would be an annual review. He stated that the issue was monitored by the industry. 9:54:30 AM Vice-Chair Micciche wondered if there were people that would switch their date of service, because of tax policy. Mr. Blattmachr replied in the affirmative. He stated that trust accounts were created to purchase life insurance policies. DOUGLAS BLATTMACHR, PRESIDENT AND CEO, ALASKA TRUST COMPANY, ARIZONA (via teleconference), spoke in support of the legislation. Co-Chair MacKinnon CLOSED public testimony. MARTY HESTER, DEPUTY DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, stated that he was available for questions. Co-Chair MacKinnon wondered why Alaska wanted to be number one on a taxation issue. Mr. Hester responded that it was a policy decision. He explained that he was available to speak to the differences in premiums from the previous years versus the small amounts. Co-Chair MacKinnon asked if he had the current spreadsheet. Mr. Hester replied that he had the updated spreadsheet. 9:58:13 AM AT EASE 9:59:12 AM RECONVENED 9:59:18 AM Co-Chair MacKinnon looked at a spreadsheet titled, "Life Insurance Companies Licensed in the State of Alaska" (copy on file). She queried the difference in the premiums. Mr. Hester replied that he had done calculations on 2013 and 2011, because they were the smallest and largest years. He explained that in 2011, if the premium tax was reduced to a 0.08 percent, the difference to the state collection would have been $88,656. In 2013, the state would have collected a difference of $15,961. The amount of the collected taxes would vary depending on the premium amount. He explained that the increase in 2011 was due to a policy that was written in excess of $300 million. Co-Chair MacKinnon wondered if he said $3 million or $300 million. Mr. Hester replied that it was $300 million. Senator Dunleavy wondered if the bill would translate into state investment in which companies would hire more people. Mr. Hester responded that he did not know the business plans of the companies. Senator Dunleavy stressed that he would like to know if the companies would pursue instate hire. Ms. Hulbert replied that the Alaska Trust Act passed in 1967 required that one must have a major asset in Alaska in order to set up a trust. The Alaska Trust, and the premium tax bills had added financial capacity to Alaskan banks, as well as attracted many individuals to invest in the state. Co-Chair MacKinnon wondered if the Alaska Trust Company located in Alaska. Mr. Blattmachr replied that the corporate headquarters were located in Alaska. Co-Chair MacKinnon remarked that there was a letter which stated that 362 life insurers were licensed to do business and none were domiciled in the state. She asked for more information. Mr. Hester replied that a domesticated insurer was an insurance company that was based in Alaska. He stated that Alaska had seven domesticated insurers, and the majority were property and casualty insurers. He stated that the life insurers were domesticated in other states and were admitted to write in any state they decide to conduct business. 10:05:49 AM Senator Olson felt suspicion when the corporations attempted to speak in favor of consumers. He wondered if there was an effect on the consumers. Mr. Hester responded that the premium must reflect the risk if the premium was less, and the premium taxes were built into the price of the premium. He stressed that each risk must be determined on its own merit. Senator Olson surmised that consumer groups would be in favor of the legislation. Mr. Hester replied that he had not heard from any consumer groups regarding the legislation. Vice-Chair Micciche noted that there was an estimated $16,000 reduction in taxes. He wondered if there was an anticipated increase to make up the difference in revenue. Mr. Hester replied that there could one or many policies to make up the difference in revenue. Vice-Chair Micciche wondered if there was a national trend for a reduction in life insurance policies. Mr. Hester replied that he was not aware of a trend, and agreed to provide more information. Vice-Chair Micciche remarked that the state should understand the policy, and there should be some resistance. SB 15 was HEARD and HELD in committee for further consideration. 10:10:22 AM RECESSED 12:14:00 PM RECONVENED