CS FOR HOUSE BILL NO. 233(FIN) am "An Act relating to the insurance tax education credit, the income tax education credit, the oil or gas producer education credit, the property tax education credit, the mining business education credit, the fisheries business education credit, and the fisheries resource landing tax education credit; providing for an effective date by repealing the effective dates of secs. 3, 5, 7, 10, 14, 16, 18, 21, 23, 25, 28, 30, 32, 35, 37, 39, 42, 44, 46, 49, 51, 53, and 55, ch. 92, SLA 2010, sec. 14, ch. 7, FSSLA 2011, secs. 15, 17, 19, 21, 23, and 25, ch. 74, SLA 2012, sec. 49, ch. 14, SLA 2014, secs. 37, 40, 43, and 46, ch. 15, SLA 2014, and secs. 26 and 31, ch. 61, SLA 2014; providing for an effective date by amending the effective date of secs. 1, 2, and 21, ch. 61, SLA 2014; and providing for an effective date." 10:13:46 AM Co-Chair MacKinnon read the title of the bill. Vice-Chair Bishop MOVED to ADOPT proposed committee substitute for CSHB 233(), Work Draft 30-LS0152\N (Nauman, 4/23/18). Co-Chair MacKinnon OBJECTED for discussion. Ms. Lucky discussed the CS. She noted that the committee had heard a similar bill in concept, but not content, with SB 16. She stated she would present the differences between the bill as it came to the Senate Finance Committee and the new version currently before the committee. She referenced the explanation of changes (copy on file): Deletes Legislative Findings and Intent. Sets the amount of the credit at 50% of all contributions. Currently, a tiered system provides a credit of 100% of contributions between $100,000 and $300,000, and 50% of contributions that do not fall in that range. See sections: 2, 5, 8, 11, 14, 17, and 21. Reduces the total amount of credits that can be claimed in any tax year to $1,000,000 current law allows $5,000,000. Sections: 3, 6, 9, 12, 15, 18, and 22. 10:17:23 AM Ms. Lucky continued to address the Explanation of changes: Adds section 24 at the request of the Revisor of Statutes to reconcile the effects of the passage of both House Bill 233 and House Bill 97, which passed the House on 4/9/2018 and the Senate on 4/20/2018. Adds conforming amendments to the effective date sections to accommodate these changes. Ms. Lucky noted that the effective date of the changes to the program was not changed. The date was January 1, 2019, to correspond with the beginning of the new tax year. Senator Stevens understood that the program had been successful in opening opportunities for Alaska students. He expressed concern that businesses might not contribute as much in the future as they have in the past. Co-Chair MacKinnon stated that currently business was paying either corporate, income, or fisheries taxes, which maintained a constant tax base unless services were hindered. She said that whether the businesses donated or not, the reduction in the availability of the tax credit would provide savings to the state, like an indirect tax expense. She said that the money would remain with the state in the form of money that the corporations or businesses were already paying in taxes. 10:19:54 AM KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, addressed Senator Stevens question. He asserted that the department could not conjecture on how company behavior would change. The analysis had been done based on the known set of donations over the last three years and projecting forward the same or a similar amount. He thought that much good will was attached to the donations. Senator Stevens summarized that it the future was unknown. He assumed that there would be fewer donations, which would result in fewer opportunities for students. Mr. Alper stated that there were many different eligible recipients for the potential donations. He said that educators looked to the donations to back fill the reductions of state funding that they had experienced in recent years. 10:22:00 AM Senator Micciche commented that there were only 2 substantive changes in the bill. He thought that the 50 percent reduction between $100 thousand and $300 thousand could alter business's donation behavior. The reduction from $5 million to $1 million of the annual total would have neutered the legislative appropriation authority and would have increased state operating costs. He expressed support for the bill. Senator von Imhof wanted to understand the flow of funds. She understood that under the bill if a business wrote a check for $200 thousand to the University of Alaska, the money would be split between the state and the University. Mr. Alper explained that a company would make a donation and then sometime in the next year would file their tax return. The tax return would include a line for eligible donations for the education tax credit and the tax reduction would be based on the statutory percentage. The first $100 thousand in donation, under current law, received a 50 percent credit, the next $200 thousand would reach the 100 percent credit. He said that the way the CS was written the tax reduction would be smaller. Senator von Imhof asked whether there was a 35 percent taxable rate of on the extra $50,000, or would the business pay $50,000 less in state taxes. 10:25:55 AM Mr. Alper stated that it would be a straight reduction from the tax liability, not the taxable income. He said that the credit could not be received for multiple taxes but that companies that, for example, a mining company that also pain corporate income tax could zero out one tax and then use the rest of the benefit to offset the other tax. Co-Chair MacKinnon asked whether it was fair to say that, currently, private sector donations above $100,000 were deployed wherever the business chose. Mr. Alper answered in the affirmative. He assessed that the state had essentially outsourced to companies the ability to set state education priorities. Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO OBJECTION, it was so ordered. SCS CSHB 233() was ADOPTED. Co-Chair MacKinnon informed that she had met with the sponsor and a compromise had been made. 10:28:02 AM Representative Chris Tuck, Sponsor, discussed the bill. He read from the Sponsor Statement: House Bill 233 will extend the education tax credit program from December 31, 2018 to January 1, 2025 and ensure that the credits that exist in statute today will continue to support our education programs and institutions. Education tax credits encourage private businesses to make charitable contributions to educational institutions and programs in Alaska. Eligible recipients include: non-profit, public, or private accredited Alaska two-year or four-year colleges; non- profit elementary or secondary schools and school districts; state operated vocational education and training schools; non-profit regional vocational training centers; apprenticeship programs; Alaska Native cultural programs; the Alaska Higher Education Investment Fund; and postsecondary institutions providing dual-credit courses. The credits are non-transferable and non-refundable and can be used against the following taxes: corporate income tax; fisheries business tax/fisheries resource landing tax; insurance premium tax/title insurance premium tax; mining license tax; oil and gas production tax; and the oil and gas property tax. Currently, the credit provision allows for 50% of the annual contributions up to $100,000, 100% of the next $200,000, and 50% of annual contributions beyond $300,000. The total credit per taxpayer, across all tax types, may not exceed $5 million. Historically, well over two dozen companies have used this benefit. The contributions are good for the companies and good for the recipient institutions. House Bill 233 will continue to ensure that our education institutions and programs are supported. Senator Stevens asked the sponsor to reflect on the reduction in contributions and whether there would be impact on assistance to students. Representative Tuck responded that he was not sure how the bill would affect contribution behavior. He hoped the connect local business with education institutions to partner better and help educational institutions to teach towards the jobs that were necessary for the needs of the state. 10:30:52 AM Senator von Imhof noted that the state had utilized tax credits in various ways. She asked whether other states had used education tax credits in creative ways to help offset corporate taxes owed to their particular state. Representative Tuck had not compared Alaska to other states. He had investigated how to make the tax credit system better in Alaska. He made note of the many statutes referenced in the bill title. He thought that it would be cleanest to begin by extending the tax credits and then working on ways to improve the system. 10:32:32 AM Ms. Kloster spoke to the Sectional Analysis for the bill (copy on file): Section 1 Amends the Insurance tax (AS 21.96.070(a)) education credit to add an Alaska two-year or four- year college accredited by a national association to be eligible for the education tax credit program. It also removed an annual intercollegiate sports tournament from being eligible for an education tax credit. Section 2 Amends the Insurance tax, AS 21.96.070(b) to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 3 Amends the insurance tax AS 21.96.070(d) to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 4 - Amends the Net Income tax (AS 43.20.014(a)) education credit to add an Alaska two- year or four-year college accredited by a national association to be eligible for the education tax credit program. Section 5 Amends 43.20.014(b) the net income tax, to remove the 100 percent contribution from the $100,000- $300,000, therefore, all contributions will be a 50 percent credit. Section 6 Amends 43.20.014(d) the net income tax, to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 7 - Amends the oil or gas producer (AS 43.55.019(a)) education credit to add an Alaska two- year or four-year college accredited by a national association to be eligible for the education tax credit program. It also removed an annual intercollegiate sports tournament from being eligible for an education tax credit. Section 8 Amends the oil and gas producer tax, AS 43.55.019(b), to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 9 - Amends the oil and gas producer tax, AS 43.55.019(d), to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 10 - Amends oil and gas property tax (AS 43.56.018(a)) education credit to add an Alaska two- year or four-year college accredited by a national association to be eligible for the education tax credit program. It also removed an annual intercollegiate sports tournament from being eligible for an education tax credit. Section 11 Amends the mining business (AS 43.65.018(b)) to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 12 - Amends the mining business (AS 43.65.018(d)) to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 13 - Amends mining business (AS 43.65.018(a)) education credit to add an Alaska two-year or four- year college accredited by a national association to be eligible for the education tax credit program. Section 14 - Amends mining business (AS 43.65.018(b)) to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 15 - Amends mining business (AS 43.65.018(d)) to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 16 - Amends AS 43.75.018(a) fisheries business education credit to add an Alaska two-year or four- year college accredited by a national association to be eligible for the education tax credit program. Section 17 - Amends AS 43.75.018(b) fisheries business tax to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 18 - Amends AS 43.75.018(d) fisheries business tax to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 19 - Amends AS 43.77.045(a) fisheries resource landing tax education credit to add an Alaska two-year or four-year college accredited by a national association to be eligible for the education tax credit program. Section 20 Amends AS 43.77.045(a), the education tax credit against the fisheries resource landing tax, contains a cross reference to AS 43.77.040. AS 43.77.040 is a different credit, separate and apart from the education tax credits, that provides a credit for various donations related to fisheries and the seafood industry. Under Secs. 23 and 36, Ch. 61, SLA 2014, AS 43.77.040 will be released December 31, 2020. Because the repeal of AS 43.77.045. the education tax credit, has been extended from 2018 to 2025, the cross reference to AS 43.77.040 must be removed from AS 43.77.045 on December 31, 2020. Section 21 - Amends AS 43.77.045(b), the fisheries resource landing tax to remove the 100 percent contribution from the $100,000-$300,000, therefore, all contributions will be a 50 percent credit. Section 22 - Amends AS 43.77.045(b), the fisheries resource landing tax to decrease the cap for the total amount of the credit to be not more than $1,000,000. Section 23 - repeals the contraction dates set at 2021 for the education tax credit expansions which includes the number of programs that are eligible for the education tax credits and the cap amount. By repealing the contractual language, it leaves the program AS IT IS TODAY in place. Ms. Kloster noted that because the education tax credits had expanded over the years, with multiple different iterations, there were multiple repeal dates. The Section was meant to lineup all the repeal dates. 10:37:36 AM Ms. Kloster continued to address the Sectional Analysis: Section 24 Adds reviser's instructions to reconcile the effects of the passage of both House Bill 233 and House Bill 97, which passed the House on 4/9/2018 and the Senate on 4/20/2018. Section 25 repeals the effective dates that are in accordance with section 23. Per legislative drafting the repeal of effective dates need to be in separate section. Section 26 extends the sunset date from December 31, 2018 to January 1, 2025. Section 27 Sections 1-19, 21, and 22 take effect on January 1, 2019 which relate to the national accreditation, removal of intercollegiate sports tournament, make all tax credits contribution amounts at 50 percent, and decreasing the total cap from $5,000,000 to $1,000,000. Section 28 Relates back to section 20 of the bill which is removing a cross reference to an unrelated fisheries tax credit. Section 29 With the exception of sections 27 and 28, everything else in the bill has an immediate effective date. 10:38:36 AM Vice-Chair Bishop discussed a new fiscal note from the Department of Revenue, OMB Component 2476. He read from the analysis: Assuming an unchanged donation profile in future years, the reduction to the credit rate would reduce the total credits claimed under this version of the bill to $5.42 million. Although the fiscal note shows "negative" revenue of $5.42 million, this is compared to the status quo which would be a full sunset on 1/1/19. Alternatively, this should be viewed as a reduction in revenue impact of $2.15 million. In other words, this bill represents $2.15 million in additional revenue versus a so-called clean extension. For FY1019, the impact will be half this number due to the change occurring in the middle of the fiscal year. Continuing this program will not add administrative costs to the Department of Revenue. Co-Chair MacKinnon pondered why reducing the ability to apply a tax credit against taxes owed to the state was not reflected in the fiscal note as increased revenue. Mr. Alper stated that the initial purpose of the bill had been to extend a program that had been scheduled to sunset. He said that if the bill were not to pass the $7.5 million in education tax credits currently being claimed would be reflected as additional state revenue in future years. He said that the fiscal note showed a revenue reduction because the comparison was between the current bill version and what would happen if no legislation were to pass. 10:42:22 AM Co-Chair MacKinnon directed committee attention to the analysis previously related by Vice-Chair Bishop, which outline d the $2.15 million in additional revenue that the state would receive based on the changes in the CS and allowing the extension to go forward. Mr. Alper agreed. Co-Chair MacKinnon asked whether it was accurate to say that the bill was extending the program in its current form versus reducing the state's contribution and that the difference was reflected on the fiscal note. Mr. Alper said that roughly speaking approximately $200,000 of the $2.15 million would be from the very large donations that would be above the $2 million cap. A little less than $2 million would be the lower credit rate between $100 million and $300 million donation. Co-Chair MacKinnon understood that if the bill did not advance the state could save $7 million. Mr. Alper stated that if the program were to sunset completely the state would save $7.5 million per year. Co-Chair MacKinnon recognized that sunsetting the program would negatively affect Alaskan students. She said that the bill would represent a compromise that the tax credit would be extended at a cost to the state as long as donations remained the same at $5.4 million. Co-Chair MacKinnon discussed the challenging fiscal situation in the state. She lamented the possible loss of good programs, reduction of contributions, and the availability of the private sector to donate to good causes. 10:46:00 AM Co-Chair MacKinnon OPENED public testimony. SUSAN FOLEY, PRESIDENT, UNIVERSITY OF ALASKA FOUNDATION, ANCHORAGE (via teleconference), testified in support of the bill. She explained that the foundation was the biggest beneficiary of the donations that qualified for the education tax credit. She stated that one of the most serious threats to the state was "brain drain" from students leaving the state to pursue postsecondary education. She said that it was impossible to know the impact of the 50 percent credit remaining constant, rather than the increase under the bill, but relayed that gifts from businesses - more than $100,000 in any one year - amounted to an average of 44 percent of the total donations received by the foundation since January 1, 2010. She added that for the same period, donations in excess of $1 million averaged 9 percent of total donations. She related that a large portion of those donations went to scholarships and programs important to employers. She said that the extension of the tax credits was important to the foundation and the University. 10:49:34 AM Senator Stevens understood that 44 percent of total donations to the UA Foundation were from businesses making donations in excess of $100,000 per year, 9 percent were from donations that were over $1 million. Ms. Foley agreed. Senator Micciche asked about the average of the 44 percent of the donations. Ms. Foley stated that the time frame was from January 1, 2010, to the present. Senator Micciche asked for the average amount over $100,000 for the 44 percent. Co-Chair MacKinnon asked Ms. Foley to respond in writing. Ms. Foley agreed to provide the information. Ms. Foley clarified that the 44 percent was for all donations over $100,000. 10:51:48 AM MIKE SATRE, MANAGER, GOVERNMENT RELATIONS AND COMMUNITY AFFAIRS, HECLA GREENS CREEK MINE, testified that the largest legislative priority for the mine in 2018 was to advocate for a clean extension of the tax credit. He spoke to his concerns with the current bill version. He said that the greatest challenge for the mining industry in the state was the recruitment and retention of quality employees. He said that the mine had utilized the credit almost exclusively for workforce development programs at all three University of Alaska campuses and various vocational/technical centers throughout the state. He related that the current format of the tax credit system allowed the industry to make large, programmatic type donations that institutions could count on to provide multi-year programs. He said a $300,000 donation from the mine to the University allowed for a budget of $100,000 for a three-year program, which the mine had done for many years, contributing nearly $1 million to the Pathways to Mining Careers program. He believed that by taking away the incentive for making these large donations, companies would likely make smaller donations or no donation at all. He shared that the $100,000 donation now cost the industry $50,000 out-of-pocket; that same donation would cost $150,000 out-of-pocket under the bill. He stressed that that out-of-pocket money was new money to the University, new money to the school system, in addition to the money that was redirected from the General Fund to local institutions. He hoped that the intent of the legislation would be to incentivize partnerships and new money into the University and school systems. He reiterated that the extension of the tax credit was the priority but thought that the current version would result in less donations. 10:55:18 AM He referenced the newspaper in Juneau, in which was reported the cancellation of the automotive program at Juneau-Douglas High School. Under the current tax credit, it was possible for the school to solicit a qualifying tax payer to make a $200,000 payment in support of the program. Under the CS, there would be no incentive for the tax payer to donate. 10:57:16 AM Co-Chair MacKinnon thanked Mr. Satre for his company's participation in the tax credit program. Vice-Chair Bishop asked Mr. Satre to convey the increased percentage of Alaska hire since the tax credit programs had been in place. Mr. Satre agreed to provide the information. Senator von Imhof thought Mr. Satre had made salient points and sound and reasonable arguments. She thought that the challenge for the committee was to keep the credit program alive but at a higher expense to industry. She believed that time would tell how the change would impact donation behavior. 10:59:15 AM Co-Chair MacKinnon notified that the committee had posted the CS online and provided a copy to the sponsor before public testimony. 11:00:08 AM DOUG WALRATH, DIRECTOR, NORTHWEST CAREER AND TECHNICAL CENTER, NOME (via teleconference), spoke in support of the education tax credit program. He said that the center had been aggressive in pursuing business partnerships with the education tax credit for nearly a decade; the education tax credit represented approximately 30 percent if the center's annual operating budget. He said that prior to the credit the graduation rate from the Bering Strait School District was 39 percent, since training programs had been build using the credit donations graduation rates had risen to 82 percent. He echoed the concerns of the previous testifier that the current bill version could negatively affect donations from industry. He thought that it was important to acknowledge the total contribution of new money for credits claimed in 2017. 11:04:44 AM Senator Micciche stated that the tax credit program still had bi-partisan support in the legislature. He asked about the total contributions to the Northwest Alaska Career and Technical Center in 2016 of $320,500. He wondered what percentage of the donations were between $100,000 and $300,000. Mr. Walrath considered the technical center's nine-year history. He said that 27 contributions had been received between FY10 and FY18, of those contributions only one was at the $300,000 level. 96 percent of the contributions received had been below $300,000 level. He said that 15 of the contributions were between $10,000 and $100,000, 11 contributions were between $100,000 and $300,000. Vice-Chair Bishop asked about the graduation rates at the center. Mr. Walrath stated that the grad rate of the district was at 32 percent in 2008, one year before the tax credit was available at the secondary level. He that the rate had grown since the programs inception to 89 percent in FY17. He said that the program had directly contributed to the reduction of the dropout rate by 76 percent. 11:08:22 AM DR. BRAD HARRIS, SELF, ANCHORAGE (via teleconference), testified shared that he was a professor at the University of Alaska. He stated that the program in its current form was extremely effective. He encouraged the extension of the program in its current form. He disagreed with the removal of the "sweet spot' and the changes in the current bill version. He believed that the legislation would hurt the relationship between educational institutions and industry. He thought that the fiscal note that showed the cost of the program did not reflect the full benefits associated with the program. He requested the extension of the program in its current form. 11:12:40 AM TOMMY SHERIDAN, SILVER BAY SEAFOODS, CORDOVA (via teleconference), testified in strong support of HB 233. He shared that he had benefited from the education tax credits as a student in the University of Alaska Southeast Fisheries Technology program. He summarized that the extension of the program would continue to promote private investment in Alaskan higher education and would ensure that the state could maintain its world-class fishery management system. 11:14:58 AM Co-Chair MacKinnon CLOSED public testimony. Representative Tuck gave an example of the tax credit program partnering with industry. He stated he was an electrician by trade. He shared a story relating the way that industry supported schools, and ultimately, society. CSHB 233(FIN) am was HEARD and HELD in committee for further consideration. Co-Chair MacKinnon informed the committee that amendments were due April 27, 2018, at noon. Co-Chair MacKinnon discussed housekeeping. She announced that the committee would hear public testimony on the capital budget. She relayed the public testimony process. Co-Chair MacKinnon offered words on the fiscal crisis faced by the state and the hard decision to discontinue funding meaningful programs. She explained that the committee was working to reduce the state's fiduciary responsibilities while balancing the consequences of those reductions. She discussed the history of the inception of the Parament Fund Dividend. She stressed the difficult financial choices that the committee had been, and would be, forced to make in order to balance the state budget. She complimented the individual talents and strengths each committee member brought to the table.