SB 103 TAX CREDIT FOR PROVIDING CHILD CARE  Number 494 CHAIRMAN GREEN called the Senate Health, Education & Social Services meeting to order and announced SB 103 as the only order of business before the committee. SENATOR SALO pointed out that the committee had a CS to SB 103. She explained that the Department of Revenue's analysis had discovered the problem with double dipping which lead to the changes in the CS. The major change in the CS is the allowance of 50 percent of the costs up to $100,000 for start up costs on a child care facility. She pointed out the possible problem with giving a tax credit to a facility that is totally open to the public; that lead to the change in the CS which specifies that the majority of the children in the facility must be of the employer or taxpayer. The CS also clarifies the start up costs which pose a major barrier. SENATOR SALO moved the 4/8/95 CS be adopted in lieu of the original bill. Hearing no objection, it was so ordered. She also noted the presence of the sponsor statement and pointed out that the first paragraph is not entirely accurate with regards to the CS. SENATOR MILLER asked if the credit referred to in the bill would only be for the first year the operation in which the facility is built; does it include the construction of the facility, the facilities maintenance? How long does the credit last for any given taxpayer? SENATOR SALO directed Senator Miller to page 2, lines 3-5 in which "start" is defined by what it does not mean. The credit would be given to the taxpayer during the tax year a new child care facility is started. SENATOR LEMAN indicated agreement with the changes in the CS. He noted that he had worked to create uniformity in tax credits. He recognized that a 50 percent credit, which is a large credit, does provide incentive. What is the credit offered in the other 17 states referenced in the backup? SENATOR SALO said she did have a state by state comparison and could have that information for him. SENATOR LEMAN felt that the 50 percent credit seemed consistent with other credits. Number 554 CHAIRMAN GREEN informed the committee of the Mat-Su Campus which has a wonderful child care facility and within a three or four mile radius from that are three wonderful child care centers. The concern arises regarding the subsidy which would compete with privately run child care centers. Where would this bill fall in the realm of unfair or subsidized competition? SENATOR SALO acknowledged that question as central to corporate sponsored or corporate subsidized child care. Alaska is lacking in good quality child care which would support the encouragement of more quality child care. In addition, corporate sponsored or subsidized child care seems to be a higher degree of quality; such a child care center's operation would probably mesh with the demands of the employer which sponsors it. Furthermore, the commitment from the employer to the importance of raising children. Senator Salo said that she did not want to negatively effect good privately owned child care. Privately owned child care centers could enter into a corporate sponsorship agreement. In conclusion, Senator Salo hoped that this bill would not pose barriers to private child care centers, however the benefit of corporate sponsored child care is worth the effort. SENATOR MILLER clarified that a corporately sponsored child care facility would be a private entity because the corporate sponsor is a private business. TAPE 95-29, SIDE B Number 582 SENATOR MILLER recognized that the corporately sponsored child care facility may be in competition with a child care facility in the area, but the corporately sponsored child care is a privately run business also. CHAIRMAN GREEN questioned if by giving a tax credit to the corporately sponsored child care facility, the small child care business was disadvantaged because it did not receive a comparable tax credit. SENATOR MILLER understood the concern of Chairman Green, however he agreed with Senator Salo regarding the shortage of child care in Alaska. Often only large businesses can achieve such measures; small businesses often do not have the resources. He pointed out that studies have shown that corporately sponsored child care facilities create more productive employees of the corporate sponsor as well as a better work environment. SENATOR LEMAN expressed interest in discovering how a little company could be given some advantage. In regards to the definition of "start", he asked what would be the problem with allowing "start" to apply to the substantial expansion of an existing facility. Would an expansion of a facility be that different from the construction of a new facility? He understood that the intent was probably to avoid claims for credit for new toys or other things that are not intended. Perhaps, there is a manner in which to clarify a substantial remodel. SENATOR SALO explained that the CS attempts to eliminate the tax credit for operational costs; the incentive is only intended for the development of the center. Although she did not intend for the bill to include expansion or remodeling, she felt that it would be acceptable. That could be addressed with a small change in wording. SENATOR LEMAN suggested using the language "capital expenditures that increased its capacity" which would allow for the enhancement of the facility in its capacity to receive more children. Perhaps, the bill drafters could address that issue. SENATOR SALO indicated that a better definition of "start" could be determined and she would be available to work on that. SENATOR LEMAN requested the information regarding the tax credit in other states in order to determine if Alaska is being reasonably consistent. Number 541 BOB BARTHOLOMEW, Deputy Director for the Income and Excise Tax Division at the Department of Revenue, informed the committee that tax credits shrink the state's revenue base at a time when revenue short fall should be reversed. Therefore, there is hesitancy in backing tax credit bills. With regard to SB 103, the initial fiscal note did not anticipate any increased costs to the department. However, the fiscal note does not necessarily reflect a zero fiscal note. The asterisks in the fiscal note indicated that the department could not anticipate or calculate the loss to revenue; there would be a fiscal impact, but it is unknown at this time. Mr. Bartholomew pointed out that the change in the tax credit to 50 percent of the expenditures would decrease the impact to the treasury. He reiterated Senator Leman's concern regarding keeping tax credits similar, or as the department calls it "double dipping". The CS does not specifically address that problem. The corporation can deduct the entire expenditure from their income. If the corporation spends $100,000 to construct a child care facility, the entire $100,000 would be deducted from income to calculate taxable income which would determine the tax liability. Then 50 percent of the same $100,000 that the corporation deducted would also reduce their taxes by $50,000. SENATOR SALO asked if the corporation deducts the $100,000 from their income in order to determine their taxable income; dependent on their tax rate, what does that mean in money terms? BOB BARTHOLOMEW explained that with the highest state corporate income tax rate, 9.4 percent, a $100,000 deduction would reduce their tax liability by 10 percent. SENATOR SALO thought she had solved that issue by changing to the 50 percent tax credit. SENATOR LEMAN said that there is still a problem with double dipping. In this case, $50,000 plus $9,400 which totals $59,400. There is a way to only get the $50,000 which is 50 percent of... BOB BARTHOLOMEW clarified that, as with other credits, if the corporation has an expenditure that is eligible for a tax credit that expenditure would not be deductible from gross income in calculating the corporation's tax liability. A credit is calculated and deducted from the tax liability. He explained that any expenditure eligible for a credit comes out of the equation of the calculation of taxable income and the credit returns after the tax liability has been determined. SENATOR MILLER pointed out that this construction would depreciate over the years. The corporation would not write off the entire amount all at once in one year. BOB BARTHOLOMEW said that would be correct with capital expenditures under the rules of the Internal Revenue Service which would determine the write off over a specified number of years. Mr. Bartholomew recommended that if a capital expenditure is made eligible for a tax credit, then do not place that expenditure into your fixed asset records to be depreciated; that expenditure would not depreciate. This bill would allow the corporation to receive the full benefit of those expenditures up to the percentage in the first year. Number 469 SENATOR MILLER said that would be tough on the taxpayer. The taxpayer would have to pay federal taxes which should be depreciated. This would add more bookkeeping requirements because it could not be done at the state level while it would be allowed at the federal level. Senator Miller did not believe this issue to be as great a problem as Mr. Bartholomew has described. BOB BARTHOLOMEW stated that he merely wanted to point out that there is double dipping. If the intention is to allow a $59,400 tax credit, then leave the bill and there would be a difference between how some credits are applied versus this credit. He stated that the same dollar comes away twice. SENATOR MILLER specified that the $9,400 would be spread over 27 and a half years due to the federal rules. BOB BARTHOLOMEW predicted that the corporations would take on the double bookkeeping themselves and take the entire credit in the first year. The corporations would take a credit for their expenditures against the Alaska tax in the first year to the maximum. SENATOR MILLER pointed out that the corporations could not do the double bookkeeping because the other $9,400 would be depreciated out; that tax would come off their taxes in the next 27 and a half years. BOB BARTHOLOMEW clarified that the double dipping would occur over the life of the asset if the corporation capitalized the building of the new facility. The intent of the bill is to focus on capital construction. SENATOR SALO said yes. CHAIRMAN GREEN stated that the tax credit would be immediate versus being spread. BOB BARTHOLOMEW noted that this bill would give the corporations the immediate credit for a major portion. SENATOR SALO disagreed with the term double dipping. If the 100 percent tax credit had been allowed and the corporation could also deduct that amount, then double dipping would be the appropriate term. The CS only allows a tax credit for half of what was spent and only up to $100,000, therefore, the additional tax credit would fall in the other half of the costs which may be a benefit and a half not double dipping. BOB BARTHOLOMEW explained that if a corporation spent $250,000 on a new facility, then they would receive $109,000. The method that the credit is worked on allows double dipping. SENATOR LEMAN said that the corporation would get 9.4 percent of the excess which is more than the $9,400 if $250,000 is spent. BOB BARTHOLOMEW emphasized that the original break is intended. If a corporation spends $250,000, the corporation would still receive a tax deduction for expenditures incurred to run their business. Those same expenditures would be applied to a credit. SENATOR LEMAN asked if the same phenomena occurred with other credits. BOB BARTHOLOMEW explained that the Department of Revenue and the IRS attempts to utilize the investment tax credit. Property expenditures are not placed in a schedule for depreciation if an investment tax credit is used. Alaska has a mixed bag. Mr. Bartholomew noted that the department has proposed amendments to other legislation such as Public Broadcasting. The department would propose an amendment to this bill that would limit the total benefit to the set percentage. SENATOR MILLER pointed out that the amendment would be easier to accomplish with Public Broadcasting than with this bill which would involve depreciation schedules. As someone who owns a business, the more forms added the worse it becomes. Number 395 BOB BARTHOLOMEW informed the committee that there was a resolution that was sent to Congress which had requested a flat tax in order to simplify matters on the other hand, there are lots of tax credit legislation. He agreed with Senator Miller that it would complicate matters. The investment tax credit is already being utilized at the federal level; the distinction is already being made, assets are not included. SENATOR MILLER emphasized the need to develop a fiscal note before the bill reaches the floor. BOB BARTHOLOMEW indicated that he could talk with the sponsor. CHAIRMAN GREEN asked if the corporation is given a tax credit when they provide a health plan, an insurance plan, a vacation leave plan or other items that are perceived as perks. BOB BARTHOLOMEW explained that if the corporation incurs a dollar of expense to provide a benefit to its employees, that becomes a business expense deduction from their sales which would be similar to salaries. That would not be considered a credit or a special benefit. There are no specific tax credits for Alaska. CHAIRMAN GREEN inquired as to what would prevent a small corporation from setting up a child care facility. SENATOR SALO said money. SENATOR MILLER specified that the bill would not prevent a small business from providing a child care facility. CHAIRMAN GREEN asked if an office of seven people of which three have children and they decide to allow child care... SENATOR SALO replied that they could. SENATOR MILLER reiterated that nothing would prevent small businesses from doing this, but large taxpayers would probably take advantage of this option because small taxpayers usually cannot afford to provide such services. Number 347 BOB BARTHOLOMEW restated Senator Salo's earlier clarification that a majority of those in child care must be from the employer in order to receive this benefit. That would seem to allow smaller employers the ability to take advantage of this. He indicated the need to review the CS more closely in order to ensure that the legislation is very specific which would avoid the need for regulations. In other words, the need for the majority of those in child care to be from the employer made need to specified in the bill as 51 percent. Mr. Bartholomew explained that such a clarification would alleviate the problem in differences in regulation and legislative intent. CHAIRMAN GREEN asked if a fee for the service, if the employees paid for their children to be in the employer's child care, would impact any aspect of this. SENATOR SALO replied no, that has nothing to do with the revenue. A corporate sponsored child care center would cost the parents about the same as if their children were in a private child care setting. Senator Salo stated that the quality of the child care in a corporate sponsorship situation is probably higher which results from the money the sponsor puts into the child care. Corporate sponsored child care usually has better equipment, less children per caregiver than in private child care. Senator Salo clarified that any extra money given to the child care facility is left to the corporation's discretion and would not impact this tax credit. Number 315 CHAIRMAN GREEN stated that the bill could be held until Monday in order to receive the requested information. SENATOR SALO expressed her desire to make this bill workable. She agreed that holding the bill to clarify some of the remaining questions would be for the best. SENATOR LEMAN asked Mr. Bartholomew if state regulations require that the expenditure be reasonable and necessary, as the tax code specifies. Is there a provision for a test of reasonableness? BOB BARTHOLOMEW explained that the test for taxes which should apply to credits specifies that one is eligible if they meet the expenditure definition for tax deduction. The definition for tax deduction is ordinary and reasonable business expenditure. Mr. Bartholomew said that he would check to make sure that a corporation could be eligible for credit which could not be used as an ordinary and reasonable everyday business expense. It would seem that the two are tied together and the test would have to be meet. CHAIRMAN GREEN asked if there was anyone else present who wanted to testify on this bill. No one came forth.