SENATOR TAYLOR announced SB 161 (INTEREST RATES: JUDGMENTS/TAXES/ROYALTIES) to be up for consideration. DEBORAH VOGT, Department of Law, supported SB 161 which addresses two distinct areas relating to interest in the state, judgements in all civil litigation, not just litigation involving the state of Alaska, and interest on back taxes and royalties. The 10.5% statutory interest rate is totally out of wack with current reality, she said. The legislation would simply adopt a market rate that would float with the market for both prejudgement and postjudgement interest. TAPE 94-20, SIDE A Number 001 SENATOR TAYLOR said that is not 10.5% more than you would have had to have paid. If we take this legislation and apply a sliding scale or a market test, the state would have to pay 7% or 8% interest. So we are talking about a 3% penalty. MS. VOGT said that interest under this legislation would be 3.49%, an amount that would apply to postjudgement interest were the litigation concluded this year. The prejudgement interest would flow under the legislation from the rate in effect in the year in which the litigation began. That might be significantly higher if it was several years ago. SENATOR DONLEY said he liked interest rates to be a little high as incentive for people to settle. He thought her proposal took away a lot of that incentive. MS. VOGT explained that in the examples she brought for the Committee the state makes an original deposit, an additional deposit, and a master's award. The state deposits into an escrow account the amount it believes the property is worth so interest is just paid on the net. There was some discussion regarding the examples of condemnation cases she brought for the Committee because they involved such large amounts of money owed by the state. MS. VOGT explained that a very small percentage of condemnation cases ever are contested. Most of them are agreed upon. A small percentage goes into hearing and these are some of the ones they have paid most of the interest in. SENATOR DONLEY suggested having a fixed addition to the sliding scale. MS. VOGT emphasized that the state's position is that the interest should be a floating market rate. It shouldn't be an incentive to either party to either drag out the litigation or to settle. Number 219 LARRY MEYERS, Department of Revenue, said under current law the interest rates for over and under payment are determined by the federal discount rate compounded quarterly at a percentage of the greater of 5% or 11% above that rate. Currently, that discount rate has been at 3% which means we have an 11% interest rate. MR. MEYERS said what the state is seeing now is that we are currently earning between 3 1/2% and 4% on our own money that is being invested. We are seeing example of taxpayers who are actually parking their money with the state to earn a higher rate than they could under short term earnings elsewhere. SENATOR HALFORD asked if there is any effort to accelerate in getting the refunds out? MR. MEYERS answered by law if they issue a refund within 90 days there is no interest due. The bulk of the refunds we are paying have to do with taxpayers who are filing an amended return. These are people who are voluntarily coming forward saying they have made mistakes. Number 284 SENATOR HALFORD asked if there was a way to separate by classification those voluntary actions from the acts of conflicts. MR. MEYERS said there is. If the state has, in an assessment mode, collected and then had to make a refund. SENATOR HALFORD said for the ones where the state was precipitating the conflict, it would seem that the interest rate ought to be 25% in both directions so everyone is betting a whole lot higher and would come to an agreement a whole lot quicker. MR. MEYERS said there are penalty provisions that they do apply routinely for negligent preparation. Number 334 MR. MEYERS suggested they change language that reads, "However, if the overpayment is a result of the correction of an assessment, a return made by the Department, the amount overpaid bears interest rate in the manner provided in AS 43.05.225. GRANT HUNTER, Anchorage, suggested that there be an alternative interest rate which would be greater than 10.5%. He didn't think interest should be paid on overpayments of taxes and royalty payments to the state of Alaska. It's the obligation of every citizen or royalty payer to determine on their returns what is the current rate, he said. SENATOR TAYLOR said he intended to have this bill again after an informal work session.