SJR 4-CONST. AM: STATE TAX; INTIATIVE  1:39:10 PM CHAIR HUGHES announced that the first order of business would be SENATE JOINT RESOLUTION NO. 4, Proposing amendments to the Constitution of the State of Alaska prohibiting the establishment of, or increase to, a state tax without the approval of the voters of the state; and relating to the initiative process. [Before the committee was CSSJR 4(STA), Version U]. CHAIR HUGHES made opening remarks. 1:40:35 PM WILLIAM MILKS, Attorney, Labor & State Affairs, Civil Division, Department of Law, Juneau, stated that the Department of Law provided a memo to the committee dated April 15, 2019, that addresses certain issues raised by the Legislative Legal Services, Legislative Affairs Agency. The first question relates to the administration's intent related to the definition of new taxes and increased tax rates. The changes to deductions, exemptions, or credits from an existing state tax would not be covered by SJR 4, so it would not trigger a vote by the people, he said. The department has one suggested change that will be considered by the committee later, which would insert the word "nominal" in front of tax rate to clarify that the intent is not to increase the nominal tax rate or an individual's tax rate. He related an example, that if the number was 10 that changes to it would trigger the constitutional amendment. 1:42:33 PM CHAIR HUGHES related her understanding that an initiative to change tax credits or deductions would effectively change the tax rate, but [SJR 4] would not apply. MR. MILKS answered that is correct. He said that questions arose regarding various scenarios and how this provision would work if a bill created several new taxes as well as a regulatory program. If a bill were to pass the legislature that creates multiple taxes, each of the new taxes would be presented to the voters to consider separately. Since this resolution focuses solely on taxes, only the portion related to taxes would be subject to the provisions of SJR 4 if a program was passed by law that created a new tax or increased an existing tax that had regulatory changes. MR. MILKS said another question that was raised related to the circumstance in which a bill decreased a tax and a referendum by the voters rejected it. This would mean the state would revert to an existing tax. This circumstance would not be covered by SJR 4, which does not speak to a referendum in that circumstance. Instead, it would speak to a tax rate or a new tax passed by the legislature or by the voters via an initiative, he said. MR. MILKS said that two additional issues were raised that the committee will consider. One concerned Article IX Section 1, which is a specification related to the effective date of an initiative law. He said that initiative laws become effective pursuant to constitutional provision in Article XI, Section 6, except for subjects related to tax changes. In those circumstances SJR 4 would govern, which means the initiative law would not become final law 90 days later, but it would be subject to the process by which the legislature would review the law. 1:46:26 PM MR. MILKS said that another issue was to clarify questions related to the tax year when establishing a new tax. He said that the department suggests amending SJR 4 to change the effective date to January 1 of the following fiscal year to avoid a new tax becoming effective mid-year. MR. MILKS related that a question was raised as to whether the legislature's Uniform Rules would need to be modified if SJR 4 were to pass. He said it is possible, but he did not think it would impact SJR 4. [Uniform Rules] would not be addressed in SJR 4, he added. MR. MILKS said that the memo outlines the department's response to technical issues and further explanations, reiterating the scope of SJR 4. 1:47:35 PM CHAIR HUGHES noted that the memo from the Legislative Legal Services, Emily Nauman, legal counsel, brought up important issues to consider. She said that one of the issues she raised is the effect of SJR 4 on a new group of taxpayers or product. MR. MILKS related his understanding that SJR 4 would apply if a new tax would be applied to a new product. CHAIR HUGHES asked whether SJR 4 would apply to a new group of taxpayers. MR. MILKS answered that SJR 4 would also apply to the new group of taxpayers. 1:49:16 PM SENATOR MICCICHE related his understanding Ms. Nauman believes that SJR 4 is not an amendment [but is a revision] to the Constitution of the State of Alaska. 1:49:29 PM EMILY NAUMAN, Deputy Director, Legislative Legal Services, Legislative Affairs Agency, Juneau, responded that is correct. SENATOR MICCICHE asked whether this would make a political statement or if it does not matter. In this case it is a substantial shift and the power of taxation should never be surrendered or contracted away. He offered his belief that the legislature would be surrendering and contracting away the power of taxation and [SJR 4] would result in a tax being implemented sooner. He said he has put on the record that the only people losing rights in SJR 4 are the people of Alaska in the initiative process. He said, "On a bumper sticker this sounds like a really good idea for conservatives that think they're gaining something but the reality of it is they're losing substantially." CHAIR HUGHES suggested that one of the amendments will address his concern a bit. She said that the Senate Finance Standing Committee could also consider the matter. She said that SJR 4 would really just move up the timeline instead of having the two-year delay in place with an initiative. 1:51:16 PM CHAIR HUGHES moved to adopt Amendment 1, work order 31- GS1070\U.2, Nauman, 4/5/19. AMENDMENT 1  OFFERED IN THE SENATE BY SENATOR HUGHES TO: CSSJR 4(STA) Page 1, line 3, following "state;": Insert "relating to effective dates of laws;" Page 1, following line 4: Insert a new bill section to read: "* Section 1. Article II, sec. 18, Constitution of the State of Alaska, is amended to read: Section 18. Effective Date. Laws passed by the legislature become effective ninety days after enactment. The legislature may, by concurrence of two- thirds of the membership of each house, provide for another effective date. This section does not apply to  a law establishing a state tax or increasing a state  tax under Section 1(b) of Article IX." Page 1, line 5: Delete "Section 1" Insert "Sec. 2" Renumber the following bill sections accordingly. Page 1, line 11: Delete "Notwithstanding Section 18 of Article II, a" Insert "A" Page 2, lines 2 - 3: Delete "the later of ninety days after" Insert "January 1 of the fiscal year following the fiscal year in which" Page 2, lines 3 - 4: Delete "or an effective date provided for by concurrence of two-thirds of the membership of each house" Page 2, line 12: Delete "ninety days after approval" Insert "January 1 of the fiscal year following the fiscal year in which the initiated law is approved" SENATOR MICCICHE objected for discussion purposes. 1:51:34 PM MR. WHITT explained that Amendment 1 speaks to the issue the Department of Law raised and would address concerns related to the effective date. Amendment 1 would add a line to Article II, sec. 18 of the Constitution of the State of Alaska to read, "This section does not apply to a law establishing a state tax or increasing a state tax under Section 1(b) of Article IX." It would also change the effective date to January 1 of the fiscal year following the statewide voter [initiative]. He explained the timeline, that following a November statewide election when the legislature reconvenes in January, it would make a decision regarding the [initiated law]. Thus, the effective date would be the following January 1. In response to Chair Hughes, he agreed it related to a voter initiative. He said this would provide nearly a year for the administration to take actions to administer the new tax. 1:53:15 PM SENATOR KIEHL said Amendment 1 is cleaner than the original draft. He related a scenario with seasonal activities and industries that occur in the winter. However, January 1 falls in the middle of the season. He asked whether any provision exists for the legislature or voters to adjust to a different start date. MR. WHITT surmised that provisions would be in place for agencies and businesses to gear up to implement a new tax that would begin on January 1 and run through December 31. This would not be the first time a new tax was implemented. CHAIR HUGHES added that she thought this reflects a fairly typical January 1 to December 31 timeframe. 1:55:25 PM MIKE BARNHILL, Policy Director, Office of Management and Budget, Office of the Governor, Juneau, stated that Amendment 1 would establish the effective date on January 1. For example, a new Heli-ski company whose season begins on October 1 would be tax free for three months. He did not envision any tax administrative issues, but rather that the division would use its standard practice to implement the new tax. 1:56:01 PM SENATOR KIEHL said he was hoping for more. He asked for further clarification on the mechanics of Amendment 1. He recalled that the legislature has sometimes implemented retroactive changes to the tax code. He further recalled that the Alaska Supreme Court has said "that retroactivity is not an effective date." He asked whether it would be available under the language in Amendment 1. MR. BARNHILL deferred to the Department of Law. CHAIR HUGHES offered to follow up with the department on that specific question. 1:57:00 PM SENATOR MICCICHE said that Amendment 1 would make it impossible for the legislature to respond to a substantial drop in the price of oil. He said that assuming the legislature puts a full dividend in the Constitution of the State of Alaska, an "x" amount of revenue flows in, but the state is not always going to have $17 billion in the earnings reserve account (ERA). There may not be anything in the CBR [Constitutional Budget Reserve] or the ERA. In order to keep the state operating, the state may need to implement a tax one day. He emphasized that he does not currently support implementing a tax. However, this language makes it so the legislature is always in session because the approval process would take a year. Even if the legislature held a special session, the tax would not become effective until January 1 of the following year, he said. SENATOR MICCICHE said Amendment 1 would create a completely unmanageable financial situation and there is a reason why the legislature retains taxing power. Although the state has not had to do so for generations, one day the legislature may need to [implement taxes] in order to provide basic services people cannot afford to do on their own, such as troopers and schools. Extending the date would mean waiting to see if something passes on November 2 and managing it if it doesn't. That would mean holding a special session, immediately holding a special election, and waiting until the following year for a correction on the next January 1. Although it sounds good, he did not think this has been adequately thought through. 1:59:39 PM CHAIR HUGHES pointed out that he is speaking more generally about the resolution, but Amendment 1 and the trigger date is before the committee. She pointed out that Colorado has done this. If the legislature were to pass a tax, it would require public education and a mutual agreement that taxes were necessary to continue to provide services. MR. BARNHILL said, "Just briefly, Madam Chair, and with respect to Senator Micciche, I think there's a difference between making the enactment of new tax or an increase in the tax rate more difficult, which this certainly does, and impossible, which this does not." CHAIR HUGHES asked whether he maintained his objection. 2:01:14 PM At-ease. 2:06:42 PM CHAIR HUGHES reconvened the meeting. 2:06:47 PM SENATOR MICCICHE made a motion to adopt Conceptual Amendment [1] to Amendment 1, on page 2 to delete lines 4-6. CHAIR HUGHES, referring the language on page 2, asked for clarification from Mr. Whitt. She asked if the committee would like the possibility of concurrence of two-thirds as another option, if it should "delete" the word "delete" or whether all of lines 4-6 in the amendment should be deleted. MR. WHITT responded that either language would have the same effect. CHAIR HUGHES acknowledged that the language is in the resolution. 2:07:35 PM There being no objection, the Conceptual Amendment [1] to Amendment 1 was adopted. CHAIR HUGHES said that Amendment 1, as amended, was before the committee. SENATOR MICCICHE removed his objection. There being no further objections Amendment 1, as amended, was adopted. 2:07:56 PM CHAIR HUGHES moved to adopt Amendment 2, work order 31- GS1070\U.3, Nauman, 4/10/19. AMENDMENT 2 OFFERED IN THE SENATE BY SENATOR HUGHES TO: CSSJR 4(STA) Page 2, lines 7 - 14: Delete all material and insert: "(c) Unless rejected by the legislature under this subsection, a law enacted by voters through the initiative process under Article XI that establishes a tax or increases the rate of an existing tax takes effect January 1 of the fiscal year following the fiscal year in which the law is enacted by voters. The legislature shall have sixty days of the next regular session beginning after the initiative election, or a full session if of shorter duration, to reject the initiated law. The law must be rejected by resolution concurred in by a majority of the members in joint session. If the legislature rejects the initiated law, the initiated law does not take effect." SENATOR MICCICHE objected for discussion purposes. 2:08:02 PM MR. WHITT explained Amendment 2, would replace language on page 2, lines 7-14. Senator Micciche raised the concern that the resolution would be removing power from the people. After discussions with the Department of Law, the language in Amendment 2 mirrors Article III of the Constitution of the State of Alaska under executive powers. The current language in SJR 4 states that the legislature must, by resolution, approve an initiative with a majority vote. If it does not approve the initiative, the initiative would die, he added. Under Amendment 2, by resolution, the legislature would reject an initiative [by a majority vote]; otherwise the initiative would automatically become law. This process is similar to an executive order, he said. CHAIR HUGHES pointed out that if the legislature does nothing, the initiative would also become law. Amendment 2 would require the legislature to go on record, after the people have weighed in [by passing an initiative]. She envisioned that it would be more demanding for the legislature to go on record to oppose [a vote] by the people. 2:09:55 PM SENATOR MICCICHE clarified that [Amendment 2] does not replace that right, that the public has lost the right to initiative. The current constitutional language provides the legislature the right to tax, but the people can remove the tax through an initiative process or a referendum process. The people also have the right to create a law by initiative and the legislature must honor that law for two years. After two years, it is more difficult to change the law because people remember they voted to create it. All Amendment 2 does is to document how [legislators] voted when [the legislature] takes away the right to initiative for two years. CHAIR HUGHES agreed that it documents the vote, but it also makes it a higher bar and more difficult [for the legislature] to overturn the law since the people passed it by initiative. She said that legislators might be hesitant to go against a law the people have asked for [via the initiative vote]. The way the resolution currently reads, one would never really know who was in agreement or who was not in agreement. She characterized it as "somewhere in between." 2:11:26 PM SENATOR KIEHL offered his belief that Amendment 2 would make a smaller reduction in the people's authority to pass an initiative, but it would still be a reduction. CHAIR HUGHES asked whether he would agree it was a slight improvement. SENATOR KIEHL indicated it was a small one. SENATOR MICCICHE removed his objection. There being no further objection, Amendment 2 was adopted. 2:12:25 PM CHAIR HUGHES moved to adopt Amendment 3, work order 31- GS1070\U.4, Nauman, 4/16/19. AMENDMENT 3 OFFERED IN THE SENATE BY SENATOR HUGHES TO: CSSJR 4(STA) Page 1, line 12, following "the": Insert "nominal" Page 2, line 8, following "the": Insert "nominal" SENATOR MICCICHE objected for discussion purposes. 2:12:35 PM MR. WHITT reviewed Amendment 3, which would specify "nominal." He said the language on page 1, line 12 would read, "? the nominal rate of an existing state tax ?." He said that the Department of Law described it as cleanup language per its memo. SENATOR MICCICHE said he was not positive that it resolves the issue. For example, a 35 percent base tax rate on oil taxes also has a $5 per barrel tax. One might say that the 35 percent is a nominal rate. However, it is not the nominal rate because it is inherently a part of the tax that results in a nominal outcome. While he understands the argument, it would be very easy to challenge in court since taxes are not a base rate. They are a function of exclusions, deductions, and other levers that are designed for a specific outcome, he said. In this instance, nominal is not what one would think it is. He said that it just means if the state decides it is "nominal" and the people decide it is not, it would go to a vote of the people. He said it is not a huge deal to him, but it is something to think about. CHAIR HUGHES suggested that the record would reflect the committee's intent and that the committee's discussion is related to the 35 percent and not the deductions or other things. She asked Mr. Barnhill if "nominal tax rate" is a standard term used to refer to the base rate and that it does not include other calculations that occur above the line. 2:15:28 PM MR. BARNHILL said that he did not know if it was a standard tax term. He said that the record could reflect that the 35 percent rate in the state's production tax statutes is the nominal rate. In order to trigger [SJR 4,] the legislature would need to change the nominal rate from 35 percent to some another number. CHAIR HUGHES suggested the committee adopt [Amendment 3] and ask the Senate Finance Standing Committee to determine if this is a standard tax term that could be relied upon. MR. BARNHILL offered to research it. 2:16:17 PM SENATOR KIEHL said that it is a fairly standard term. He acknowledged that Senator Micciche is correct. He said he does not think this provision would be triggered if the legislature passed a law to apply a credit of minus $5 on every barrel of oil. Although it is not the nominal rate, it raises the taxable value for tax purposes by $5 and collects 35 percent, he said. The legislature could change the nominal rate and what Senator Micciche said was "spot on," he said. He characterized it as a can of worms that is wriggling and hard to grab. MR. BARNHILL responded that Amendment 3 tries to provide clarity for future cases that are litigated. He said that broad terms are used in constitutional language and it leaves it up to the courts to ultimately decide. SENATOR MICCICHE said the legislature has been known to find "work arounds." He acknowledged that it is popular to require voter approval but adding "nominal" creates a work around. He brought up the $5 per barrel tax example to illustrate it. He said the legislature could find another way to change the tax rate without voter approval. He understood Amendment 3 is an attempt to achieve clarity, but it may work the other way. MR. BARNHILL responded that the administration is trying to strike a balance, so everything does not need voter approval and to create a dividing line. Some things will need voter approval and others will not, and some gray areas will occur, he said. Adding words like "nominal" may help reduce the ambiguity in certain cases, and if so, the committee should do so. He said the record should be clear that the administration is not trying to amend the Constitution of the State of Alaska by sending every tax fee, deduction, or question to the people [for voter approval]. [Under Amendment 3], some things will require voter approval, such as an increase in the "nominal" rate of tax or to create a new tax. However, certain things will not require voter approval, such as fees, deductions, or implied changes to the rate of tax that do not change the nominal rate of existing state tax. 2:20:26 PM SENATOR REINBOLD [via teleconference] said she appreciated hearing the discussion. 2:20:39 PM SENATOR MICCICHE said he opposes the legislature telling people it is doing something that it is not really doing. For example, the Constitution of the State of Alaska has a spending limit. The minutes reflect that the legislature put into place something that sounded like a spending limit, yet it was a "big joke," and the legislature knew it was not going to have any effect on spending. He acknowledged that this may be uncomfortable to discuss. However, he views Amendment 3 as a work around and people should understand that there are not any corporate taxes, fish taxes, fuel taxes, or marijuana taxes in place that the legislature cannot find a work around. He said that the committee could create a "purer" approach, or it could make the process more flexible, which might bring out creativity by the legislature. 2:21:52 PM SENATOR MICCICHE withdrew his objection. There being no further objection, Amendment 3 was adopted. 2:22:10 PM CHAIR HUGHES moved to adopt Amendment 4, work order 31- GS1070/U.5, Nauman, 4/16/19. AMENDMENT 4 OFFERED IN THE SENATE BY SENATOR HUGHES TO: CSSJR 4(STA) Page 2, line 19: Delete "Section 1" Insert "Section 1(c)" SENATOR MICCICHE objected for discussion purposes. 2:22:21 PM MR. WHITT explained Amendment 4 is a "carve out" for Article IX, Section 1(c), which relates to the enactment provisions in Amendment 2. Thus, except as provided in Section 2 of Article IX, the enactment would follow the provisions in Section 1(c) of SJR 3. 2:23:05 PM SENATOR MICCICHE removed his objection. There being no further objections, Amendment 4 was adopted. [SJR 4 was held in committee.]