SB 50-EMPLOYMENT TAX FOR EDUCATION FACILITIES  1:55:40 PM CHAIR REINBOLD reconvened the meeting and announced that the final order of business would be SENATE BILL NO. 50, "An Act imposing an annual educational facilities maintenance and construction tax on net earnings from self-employment and wages; relating to the administration and enforcement of the educational facilities maintenance and construction tax; and providing for an effective date." 1:56:31 PM SENATOR BISHOP made opening remarks. He said that SB 50 has been around since 1970s. He paraphrased his sponsor statement: From 1919-1980, Alaska had an annual employment head tax for the purpose of collecting revenues to fund schools. The tax went through numerous transformations, but it always charged an equal amount to each employed individual. When it was repealed in 1980, the tax was $10 per person which has the equivalent value of $30 today. SB 50 proposes to revive the repealed head tax on employed individuals, both resident and nonresident, with income from a source in Alaska. The "Alaska Education Facilities, Maintenance, and Construction Tax" would collect $30 from each person employed in the state. The tax would be withheld from an employee's first paycheck each year while self- employed individuals would be required to remit payment to the Alaska Department of Revenue. The tax would be deductible on an individual's federal income tax return. According to the most recent statistics from the Alaska Department of Labor and Workforce Development and the U.S. Census Bureau, there are approximately 441,596 employed individuals in Alaska. Roughly 20% of those workers who earn their living in Alaska do not reside here resulting in $2.5 billion in nonresident income that leaves Alaska's economy each year and, in most cases, gets taxed by a nonresident's home state. It is estimated that this tax would generate $13 million each year. The revenue collected would be deposited into the state's general fund and accounted for separately to pay for the growing maintenance and construction needs of Alaska's schools. 1:58:34 PM SENATOR BISHOP said the state has had a minimal budget for the past five years. He expressed concern about the level of deferred maintenance for schools in disrepair. In 1980, the head tax was repealed. However, a bill to recreate the head tax has been introduced in the legislature 15 times. In fact, he has introduced this concept in the last three legislatures. He reported that the Department of Education and Early Development (DEED) indicates that the state has $112 million in deferred maintenance and $190 million in school construction debt. He said that $2.5 billion in nonresident income leaves Alaska's economy each year. These nonresidents are most likely taxed in their home states and those taxes help provide education in their home states. The state has had limited capital budgets based on federal matching funds. The deferred maintenance is not getting better, he said. He remarked that he worked for Joe Jackovich when he attended high school. Mr. Jackovich explained to him that the $5 school tax helped pay for his high school education. 2:02:00 PM DARWIN PETERSON, Staff, Senator Click Bishop, Alaska State Legislature, Juneau, on behalf of the sponsor, reiterated that from 1919 to 1980 Alaska had an annual employment head tax for the purpose of collecting revenues to help fund its schools. The tax was established to charge an equal amount to each employed individual. When it was repealed in 1980, the tax was $10 per person, which would be equivalent to $30 today, if adjusted for inflation. SB 50 proposes to revive the repealed head tax on those employed, both residents and nonresidents. MR. PETERSON said that this bill would collect $30 withheld from the first paycheck each calendar year and is deductible on federal income tax returns. He provided statistics from Department of Labor & Workforce Development and the U.S. Census Bureau, such that 20.0 percent or 85,000 of 441,596 employees are nonresidents, which results in $2.5 billion leaving the state's economy each year. In 2017, 407,255 of the 441,596 employees were wage and salary workers. He said that 11,329 of the self-employed Alaskans work in the business sector and the remainder are self-employed in non- incorporated businesses. MR. PETERSON said that based on those figures, the education head tax would bring in $13 million in revenue per year to the state's general fund to pay for growing maintenance and construction needs. The Department of Education and Early Development (DEED) indicates that the state's share of the FY 2020 major school maintenance list totals $112-113 million and the FY 2020 school construction list totals $190 million totaling over $300 million. He pointed out that it costs districts money to place something on the list, so the total does not reflect all of the needs. He referred to members' packets and letters of support. 2:06:41 PM SENATOR COSTELLO asked whether this is considered a dedicated fund, and if not, how does the legislature avoid it. MR. PETERSON answered no. He referred to page 4, lines 13-19, to language that states it does not create a dedicated fund. AS 43.45.061 read: (a) The tax and penalties collected by the department under this chapter shall be deposited into the general fund and accounted for separately. (b) The legislature may appropriate the estimated amounts to be collected and separately accounted for under (a) of this section into the educational facilities maintenance and construction fund established under AS 37.05.560. Nothing in this section creates a dedicated fund. MR. PETERSON explained that the legislature is constitutionally prohibited from creating dedicated funds. The legislature may appropriate and separately account for and place the funds in an account with the intent to pay for construction and deferred maintenance. SENATOR COSTELLO asked whether this would be considered an income tax. MR. PETERSON agreed that it would create an income tax, but it is a flat tax, not a bracketed income tax. SENATOR COSTELLO asked for further clarification as to why maintenance was not included as part of school construction. MR. PETERSON answered that over the last five years, the operations are ongoing but capital budgets can be held back while the legislature waits for additional revenue. 2:09:57 PM SENATOR BISHOP said he likes the title of the bill, which relates to facilities and construction tax. It read: "An Act imposing an annual educational facilities maintenance and construction tax on net earnings from self-employment and wages; relating to the administration and enforcement of the educational facilities maintenance and construction tax; and providing for an effective date." He characterized this matter as a policy question. 2:10:32 PM SENATOR BIRCH commended the sponsor for bringing this forward. He also recalled his first pay stub signed by Jim Dalton. The Dalton Highway was named after him. He recalled the head tax was $10 and he understood it went to education. He said that maintenance is important and deferred maintenance needs to happen but can be pushed off for a while. These deferred maintenance costs are significant ones in rural communities. He characterized this as a step in the right direction. He said he thought it may help educate a new generation of Alaskans that it is necessary to pay for things. 2:12:34 PM CHAIR REINBOLD raised the concern that home schools must absorb property taxes. She asked whether this tax would apply to everyone, whether these residents have kids in the system or not. MR. PETERSON answered yes. He said that everyone who is employed would be subject to a $30 head tax per year. Not everyone in the state has the ability to homeschool their children. However, the state is constitutionally required to provide a public school system for all children, and everyone in the state benefits from having an educated population. CHAIR REINBOLD argued that it does not mean that the state must have 54 school districts and a $2.2 billion budget, with some of the lowest outcomes in some areas. She expressed frustration to see "common core" math standards that she characterized as some of the worst possible. She emphasized that she is resistant to increasing education funding at this time. She highlighted that her constituents question their high property taxes when other residents pay none. She asked how to track where the money is spent. Since designated funds are prohibited, this could result in additional general fund monies. MR. PETERSON pointed out that employed rural residents that do not currently pay property taxes would be contributing $30. CHAIR REINBOLD expressed concern that the funding would not be tied to the local community. She said she preferred local community control. MR. PETERSON referred to the prioritized DEED major maintenance fund list and school construction fund list in members packets. The funds would be allocated towards those projects in priority order. CHAIR REINBOLD related her understanding that there would not be any guarantee that funds would be spent in the area in which the funds were collected. MR. PETERSON agreed that it was a statewide effort. 2:15:47 PM CHAIR REINBOLD expressed concern that the initial fees could dramatically increase over time. She offered her belief that government always wants more, so this could just become a general bracketed income tax. MR. PETERSON agreed that it was always the prerogative of future legislatures. Future legislatures could abandon this approach and impose an income tax based on net income. He remarked that doing nothing was not an answer, either. CHAIR REINBOLD said this sets up the framework for a full- fledged income tax so it could become a vehicle for that to occur. SENATOR BISHOP did not disagree. However, he said that he could not in good conscious propose addressing the issue by taking funding out of savings. He emphasized that he was trying to do something to address deferred maintenance. He pointed out that some school kids in his district have not had drinking water in three years. He maintained that it was not an option to do nothing. 2:18:02 PM CHAIR REINBOLD said she appreciated his courage since there is significant resistance to taxes. She expressed concern over the inequalities in school districts, such that some schools have great facilities whereas others do not. She would like a program that engages students to care for school lawns and encourage school pride. She said that one thing she liked about the bill is that the fees were the same fee for everyone. [SB 50 was held in committee.]