SJR 7-CONST. AM: STATE TAX; VOTER APPROVAL  4:08:06 PM CHAIR SHOWER announced the consideration of SENATE JOINT RESOLUTION NO. 7 Proposing amendments to the Constitution of the State of Alaska relating to prohibiting the establishment of a state tax without the approval of the voters of the state; and relating to the initiative process. 4:08:13 PM MIKE BARNHILL, Deputy Commissioner, Department of Revenue, Juneau, Alaska, stated that SJR 7 amends Art. IX, Sec. 1, Constitution of the State of Alaska to require voter approval for any new tax enacted by the legislature. It was similar to Senate Joint Resolution 4 that this committee considered two years ago. He reminded members that the Alaska Constitution already has two forms of direct democracy. These are the people's power to initiate laws through initiative and the people's power to repeal laws enacted by the legislature through referendum. SJR 7 adds a new form of direct democracy to the constitution, functionally authorizing an automatic referendum on new taxes. The people already have the power to initiate a referendum to repeal a tax measure enacted by the legislature and SJR 7 makes it automatic by placing it in the constitution. MR BARNHILL said the second part of SJR 7 amends the people's constitutional power of initiative by requiring legislative approval with a majority vote in joint session of any new tax enacted by initiative. Functionally, it is a form of checks and balances. He described this as a new partnership between the people and the legislature. 4:11:10 PM SENATOR COSTELLO asked if the majority vote requirement means 31 votes regardless of the votes in the individual bodies or a majority of the votes in each body. MR. BARNHILL replied he reads it as a majority vote of 31 in a joint session. 4:11:53 PM SENATOR REINBOLD pointed out that Alaska's government is a representative republic, which means that the voters elect people to make decisions on things such as taxes. She said she does not like taxes but she feels that this administration is tying the hands and reducing the power of the legislature. CHAIR SHOWER referred to the last sentence in the proposed new subsection (c) and asked if this would be interpreted to apply to only this provision for a tax increase that the voters approve by initiative or if the judiciary could interpret it to apply to any initiative. 4:13:43 PM MR. BARNHILL directed attention to the language on page 2, line 7 that confines the application to an initiative that establishes a state tax. He said that triggers the legislature's ability to approve the initiated law by a majority vote in joint session. CHAIR SHOWER expressed concern about how the court might interpret that and said the committee would take a harder look. 4:14:50 PM MR. BARNHILL said that in 1955 the direct democracy elements of initiative and referendum were added to the representative democracy in the Alaska Constitution. That is part of Alaska's legal heritage and the governor is proposing to automate a referendum in the sole instance of legislative enactment of a new tax. 4:16:22 PM MR. BARNHILL proceeded to slide 7 and described other states that have similar constitutional provisions regarding voter approval of new or increased taxes. Colorado, in 1992, amended its constitution to add the Taxpayer Bill of Rights (TABOR). He noted that TABOR was essentially a combination of SJR 5 and SJR 7. It requires voter approval of any new tax or increase to existing taxes at the state and local level. Notably, Colorado voters approved a marijuana tax in 2013 and certain tobacco tax increases in 2020. 4:17:55 PM SENATOR COSTELLO asked if he had a definition of tax. MR. BARNHILL said the Department of Revenue's view was that a tax includes a broad-based sales tax, a broad-based income tax, and an excise tax. It does not include user fees, such as court filings tied to a specific service to defray the cost of that service. 4:19:23 PM SENATOR COSTELLO asked if a reduction in the permanent fund dividend (PFD) would be considered a tax. MR. BARNHILL answered no. CHAIR SHOWER asked Mr. Milks if he had anything to add to the definition. 4:19:51 PM BILL MILKS, Assistant Attorney General, Labor and State Affairs Section, Civil Division, Department of Law, Juneau, Alaska, said the framers put the term "tax" in the constitution and the basic definition came from dictionaries used at that time. It was a charge levied by the government on persons or property for a public purpose. He agreed with Mr. Barnhill that user fees were different and would not be considered a tax. 4:21:27 PM SENATOR KAWASAKI relayed that years ago in Fairbanks, property taxes paid for the garbage utility. Then the assembly changed that tax to a fee so it would be outside of the revenue cap. There was vigorous debate because residents inside the city were required to get the garbage utility but apartment complexes of more than four could contract with a private vendor. He asked, under that circumstance, if that was a fee or hidden tax. MR. BARNHILL said it was difficult to assess but from a policy perspective, it sounded more like a fee than a tax. It was tied to a specific function and the purpose was to defray the cost of that specific function. That is different from revenue raised broadly for the purpose of funding public services generally. He added that he could see the argument going both ways. He deferred further explanation to Mr. Milks. 4:23:29 PM MR. MILKS said Mr. Barnhill's explanation was reasonable but it was difficult to assess the example. SENATOR KAWASAKI posed the hypothetical example of increasing the cost of what the Division of Motor Vehicles (DMV) charges far more than the cost to operate the division. He asked if that would be considered a tax. MR. BARNHILL said it would be difficult to say categorically one way or the other in that situation. MR. MILKS agreed with Mr. Barnhill. 4:27:09 PM SENATOR REINBOLD asked how SJR 7 answers to Art. IX of the Alaska Constitution that says, "The power of taxation shall never be surrendered. This power shall not be suspended or contracted away, except as provided in this article." MR. BARNHILL replied the resolution proposes to amend the constitution so it would fall under the existing words, "except as provided in this article." CHAIR SHOWER asked if he was saying that the resolution would be constitutional because it would amend [Art. IX, Sec. 1] of the Alaska Constitution. MR. BARNHILL agreed. SENATOR REINBOLD questioned whether it made sense to allow and not allow something in the same sentence. CHAIR SHOWER asked Mr. Milks to give a more precise legal definition of the process. 4:29:16 PM MR. MILKS explained that the constitution currently says that the power of taxation shall never be surrendered or contracted away except as provided in [Art IX, Sec.1]. SJR 7 adds two new subsections to that article that address the separate question of establishing a state tax. SENATOR REINBOLD asked him to read the constitution with the addition of the two new subsections. MR. MILKS directed attention to page 1, line 9 of the resolution and explained that the new subsections would fall immediately after the existing language in Art. IX, Sec. 1. The new subsections set the rules regarding establishing a state tax. SENATOR REINBOLD observed that it sounds like, "it's shall not and then we're going to." 4:31:29 PM MS. SCHULTZ said an example in the constitution appears in Art. IX, Sec 7, the anti-dedication fund clause. As originally drafted, it prohibited the dedication of state funds. That was amended in 1976 to add "except as provided in Sec. 15, which allowed the creation of the permanent fund. SENATOR REINBOLD said the people voted to support the permanent fund and the dividend and now it is being taken. She said she appreciated Senator Costello's question about the permanent fund because many people feel the reduction in the dividend is a tax. She said she was not a fan of taxes, but this resolution gave her pause. CHAIR SHOWER asked if the Department of Law could provide a written explanation, with examples, about how it was done before. MR. MILKS agreed to do so. 4:34:14 PM SENATOR HOLLAND asked how many tax proposals Colorado voters rejected after the passage of TABOR. MR. BARNHILL said he would follow up with the information. He recalled that a number of taxes in Colorado failed from 1992 to the present. CHAIR SHOWER asked him to provide the information by the next hearing on the resolution. 4:35:17 PM MR. BARNHILL continued the presentation on slide 7 regarding states that require voter approval of new or increased taxes. He said he included Missouri and Washington to show the variation. The constitutional provision in Missouri requires voter approval of tax increases of $50 million or more, adjusted for inflation. In 2018, voters defeated Proposition D to increase gasoline taxes by $400 million. He explained that the state of Washington has a constitutional provision that requires voter approval of certain increases to real and personal property taxes referred to as "levy lid lifts." In recent years, voters approved 75 percent of proposed levy lid lifts. Further, California has a constitutional provision that requires voter approval of general local taxes and special local taxes. CHAIR SHOWER asked him to provide information on any other states that have enacted similar constitutional provisions. MR. BARNHILL replied that these four are the states that have amended their constitutions; there may be more examples at the local level. 4:37:13 PM MR. BARNHILL displayed slide 8 and highlighted that the National Council of State Legislatures has summarized the pros and cons of the experiences of states from a policy perspective. They call the amendments proposed in SJR 5 and SJR 7 "tax and expenditure limitations." He noted that the link to the entire article was on slide 10. It exhaustively lists and categorizes the states, the nature of the tax, and expenditure limitations. A sample of the pros of a tax and expenditure limitation includes make government more accountable and efficient; foster public prioritization of programs and services; and voter consent to new taxes may increase tax compliance. He noted the latter was from a study of Eastern Bloc countries post communism and the use of the referendum to engage voters and improve tax compliance. The researchers found a positive relationship. A sample of the cons of a tax and expenditure limitation includes: more difficulty raising new revenue; waiting for voter consent can delay implementation and collection of new revenues (which may be an issue for Alaska that needs revenue soon); and it shifts fiscal decision making away from elected representatives (as Senator Reinbold pointed out). MR. BARNHILL advised that slides 9 and 10 are cut and paste from the National Council of State Legislatures webpage of more pros of "Tax and Expenditure Limitations" for policy makers to consider. 4:40:25 PM SENATOR KAWASAKI mentioned discussions in past years about locking in the price of natural gas. He described it as a contingency that the legislature did over a number of years so oil companies could figure out on the books how the gas line would work in the future. He asked what SJR 7 does to the situation in which the legislature enacts a longer-term tax that the industry agreed to but is then subject to the will of the people. MR. BARNHILL clarified that Senator Kawasaki was talking about locking in the tax rate for a number of years to make the economics of the gas line predictable over a longer period. He offered his understanding that three attorneys general considered this at separate times and rendered three opinions expressing different views on the time a tax rate could be locked in. He deferred further discussion to Mr. Milks. 4:42:04 PM MR. MILKS said the constitutional provision on taxing power would still be there so the question is whether the legislature can agree to limit potential to adjust a tax for a certain period. He offered to follow up with more information if the chair wished. CHAIR SHOWER said he would rather have more information than less even if it leads down a bit of a rabbit hole. SENATOR REINBOLD asked if it would be considered a statewide tax if the legislature applied the same tax formula on all mining products; if SJR 7 would limit the legislature's ability to establish such a tax; and if such a limitation would undermine the representative republic. MR. BARNHILL opined that a new tax on mining products would be subject to SJR 7. SENATOR REINBOLD asked if SJR 7 would prevent the administration from raising fees in any way or if it was just another step for revenue. MR. BARNHILL replied nothing in the resolution controls costs or reduces the budget. With respect to raising fees, he said that state agencies that have regulatory authority to assess fees would still be able to do so. SENATOR REINBOLD asked Mr. Milks to state for the record whether the administration believes Alaska is a representative democracy or a representative republic. 4:47:52 PM MR. MILKS explained that the Alaska Constitution sets out that both the legislature and the people can enact laws and both can repeal laws enacted by either one. The people can repeal a law through referendum and the legislature can repeal a law passed through initiative after two years. SJR 7 follows that model. CHAIR SHOWER asked whether Alaska is a representative democracy or a representative republic. 4:49:37 PM MR. MILKS replied Alaska has a representative form of government by having a legislative branch and a direct democracy component, which is the people's power to enact laws through initiative. Laws are made through a representative republic model and a direct democracy model. He advised that Art. 1, Sec 2 identifies the source of government. MR. BARNHILL added that the US Constitution Art. IV, Sec. 4 states that, "The United States shall guarantee to every State in this Union a Republican Form of Government." He said he views the terms representative democracy and representative republic as synonymous. Importantly, multiple states have added direct democracy features to their constitution and those additions have never been found to violate the guarantee of the constitutionally required republican form of government. 4:52:24 PM SENATOR KAWASAKI asked if Section 2 of the resolution would apply to modification of an existing tax. For example, the mining license tax that was created in 1959 was modified several years ago to change the progressivity in each of the tiers. MR. BARNHILL answered no; a tax modification would not be covered. SENATOR KAWASAKI listed the existing taxes on fish and mining licenses and asked if he was saying that changes to the percentages on those existing taxes would not be included in the proposed Art. IX, Sec. 1(b). MR. BARNHILL said yes. CHAIR SHOWER asked if this could be interpreted to apply to more things than intended. 4:54:42 PM MR. BARNHILL replied, "It clearly just applies to a new tax." SENATOR REINBOLD said she had a real problem with Section 2 based on concerns about a representative republic versus a representative democracy. MR. BARNHILL said he believes subsection (c) in Section 2 of the resolution should help the concern about a direct democracy taking away from the elements of a representative republic, because it essentially restores that legislative power with respect to initiated taxes. SENATOR REINBOLD emphasized that this was not transparent government and it caused her pause. 4:58:24 PM CHAIR SHOWER said he had some of the same concerns, but the legislature has recourse when laws are enacted through initiative. [SJR 7 was held in committee.]