HOUSE FINANCE COMMITTEE MARCH 19, 1996 1:40 P.M. TAPE HFC 96 - 79, Side 1, #000 - end. TAPE HFC 96 - 79, Side 2, #000 - end. TAPE HFC 96 - 80, Side 1, #000 - #212. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:40 P.M. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring ALSO PRESENT Representative Joe Green; Deborah Vogt, Deputy Commissioner, Department of Revenue; Robert Briggs, Assistant Attorney General, Oil, Gas and Mining Section, Civil Section, Department of Law; Dan Seckers, Chairman, Tax Committee, Alaska Oil and Gas Association (AOGA); Sharon Barton, Director, Division of Administrative Services, Department of Administration. SUMMARY HB 341 An Act establishing a tax court to consider and determine certain taxes and penalties due and collateral matters, and amending provisions relating to taxpayer challenges to the assessment, levy, and collection of taxes by the state; and providing for an effective date. CS HB 341 (FIN) was reported out of Committee with a "do pass" recommendation and with fiscal notes by the Department of Administration dated 3/12/96, the Alaska Court System dated 3/12/96 and a zero fiscal note by the Department of Revenue dated 1/26/96. HOUSE BILL 341 "An Act establishing a tax court to consider and 1 determine certain taxes and penalties due and collateral matters, and amending provisions relating to taxpayer challenges to the assessment, levy, and collection of taxes by the state; and providing for an effective date." Representative Brown noted that she would offer Amendments of Revenue. [Copy on file]. DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE, spoke to Amendment #1 which would provide a technical change to language already included in the legislation regarding payment of the administrative appeal. ROBERT BRIGGS, ASSISTANT ATTORNEY GENERAL, OIL, GAS AND MINING SECTION, DEPARTMENT OF LAW, elaborated, Amendment #1 has been separated into two parts. The first section relates to a reference on Page 9, addressing judicial appeals from an administrative decision. The second portion of the amendment relates to judicial appeals from a tax assessment. Conflicts result in how payments are made when an appeal is taken directly from a tax assessment administrative decision. He continued, conflict does result when determining what a tax payer must pay in the decision to appeal to Superior Court. The amendment would provide an alternative mechanism for obtaining relief in paying the full due tax. Mr. Briggs recommended that the language be made consistent and be cued to the Alaska Rules of Appellate Procedure. He interjected that there could exist a potential argument if a change was made to the security appeal mechanism, at which point, there could be a potential intrusion on the purview of the Alaska Supreme Court and the rules of appellate procedures. REPRESENTATIVE JOE GREEN indicated that it was not his intent to create a conflict within the language of the bill. He voiced support of Amendment #1. Representative Parnell asked if currently, a bond was required. Within the Department of Revenue, Ms. Vogt responded that the normal procedure would be to provide for an appeal, to be filed after the informal hearing and without paying. Typically, the bond is used in an appeal. Mr. Briggs suggested that parts mentioned in the amendment do not relate to the appeal of the administrative law judge, but instead are the appeals from the law judges decision to a court. 2 Ms. Vogt added, the legislation as currently drafted, requires bonding or showing of some letter from a creditor. The amendment would change that, making the de novo route free. The Department prefers that the route through the administrative law judge be without payment. The Department does not support the direct court provisions. Co-Chair Hanley inquired, under current legislation, if a party went to the administrative law judge, would they then be required to post a bond or to be otherwise capable of paying. Ms. Vogt replied that the party would be liable; she referenced Section 2, Page 17. Co-Chair Hanley understood that the amendment would provide a technical approach to make the information consistent. Mr. Briggs reiterated Amendment #1 would provide that when a party goes to the Superior Court, they would then be required to make a payment or post a bond. He mentioned concern in how the security would be approved. Usually, when a bond is filed in Superior Court, security is approved through the Appeal Rules of Procedure. Co-Chair Hanley agreed that the Department would not want to become involved in the business of the Superior Court. Changing the language in the amendment would provide a different type of security. Mr. Briggs concurred, and pointed out that the second section of Amendment #1 would establish that security was provided by the tax payer and then would be approved according to the rules of procedure. Co-Chair Hanley reiterated that the amendment would not change the rules regarding whether or not a person would post a bond and/or pay. Ms. Vogt echoed, the amendment would delete language that security must be provided for, before a person goes before the administrative route. Representative Brown MOVED to adopt Amendment #1. DAN SECKERS, CHAIRMAN, TAX COMMITTEE, ALASKA OIL AND GAS ASSOCIATION (AOGA), ANCHORAGE, stated that AOGA did not have an official position on the amendment, however, he agreed with Representative Therriault that payment of the bonds would be one of the deterrents from using the "straight route" to the courts. Representative Mulder thought the amendment would require payment of the bond. Co-Chair Hanley commented that the bill as it currently exists, requires that the bond be posted whether they go to the administrative law judge or directly to the court. Under the amendment, the party would only be responsible for posting the bond when they go to the court. Representative Brown responded to Representative 3 Therriault's question regarding the intent of the amendment. She stated, in continuing to use the direct court of appeal approach would then provide a means to use the administrative route. She thought the amendment provided a reasonable approach. There being NO OBJECTION, Amendment #1 was adopted. Representative Brown explained that Amendment #2 would address how the administrative law judges would be appointed. [Copy on file]. Ms. Vogt advised that the current draft clarifies that administrative law judges would be appointed by the Governor and confirmed by the Legislature. AOGA suggested that the administrative law judge be appointed by the Legislature. The Administration pointed out that the confirmation of an employee within the Department of Administration by the Legislature, would violate the Constitution. AOGA then recommended having a board. She pointed out that the Administration feels that having a board to review tax cases creates an awkward and overly elaborate approach for an administrative law judge. Ms. Vogt continued, the Administration recognizes the need for independence from the Department of Revenue within the legislation. Taxpayers need to be confident that administrative law judges are chosen in an unbiased manner. The Administration proposes that the constitutionally created Judicial Council be called upon for that duty. The administrative law judge would then be appointed by the Governor from a list of names submitted by the Judicial Council. Amendment #2 provides language to make that change. Representative Green voiced objection to the amendment, stating that the action would change the "basic" purpose of the legislation. He thought that the Legislature should have some authority in the confirmation of judges. Representative Navarre countered that the Legislature ought not have confirmation authority, emphasizing that the responsibility for administration of a tax system rests with the Executive Branch. Co-Chair Hanley inquired if appointed judges could only be removed for "cause". Ms. Vogt stated that the appointed judge position would not change with each new governor, and would be placed for a specific term limit. She reminded the Committee that the members of Judicial Council are confirmed by the Legislature. Representative Green mentioned that there are other agencies which directly affect the protection of the State and resources, which are appointed by the Governor and confirmed 4 by the Legislature. The original language of the bill removes the involvement of the Administration. DAN SECKERS, CHAIRMAN, TAX COMMITTEE, ALASKA OIL AND GAS ASSOCIATION (AOGA), ANCHORAGE, stated that AOGA had no position on the amendment, although, found merit in the confirmation process. Representative Parnell advised that confirmation by the Legislature would create a more fair process. He thought that the Judicial Council would be more impartial than the Administration. Representative Navarre advised that the confirmation process has become "politicalized" over the past ten years. Representative Mulder alluded that the tax process should not lend itself to a bipartisan support in order to be fair. Representative Navarre countered that the Legislature can change the tax laws. He emphasized that the administration of the tax code should be within the Executive Branch. (Tape Change, HFC 96-79, Side 2). Representative Brown MOVED to adopt Amendment #2. Representative Mulder OBJECTED. A roll call was taken on the MOTION. IN FAVOR: Brown, Grussendorf, Navarre. OPPOSED: Kelly, Kohring, Martin, Mulder, Parnell, Therriault, Hanley, Foster. The MOTION FAILED (3-8). Representative Brown MOVED to adopt Amendment #3. [Copy on file]. Ms. Vogt stated that Amendment #3 would delete the provisions permitting the tax payer to appeal directly to the court and would require the tax payer to use the tax tribunal established by the board. Ms. Vogt distributed two charts which illustrate State with Independent Tribunals and the States Where Tax Authorities Conduct Tax Appeals. [Copy on file]. She provided an overview of the charts. Discussion followed regarding information on the charts. Representative Navarre inquired if the taxpayer would have the ability to go to court under the system proposed. Ms. Vogt stated that parties could agree to skip the administrative agency appeal. With Amendment #3, the situation would continue as it has been in the past. Representative Navarre agreed that the taxing authority ought to have the final decision. Representative Green argued that if the Department did not agree, de novo could only be granted under the discretion of the Superior Court. 5 Ms. Vogt commented, when the Superior Court exercises their independent judgement, they review the information fresh each time, and to the extent that there is concern regarding legal questions, information will always be reviewed de novo. Representative Green asked how many Superior Court cases now are granted de novo versus those heard on the record. Ms. Vogt replied that almost all cases include factual determination which are heard under an appellate standard. Mr. Seckers voiced concern with the issue of "fairness". The option to provide a check and balance on the system would be provided in the language of the bill. If the system continues to be fair and impartial, then taxpayers will most often choose the Superior Court. He pointed out that there are many costs associated with going to the Superior Court. The amendment would eliminate one level of review. A roll call was taken on the MOTION to adopt Amendment #3. IN FAVOR: Grussendorf, Navarre, Brown. OPPOSED: Kelly, Kohring, Martin, Mulder, Parnell, Therriault, Foster, Hanley. The MOTION FAILED (3-8). Ms. Vogt explained the fiscal notes. The Department currently employees three hearing officers. The employees determine hearings on Child Support Enforcement Division (CSED) appeals, Permanent Fund Dividend (PFD) appeals and tax appeals. Each division has an appeal officer to decide the tax dispute. The hearing officer in the Commissioner's office would be the "impartial" judge. Co-Chair Hanley questioned if the hearing officer was necessary. Ms. Vogt advised that position was very much needed and currently driven by the backlog. Co-Chair Hanley voiced concern that the prepared fiscal note provides for an increased position for a hearing officer. He pointed out that under the normal process, that position would be requested at that time. He added that the hearing officer positions were range #22, and the senior hearing officer was at a range #25. He asked why the senior hearing officer was based in Seattle. Ms. Vogt replied that the Seattle based hearing officer was the last one remaining from when the State had a Seattle field office. From Seattle, that hearing officer does mostly Child Support Enforcement hearings, conducted mostly by telephone. She pointed out that the Seattle field officer is paid 21% less than a range #25 would be paid if living in Alaska. That salary includes the cost-of-living differential. 6 Co-Chair Hanley referenced Section #17, which stipulates that a hearing officer could be assigned other departmental work if their load was not full. He recommended reducing the Department of Revenue by one hearing officer and then allowing that provision as stipulated to take effect. Ms. Vogt replied that the fiscal note requested by the Department of Administration addresses fiscal concerns of the board. If the Committee opts to create a board, the cost would become significantly more than placing one hearing officer in the Department of Revenue. Representative Green felt that the fiscal portion of the bill was stacked "against" the legislation's intent. Co- Chair Hanley inquired if the personal services line was reduced by $66 thousand dollars, and then placing $33 thousand dollars in a contractual line, would then allow a part-time base employee as needed. SHARON BARTON, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF ADMINISTRATION, commented that the fiscal note had been written straight to the bill. She noted that questions regarding the administrative law judges, would need to be deferred to the Department of Law or the Department of Revenue. Representative Brown suggested changing the language on Page 19, Lines 30 & 31, deleting "....until the office of tax appeals has a full caseload, and", which would leave open the possibility of hiring two full time employees. She thought that there could be "other" work within State government that those employees could provide. Mr. Briggs thought if there were part-time board members, there could exist a "conflict of interest". Board members complying with the bill under the code of judicial conduct, could prevent them from having outside employment. He reiterated that would make it difficult for those members to be employed part-time and be able to earn a living. Representative Grussendorf supported the concept of the Judicial Council. He suggested, first the Governor would appoint members for the two year term and then when reappointed, those members would be subjected to a Legislative confirmation. This action would keep the Judicial Council in the "loop". Representative Mulder supported reducing the fiscal note to the Department of Revenue. (Tape Change, HFC 96-80, Side 1). 7 Representative Mulder encouraged consideration of removing the range #25 hearing officer position within the Department of Revenue which currently resides in Seattle. Representative Mulder MOVED to report CS HB 341 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Representative Brown requested to amend Page 19, (c), Lines 30 & 31, before the motion to move the bill from Committee. Representative Mulder WITHDREW the MOTION to move the bill from Committee. There being NO OBJECTION, it was withdrawn. Representative Brown felt that if hearing officers had excess time, they should be given the flexibility to work within other departments. She suggested deleting the language "....until the office of tax appeals has a full caseload, and". She understood that deletion would allow for flexibility of use and efficiency of resources. Co-Chair Hanley thought that language clarified the use of the remaining portion of that section. Discussion followed regarding deleting the language. Ms. Vogt stated that the language was drafted as a transition provision, covering the need to move into the realm when the case load became full. She thought the recommendation was ambiguous. Representative Brown asked to amend the previous language by deleting "until" and inserting "unless" and making any conceptual changes to qualify that intent. Representative Brown MOVED that amendment. Representative Martin OBJECTED. A roll call was taken on the MOTION. IN FAVOR: Kelly, Kohring, Mulder, Navarre, Parnell, Therriault, Brown, Grussendorf, Hanley, Foster. OPPOSED: Martin. The MOTION PASSED (10-1). Representative Mulder MOVED to report CS HB 341 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CS HB 341 (FIN) was reported out of Committee with a "do pass" recommendation and with fiscal notes by the Department of Administration dated 3/12/96, the Department of Revenue dated 1/26/96 and the Alaska Court System dated 3/12/96. ADJOURNMENT 8 The meeting adjourned at 3:15 P.M. 9