Legislature(2017 - 2018)HOUSE FINANCE 519

02/21/2017 01:30 PM House FINANCE

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01:33:44 PM Start
01:35:11 PM HB115
02:56:32 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Scheduled but Not Heard
Scheduled but Not Heard
+ Subcommittee Reports; Amendment Proposals as TELECONFERENCED
<Above Item Removed from Agenda>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 21, 2017                                                                                          
                         1:33 p.m.                                                                                              
1:33:44 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 1:33 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Jerry Burnett, Deputy Commissioner, Treasury Division,                                                                          
Department    of    Revenue;    Taneeka    Hansen,    Staff,                                                                    
Representative Paul Seaton.                                                                                                     
PRESENT VIA TELECONFERENCE                                                                                                    
Ken Alper, Director, Tax Division, Department of Revenue;                                                                       
Brandon S. Spanos, Deputy Director, Tax Division,                                                                               
Department of Revenue.                                                                                                          
HB 115    INCOME TAX; PFD CREDIT; PERM FUND INCOME                                                                              
          HB 115 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
Co-Chair Foster  reviewed the agenda  for the day.  He first                                                                    
wanted to address  the fiscal note from the  Tax Division of                                                                    
the  Department  of  Revenue  (DOR).  The  component  number                                                                    
associated with the fiscal note  was 2476. He invited Deputy                                                                    
Commissioner Burnett to the table.  Mr. Alper and Mr. Spanos                                                                    
from the Tax Division were available online.                                                                                    
HOUSE BILL NO. 115                                                                                                            
     "An  Act  relating  to  the  permanent  fund  dividend;                                                                    
     relating  to the  appropriation of  certain amounts  of                                                                    
     the earnings reserve account;  relating to the taxation                                                                    
     of  income  of  individuals;   relating  to  a  payment                                                                    
     against the  individual income  tax from  the permanent                                                                    
     fund  dividend  disbursement;   repealing  tax  credits                                                                    
     applied  against  the  tax  on  individuals  under  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
1:35:11 PM                                                                                                                    
Co-Chair  Foster invited  Mr.  Alper  to introduce  himself.                                                                    
[There was no response].                                                                                                        
1:35:33 PM                                                                                                                    
AT EASE                                                                                                                         
1:36:30 PM                                                                                                                    
Co-Chair  Foster  invited  Ms.  Hansen  from  Representative                                                                    
Seaton's office to the table.                                                                                                   
Representative  Wilson  referred  to page  4,  lines  16-17,                                                                    
which  indicated that  15 percent  of an  individual's total                                                                    
federal  income tax  would be  due  or $25,  which ever  was                                                                    
greater. There  would be  a $25  charge for  individuals who                                                                    
did not have  a tax liability so that everyone  in the state                                                                    
was  contributing.  However,  she thought  the  fiscal  note                                                                    
implied  the tax  had only  to  do with  a person's  federal                                                                    
income tax liability.                                                                                                           
TANEEKA  HANSEN,  STAFF,  REPRESENTATIVE PAUL  SEATON,  drew                                                                    
attention to Page 5, subsection C. She read from the bill:                                                                      
     An individual who, under federal law, is not required                                                                      
     to file a federal individual income tax return is                                                                          
     exempt from the tax due under this chapter.                                                                                
Ms. Hansen clarified that if  an individual was not required                                                                    
to file, they  would not be required to pay  the $25 minimum                                                                    
Vice-Chair Gara mentioned  that there was a  class of people                                                                    
required  to file  who did  not end  up paying  anything. He                                                                    
asked  about the  cutoff  for a  single  person. Ms.  Hansen                                                                    
believed  members had  a one-page  document  in their  files                                                                    
that  contained  the information.  She  recalled  that if  a                                                                    
person's income  was below  $10,300 they  would not  have to                                                                    
file. For  an individual  making above  that amount  but who                                                                    
did not  have a federal  tax liability, their  tax liability                                                                    
would depend  on the  number of  their dependents  and other                                                                    
exemptions. They would likely pay a minimum tax.                                                                                
JERRY  BURNETT,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, addressed  the fiscal note  for DOR,                                                                    
Taxation  and Treasury  Tax Division,  Office of  Management                                                                    
and Budget  component number 2476.  He started out  with the                                                                    
supplemental   request  on   Page  1.   It  was   a  capital                                                                    
supplemental request  for $14  million to  extend and  add a                                                                    
new  module to  the tax  revenue management  system. It  was                                                                    
funding   that  was   needed  as   soon  as   possible.  The                                                                    
supplemental  amount  of  $250,000 was  needed  for  writing                                                                    
regulations. The  FY 18 appropriation  was for  10 full-time                                                                    
and 8 part-time  positions. The division would  not be fully                                                                    
staffed in FY 18 because  of not receiving tax returns until                                                                    
later in  the year. However,  set up  was needed. In  FY 19,                                                                    
the  division  would  have 35  full-time  and  15  part-time                                                                    
positions.  At full  implementation  by FY  20 the  division                                                                    
would employ  45 full-time and  15 part-time  positions. The                                                                    
part-time staff would handle all  of the paper applications.                                                                    
The  department  was  assuming that  the  online  and  paper                                                                    
applications  would match  the  percentages associated  with                                                                    
the  Permanent  Fund  Dividend  (PFD)  program  (83  percent                                                                    
online, and  17 percent on  paper). He relayed that  in 1979                                                                    
or 1980,  the last  time the  state had  an income  tax, the                                                                    
state  actually  employed more  staff  than  what was  being                                                                    
suggested. It was  very difficult to go back  in the records                                                                    
to determine  an exact  amount, but he  thought it  was over                                                                    
100 staff due  to the structure. At the time,  the state did                                                                    
not  have a  Tax Division  or the  Permanent Fund  Division.                                                                    
There was an enforcement division  and an audit division. He                                                                    
reported  there were  62  people  within the  Administrative                                                                    
Services Division  that handled accounting  and collections.                                                                    
The structure  was different  at the  time and  difficult to                                                                    
compare with today's.                                                                                                           
Mr.  Burnett  highlighted  the revenue  assumption  and  the                                                                    
increase  in undesignated  general fund  (UGF) revenue  from                                                                    
the Permanent Fund  portion of the bill and  the income tax.                                                                    
In  FY   19  and  FY   20,  with  full   implementation,  he                                                                    
anticipated revenues of about  $2.3 billion. For example, in                                                                    
FY 20,  he anticipated $1.697 billion  of non-UGF (converted                                                                    
to UGF) and $648 million from  the income tax portion of the                                                                    
1:42:59 PM                                                                                                                    
KEN  ALPER, DIRECTOR,  TAX DIVISION,  DEPARTMENT OF  REVENUE                                                                    
(via teleconference)  introduced himself. He relayed  that a                                                                    
portion of the  money from the PF, called  new money, showed                                                                    
up and  was subtracted from  non-UGF. The bottom  line total                                                                    
was the incremental  revenue from the income  tax. There was                                                                    
a detail  on the  income tax  on page 2  of the  handout. It                                                                    
showed  that  about  $3  million would  come  from  the  $25                                                                    
minimum tax. [Mr. Alper's testimony became inaudible].                                                                          
Co-Chair  Seaton interrupted  Mr. Alper  because he  was too                                                                    
difficult  to hear  due to  a poor  connection. Mr.  Burnett                                                                    
relayed  the  comments  from  Mr.  Alper.  Approximately  $3                                                                    
million of the total income  tax revenue would come from the                                                                    
$25 amount.  The charts that  showed the totals were  on the                                                                    
second page  of the  fiscal note. It  showed the  income tax                                                                    
revenue and other.                                                                                                              
Representative  Wilson  mentioned  a  hypothetical  scenario                                                                    
with a  single parent. She  wondered if the parent  would be                                                                    
assessed  a  $25  tax. Mr.  Burnett  thought  Representative                                                                    
Wilson was correct. He would double check.                                                                                      
1:46:08 PM                                                                                                                    
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT  OF  REVENUE  (via  teleconference),  stated  the                                                                    
Representative  Wilson  was  correct.  He added  that  if  a                                                                    
single  mother  made under  the  threshold  in gross  income                                                                    
before any  deductions (last year the  threshold was $10,300                                                                    
gross income), she  would not be required to  file a federal                                                                    
return. Therefore,  under the draft language,  she would not                                                                    
be required to  file an Alaska income tax return  or pay the                                                                    
$25 minimum tax.                                                                                                                
Representative  Wilson  asked  if  the  same  applied  to  a                                                                    
college student. She wondered if  it all depended on income.                                                                    
Mr.  Spanos  responded, "As  long  as  there was  no  filing                                                                    
requirement." He  clarified that  for a student  it depended                                                                    
on  whether they  met  other requirements  such  as age  and                                                                    
other things.  If they  were filing as  a single  person and                                                                    
have a gross  income of $10,300 or less, they  would have no                                                                    
filing  requirement. The  state would  know what  the person                                                                    
filed  with  the IRS  assuming  they  were honest  in  their                                                                    
reporting. Representative Wilson hoped they were honest.                                                                        
Representative  Kawasaki referred  to page  4 of  the fiscal                                                                    
note which  talked about  400,000 tax  returns. He  asked if                                                                    
the  400,000 returns  included the  total number  of returns                                                                    
from  residents  and  non-residents. Mr.  Burnett  responded                                                                    
affirmatively.    Representative   Kawasaki    thought   the                                                                    
department's  figure  for manually  processed  applications,                                                                    
based  on  the PFD  Division  online  filings, was  low.  He                                                                    
thought  there would  be several  applicants  that were  not                                                                    
part of  the online  system. Mr.  Burnett commented  that it                                                                    
was  difficult   to  tell  because  the   program  would  be                                                                    
different. In  his person experience, he  filed out-of-state                                                                    
tax returns online.                                                                                                             
Mr. Spanos told of receiving  the information from the State                                                                    
of  Vermont because  it  had a  similar  population base  as                                                                    
Alaska. The estimate of 400,000  included residents and non-                                                                    
residents.  Regarding the  online filing  requirement, there                                                                    
was a  simple methodology through the  IRS called modernized                                                                    
electronic filing.  Anyone that filed their  return with the                                                                    
IRS could  piggyback that and  the state would accept  it in                                                                    
the modernized  electronic filling format. Anyone  using the                                                                    
standard  TurboTax, or  a similar  program  could select  to                                                                    
file electronically  with the state.  They could  also login                                                                    
to the state's revenue online system.                                                                                           
1:50:30 PM                                                                                                                    
Representative Pruitt wondered about  a person being able to                                                                    
write off  their state  income tax  on their  federal income                                                                    
tax. He  thought the challenge  would be for  the individual                                                                    
to determine their  state income tax based  on their federal                                                                    
income tax since  it could not be  completed without knowing                                                                    
the amount  of their state  income tax amount. He  asked how                                                                    
they  would  make  the  write-off  calculation.  Mr.  Spanos                                                                    
pointed out the  circular logic. He suggested  that a person                                                                    
would report to the IRS on  a cash basis. They would include                                                                    
what  was  withheld  from  their  W-2  as  their  state  tax                                                                    
liability. If a person received  a refund or ended up paying                                                                    
more  tax they  would receive  another form  from the  state                                                                    
which would be reported on the following year's tax return.                                                                     
Representative Pruitt  asked if  he would  be able  to write                                                                    
off  the state  income  tax he  paid for  2015  on his  2016                                                                    
taxes. Mr.  Spanos responded in  the negative.  He explained                                                                    
that  the write-off  would  equal what  a  person paid  from                                                                    
their withholding in  calendar year 2016. For  example, if a                                                                    
person  made quarterly  estimated payments  and had  written                                                                    
checks to  the state,  those amounts  would get  reported on                                                                    
their  federal return.  If a  person  had withholdings  from                                                                    
their paycheck, they would report  that amount to the IRS as                                                                    
their state tax. He noted that  the majority of folks end up                                                                    
getting a refund and paying  less that what they reported to                                                                    
the  IRS. The  following  year they  would  report what  was                                                                    
withheld  less  the  refund  that   they  received  for  the                                                                    
previous year.  The timing  difference would  be made  up in                                                                    
the following year.                                                                                                             
Representative  Pruitt  returned  to  the  discussion  about                                                                    
staffing.  In the  previous  year,  the department  reported                                                                    
needing an  additional 60 positions.  He thought  the number                                                                    
of additional  positions remained the same  with the current                                                                    
legislation.  He asked  for the  department's justification.                                                                    
Mr. Burnett was  familiar with both of the  fiscal notes. He                                                                    
responded that  the need had more  to do with the  number of                                                                    
filings rather than their complexity.  The audit staff would                                                                    
be  concerned  with  the  complexity  of  the  filings.  The                                                                    
department might require putting  more emphasis at the audit                                                                    
staff  level.  In terms  of  actually  doing the  day-to-day                                                                    
work, much of  it was automated. The sole  function for many                                                                    
of  the  positions would  be  scanning  and documenting  the                                                                    
filings. The  system would match  things up. Over  time, the                                                                    
department might  need more or  less in terms of  the number                                                                    
of positions but currently provided its best estimate.                                                                          
1:55:52 PM                                                                                                                    
Co-Chair Seaton clarified that the  previous years' bill, HB
365 [Legislation  introduced in  2016 - Short  Title: INCOME                                                                    
TAX; PERMANENT  FUND TAX  CREDIT}, had a  15 percent  and 10                                                                    
percent capital  gains component  to the bill.  He indicated                                                                    
that the current bill had the same components.                                                                                  
Representative Pruitt continued that  there was an effort to                                                                    
move people  towards online filing  in conjunction  with the                                                                    
PFD  filling.  Since the  state  was  establishing a  system                                                                    
presently,  he wondered  if there  was anything  prohibiting                                                                    
the  state  from  starting  off   with  the  expectation  of                                                                    
e-filing or online filing to  streamline and save costs. Mr.                                                                    
Burnett noted that in the  previous year the legislature had                                                                    
passed a bill  that required all of the state's  taxes to be                                                                    
presumptively  filed electronically.  The difference  in the                                                                    
current bill was  that it would affect  many individuals. He                                                                    
thought the  question should be  directed to the  sponsor of                                                                    
the bill  rather than DOR.  The Department of  Revenue would                                                                    
prefer to have PFD  applications and any taxes presumptively                                                                    
done online,  as it  saved time, effort,  and money.  It was                                                                    
not  possible   or  practical  for  everyone   to  do  that.                                                                    
Administratively speaking, electronic filing made sense.                                                                        
Representative  Thompson referred  to page  2 of  the fiscal                                                                    
note. He  noted there  was a FY  17 Permanent  Fund earnings                                                                    
Percent  of  Market  Value  (POMV)  of  $1.446  billion.  He                                                                    
wondered if it was a  retroactive FY 17 Permanent Fund draw.                                                                    
If so,  he asked if  the money  would be deposited  into the                                                                    
Constitutional  Budget  Reserve   (CBR)  or  elsewhere.  Mr.                                                                    
Burnett deferred to  Mr. Alper. [Mr. Alper  tried to respond                                                                    
but   was  inaudible].   Mr.  Burnett   answered  that   the                                                                    
governor's budget for the current  year assumed a draw in FY                                                                    
17.  The   bill  was  consistent   with  the   budget  under                                                                    
2:00:01 PM                                                                                                                    
Representative Thompson  was still confused with  FY 17. Mr.                                                                    
Burnett  responded that  the budget,  as  introduced, had  a                                                                    
draw from the  Permanent Fund in FY 17  with the presumption                                                                    
that it  would reconstitute a  portion of the CBR.  It would                                                                    
reduce the draw from the  CBR fund for FY 17. Representative                                                                    
Thompson remained perplexed.  He wondered if both  the FY 17                                                                    
draw of $1.446 billion and the  FY 18 draw of $1.527 billion                                                                    
would  be  drawn from  the  Permanent  Fund  in FY  18.  Mr.                                                                    
Burnett  responded that  the effective  date  would allow  a                                                                    
portion  to be  drawn in  FY 17  and another  portion to  be                                                                    
drawn in FY 18.                                                                                                                 
Representative Thompson asked if  the retroactive draw would                                                                    
reduce  the amount  taken  out  of the  CBR  in  FY 17.  Mr.                                                                    
Burnett  responded  that  Representative Thompson  would  be                                                                    
correct, assuming  there were not  expenditures made  by the                                                                    
legislature in FY 17.                                                                                                           
Co-Chair Seaton  asked if there  were further  questions. He                                                                    
asked Mr. Burnett  if he was going to present  the other DOR                                                                    
fiscal notes.  Mr. Burnett was  happy to do so.  He referred                                                                    
to  the  fiscal note,  OMB  component  2310, by  the  Alaska                                                                    
Permanent Fund Corporation (APFC).  The fiscal note was zero                                                                    
assuming  there were  no changes  in the  management of  the                                                                    
Permanent Fund as  a result of the bill.  The analysis spoke                                                                    
to the  annual draw  which was shown  in the  Tax Division's                                                                    
fiscal note, rather than APFC's  fiscal note. It showed that                                                                    
the  corporation did  not expect  any managerial  changes in                                                                    
their operations budget as a result of the bill.                                                                                
Representative Wilson  indicated that when APFC  came before                                                                    
the  committee,  they informed  members  there  would be  an                                                                    
impact depending on  the size of the draw.  There were other                                                                    
things that  could impact  it including  market performance.                                                                    
Since government was turning to  use the Permanent Fund, the                                                                    
corporation  would   potentially  invest   differently.  She                                                                    
referred  to page  2 of  the note  which contained  language                                                                    
that  relayed  the  difficulty of  being  able  to  forecast                                                                    
whether  the  asset  allocation  for  the  earnings  reserve                                                                    
account  (ERA) would  be  impacted to  a  degree that  would                                                                    
affect investment manager  fees. It was clear  to her, based                                                                    
on the comments  made by Angela Rodell of APFC,  that if the                                                                    
legislature  started  using  the  reserves  for  government,                                                                    
investment  practices would  be  impacted.  She thought  the                                                                    
information should be  part of the fiscal  note. Mr. Burnett                                                                    
stated that  Ms. Rodell approved  the fiscal  note completed                                                                    
by  her staff.  She noted  that if  there was  a change,  it                                                                    
would be  a reduction  in management fees  as opposed  to an                                                                    
increase. The  fiscal note showed  a zero fiscal  impact and                                                                    
assumed  that there  would be  a  positive budgetary  impact                                                                    
rather than a negative one.                                                                                                     
2:04:53 PM                                                                                                                    
Representative Wilson  wondered where the  legislature would                                                                    
see the potential negative impact  if APFC was not investing                                                                    
at its current  levels. She compared a  change in investment                                                                    
practices  to  a  person's   retirement  stage.  The  Alaska                                                                    
Permanent  Fund Corporation  would scale  back on  high-risk                                                                    
investments  and not  yield as  high of  investment returns.                                                                    
She  wondered  where such  a  change  was reflected  in  the                                                                    
fiscal  note. Mr.  Burnett  answered that  it  would not  be                                                                    
reflected  in  a  fiscal  note.  Ms.  Rodell  spoke  to  the                                                                    
committee and  discussed the  possibility, depending  on the                                                                    
POMV structure and how future  markets behaved, of an impact                                                                    
on returns. It  was not clear what the impact  would be. The                                                                    
bill did not define a certain  amount of money that would be                                                                    
put aside and kept liquid, it  was simply a draw, unlike the                                                                    
CBR. The Constitution  Budget Reserve had to  be kept liquid                                                                    
because  it  had  to  be readily  available.  It  would  not                                                                    
necessarily  change the  overall  investment performance  of                                                                    
the fund.  It had  the potential  to change  if there  was a                                                                    
series of  bad markets and  the ERA  was drawn down.  It was                                                                    
not something anyone would expect or predict.                                                                                   
Representative Wilson  remarked that was not  she had heard.                                                                    
She reported  Ms. Rodell  had emphasized  that if  the state                                                                    
were to start  taking out money and changing  the reason for                                                                    
the Permanent Fund, it would  have an impact. It was unclear                                                                    
of  the  negative impact.  She  was  concerned because  APFC                                                                    
reported   that  it   would  definitely   begin  to   invest                                                                    
differently. She wanted  additional clarity. Co-Chair Seaton                                                                    
responded that the committee could  bring Ms. Rodell back to                                                                    
answer members'  questions. His  interpretation was  that if                                                                    
the  state drew  down  too much  of a  POMV,  which was  the                                                                    
reason for keeping 4 times  the annual draw, there would not                                                                    
be  a  change  in  structure.   There  would  be  plenty  of                                                                    
liquidity. If the state took  too large of a percentage, the                                                                    
corporation  would  be  forced   to  change  its  investment                                                                    
strategy to maintain liquidity. As  long as the ERA was kept                                                                    
at healthy  level, there would  not be a problem.  He agreed                                                                    
with bringing  Ms. Rodell back  to answer questions,  as the                                                                    
committee  was   not  in   a  rush.   He  wanted   to  avoid                                                                    
Representative Wilson  agreed. She reemphasized  hearing Ms.                                                                    
Rodell talking about  looking to invest in  the same fashion                                                                    
in a fund that would keep  growing as a savings no one would                                                                    
rely on except  for the dividend. If the state  was going to                                                                    
be  using  it for  government,  the  investors would  invest                                                                    
differently. She hoped her question could be answered.                                                                          
2:10:32 PM                                                                                                                    
Representative  Guttenberg was  under  the impression  that,                                                                    
whatever  the  management  style,  one  group  managing  the                                                                    
Permanent  Fund would  be told  to  do "X"  instead of  "Y."                                                                    
However, the  particular component  only dealt  with outside                                                                    
management  fees rather  than  the result  of an  investment                                                                    
style. He thought it could  impact how the state managed the                                                                    
fund and the investment manager  fees. He argued that it was                                                                    
not  possible to  tell what  affect  it would  have. It  was                                                                    
outside of  the Permanent Fund  to pay for  management fees.                                                                    
He wondered  if he was  correct. Mr. Burnett  responded that                                                                    
the fiscal note was for management  fees paid for by APFC to                                                                    
money managers  for the Permanent  Fund. The changes  in the                                                                    
bill were  minimal compared  to other  changes that  were in                                                                    
the budget  such as adding  investment officers,  or changes                                                                    
in market  value of the  fund due to market  experience. The                                                                    
bill was not what would cause a change in their budget.                                                                         
Mr. Burnett  reviewed the fiscal  note by DOR,  Taxation and                                                                    
Treasury,  Permanent   Fund  Dividend  Division,   with  OMB                                                                    
component  number   981.  The  fiscal  impact   for  ongoing                                                                    
operations  was   zero.  However,   there  was   and  $8,000                                                                    
programing charge  at the very  beginning due to  changes in                                                                    
the  application.   The  workload  and  operations   of  the                                                                    
Permanent Fund Dividend Division would not change.                                                                              
Representative  Pruitt  gave  his  interpretation  which  he                                                                    
thought was the same as Mr. Burnett's.                                                                                          
2:14:16 PM                                                                                                                    
Mr. Burnett thought it was  a very simplified way of looking                                                                    
at it.  When a person applied  for their PFD, they  would be                                                                    
able to specify  that a portion of it could  be used to make                                                                    
their  tax payment.  It would  be an  estimated amount.  For                                                                    
some people,  the amount might  equal their  entire dividend                                                                    
and for others, only a  portion of it. Co-Chair Seaton added                                                                    
that there might  be a checked box to specify  that a person                                                                    
would not owe anymore.                                                                                                          
Mr. Burnett  had reviewed the  fiscal notes from  DOR. There                                                                    
were  also fiscal  notes by  the  Department of  Corrections                                                                    
(DOC)  and by  the  Department of  Administration (DOA).  He                                                                    
could speak to  the fiscal note by DOA. The  fiscal note had                                                                    
to  do  with  the  Office of  Administrative  Hearings.  The                                                                    
department  was estimating  hearing costs  in the  amount of                                                                    
$174,000  in the  first  year and  staying  in the  $170,000                                                                    
range  in  the  out  years.  The  Office  of  Administrative                                                                    
Hearings  had looked  at other  states with  personal income                                                                    
taxes to  estimate hearing costs. Appeals  were anticipated,                                                                    
as some  people believed the  state did not treat  them well                                                                    
in the collection of their  taxes. The fiscal note reflected                                                                    
general funds. He mentioned  the possibility of substituting                                                                    
a  fiscal  note  in  interagency receipts  and  putting  the                                                                    
general funds in  DOR's fiscal note. The amount  had to come                                                                    
from one place or the other.                                                                                                    
Representative Wilson  mentioned those individuals  that did                                                                    
not  live in  the  state,  especially if  they  had a  joint                                                                    
return where  some assets  were in Alaska  and some  were in                                                                    
another state such as Washington.  She asked if appeals came                                                                    
from  folks with  joint returns  or from  Alaskan residents.                                                                    
Mr. Burnett  was not positive  where the appeals  would come                                                                    
from.  He described  the appeal  process.  The first  appeal                                                                    
would be handled within DOR.  If it was not satisfied there,                                                                    
it would go  to the Office of  Administrative hearings, then                                                                    
to  court. He  suggested that  a person  could suspect  that                                                                    
there would  be appeals by  people, whether they  had income                                                                    
earned in the State of Alaska  or attributed to the State of                                                                    
Alaska. However,  there were a  number of other  reasons. He                                                                    
cited an example.                                                                                                               
Representative Wilson  asked about a scenario  with a couple                                                                    
where one  person worked  in Alaska and  the other  did not.                                                                    
She asked about  the person earning income in  the state and                                                                    
whether they would only claim  their job income from Alaska.                                                                    
She  relayed that  most  of their  assets,  like a  checking                                                                    
account,  might be  in Washington  state,  for example.  Mr.                                                                    
Burnett deferred to Mr. Spanos.                                                                                                 
2:18:54 PM                                                                                                                    
Mr.  Spanos wondered  if  Representative  Wilson was  asking                                                                    
whether  an employee  who worked  only on  the North  Slope,                                                                    
lived  in Washington,  and had  income from  investments and                                                                    
other  sources  would  only  be paying  income  tax  on  the                                                                    
portion   from  the   North  Slope.   Representative  Wilson                                                                    
responded in  the affirmative. Mr. Spanos  indicated she was                                                                    
correct. If income  made working on the North  Slope was the                                                                    
only source  of income  they made in  the state,  they would                                                                    
only be paying tax in Alaska on the North Slope income.                                                                         
Representative  Wilson   asked  about  a  resident   with  a                                                                    
business  outside  of  the  state.   She  wondered  if  that                                                                    
business would only be taxed  by the other state. Mr. Spanos                                                                    
responded that  it depended on  whether the other  state had                                                                    
an income  tax and  the income  tax was  as much  or greater                                                                    
than in Alaska. If so,  the income would presumably be taxed                                                                    
in  the  other  state.  The business  would  get  a  credit.                                                                    
However, if the business was in  a state with no income tax,                                                                    
then  it  would be  taxed  entirely  in  Alaska due  to  the                                                                    
person's residency in Alaska.                                                                                                   
Representative Wilson  suggested that if she  had investment                                                                    
properties, such as rentals, in  other states as long as the                                                                    
states had  an income tax,  she would  be able to  apply her                                                                    
credits to  her Alaska filing.  Mr. Spanos relayed  that for                                                                    
the  investment income,  as long  as  it was  taxed by  that                                                                    
state, a  person would receive  a credit against  taxes paid                                                                    
in Alaska.                                                                                                                      
Vice-Chair  Gara  asked  how   the  interstate  tax  compact                                                                    
worked. It was  easy to understand that with  a state income                                                                    
tax, a person  would be taxed on their  Alaska income. There                                                                    
were two  parts of the  bill's definition of  Alaska income:                                                                    
one for  individuals who  earned their  wages in  Alaska and                                                                    
one  for  businesses.  Issues  arose when  a  person  had  a                                                                    
business  in another  state, such  as Arizona.  It would  be                                                                    
different if  a person did  not pay Arizona taxes  versus if                                                                    
they did  pay Arizona taxes.  He thought the  interstate tax                                                                    
compact came into play in  certain circumstances. Mr. Spanos                                                                    
could not  speak to whether  it was based on  the interstate                                                                    
tax  compact. There  was some  general language  provided by                                                                    
the  Multi-State  Tax  Commission to  help  with  interstate                                                                    
taxes. It was  based on fairly apportioning  income to where                                                                    
it  was earned  to avoid  double  taxation. A  tax could  be                                                                    
found  unconstitutional  if  it  did  not  fairly  apportion                                                                    
income or apply income to its source.                                                                                           
Vice-Chair  Gara  thought  the multi-state  issue  was  that                                                                    
there  were  constitutional  limitations.  The  states  that                                                                    
participated  found  a  way  to  avoid  double  taxation  by                                                                    
adopting similar  rules. He  asked if  he was  correct about                                                                    
the idea behind  the tax compact. Mr.  Spanos believed Vice-                                                                    
Chair Gara was referring to  corporate taxes. He referred to                                                                    
unified  taxation between  states which  was the  pre-factor                                                                    
formula that the state had  for corporate taxes. The formula                                                                    
included property, payroll, and  sales. He continued that if                                                                    
every state had the exact  same statute, the income would be                                                                    
fairly apportioned among  the states. It had  been some time                                                                    
ago that  the Multi-State Tax Commission  had suggested such                                                                    
language.  Alaska had  incorporated  the language  word-for-                                                                    
word into Alaska's statute (AS  43.19). However, most states                                                                    
have changed it slightly so that  if a person had a business                                                                    
in all 50  states, they might be taxed on  their income more                                                                    
than once. The courts have looked  at whether it was fair if                                                                    
state tax was applied in all 50 states.                                                                                         
2:24:39 PM                                                                                                                    
Vice-Chair Gara  interrupted Mr.  Spanos. He was  not trying                                                                    
to use Mr. Spanos' time on  his own bill. On the bill before                                                                    
the  committee,  he wondered  about  a  business outside  of                                                                    
Alaska that  sold products  in Alaska.  He wondered  how the                                                                    
tax would  be applied. Mr.  Spanos asked Vice-Chair  Gara to                                                                    
clarify his question. Co-Chair  Seaton asked Vice-Chair Gara                                                                    
to limit  his questions  to the  topic of  individual income                                                                    
Vice-Chair  Gara  wondered  about  an individual  (Not  a  C                                                                    
corporation) who  owned a business  in Arizona and  lived in                                                                    
Arizona but sold products in  Alaska. He asked if the income                                                                    
tax would apply  to them. Mr. Spanos  restated the question.                                                                    
Vice-Chair Gara  was talking about a  business that operated                                                                    
via  the mail  and had  no  presence in  Alaska. Mr.  Spanos                                                                    
responded that  generally, for corporations, the  US Supreme                                                                    
Court found  that companies would  not have a  taxable nexus                                                                    
in Alaska without  a physical presence. He  thought the same                                                                    
would  apply  to  S  corporations,  partnerships,  and  sole                                                                    
proprietorships. Generally,  an income  tax would  not apply                                                                    
unless a  business had an  employee in Alaska  receiving and                                                                    
dispersing goods,  an office  in Alaska,  or a  sales person                                                                    
that traveled  to Alaska occasionally  to make  sales calls.                                                                    
These conditions would create  a physical presence nexus and                                                                    
trigger Alaska  to apportion part  of the  business' income.                                                                    
Most  states did  not tax  only sales.  He thought  the same                                                                    
would apply to individual income taxes.                                                                                         
Representative  Pruitt spoke  to  the fiscal  notes and  the                                                                    
Office of Administrative Hearings.  He spoke to tax auditors                                                                    
and the  need by 2020.  He asked  how many IRS  tax auditors                                                                    
were in  Alaska. Mr.  Burnett did not  know. Mr.  Spanos did                                                                    
not know.                                                                                                                       
Representative  Pruitt asked  about the  need for  auditors.                                                                    
Mr. Spanos  replied it would  depend on several  factors. He                                                                    
recently  spoke  to  the House  Finance  subcommittee  about                                                                    
corporate income  tax auditors.  He had  stated that  if the                                                                    
department had  more resources,  it could  potentially raise                                                                    
more revenue. He thought the  same would apply to individual                                                                    
income tax.  Generally, most states  had discovered  that by                                                                    
adding  additional  auditors,  more revenue  was  generated.                                                                    
Most people  tried to  avoid or  evade paying  taxes. People                                                                    
tended  to be  more diligent  about reporting  all of  their                                                                    
income when additional auditing was taking place.                                                                               
2:30:00 PM                                                                                                                    
Representative   Pruitt   referred    to   the   Office   of                                                                    
Administrative Hearings' request  for one full-time auditor.                                                                    
He  noted   that  in  the  seventies   Alaska's  income  tax                                                                    
accounted  for  about  20  percent of  the  workload  for  3                                                                    
revenue  appeals officers.  Since that  time, the  state has                                                                    
increased  by  84  percent.  He asked  if  the  state  would                                                                    
eventually  need another  administrative judge.  He wondered                                                                    
if  one position  was  sufficient, as  the  state had  grown                                                                    
substantially.  Mr.  Spanos  answered  that  the  individual                                                                    
income tax  cases in  other states  were mostly  resolved or                                                                    
settled at  the first stage  of the appeal, which  in Alaska                                                                    
was handled  by DOR.  The Office of  Administrative Hearings                                                                    
indicated the one position would  be sufficient for now. The                                                                    
complexity  of cases  would influence  hiring. He  suggested                                                                    
that  most cases  were easily  resolved through  an informal                                                                    
conference. If individuals were  appealing that they did not                                                                    
have  a taxable  nexus,  the appeal  process  would be  more                                                                    
complicated  and  require going  up  further  in the  appeal                                                                    
2:32:01 PM                                                                                                                    
Ms. Hansen was available for questions.                                                                                         
Representative  Pruitt thought  it would  be interesting  to                                                                    
hear  from the  Board  of Public  Accountants. He  suggested                                                                    
asking the  board for  a name  of someone  to talk  to about                                                                    
some of  the complexities and potential  challenges with the                                                                    
bill.  He mentioned  the focus  had been  on the  income tax                                                                    
portion of  the bill rather  than on the Permanent  Fund. He                                                                    
opined that for  many people, changes to  the Permanent Fund                                                                    
would  have  a larger  impact.  He  hoped  to hear  from  an                                                                    
outside economist  about the impact individuals.  He thought                                                                    
the  macro side  of things  had been  explored. However,  he                                                                    
wanted  to  know  what   a  middle-class  individual  should                                                                    
expect.  He wanted  to better  understand  how things  would                                                                    
trickle down. He  asked if the committee would  be hearing a                                                                    
different perspective.                                                                                                          
Co-Chair  Foster  thought  the  committee  could  work  with                                                                    
Representative   Pruitt   in   finding  an   individual   or                                                                    
organization to  come before the  committee. He  invited Co-                                                                    
Chair Seaton to comment.                                                                                                        
Co-Chair  Seaton responded  that  they  had heard  testimony                                                                    
from  the  Institute of  Social  and  Economic Research  and                                                                    
Northern  Economics and  other people  who had  done reviews                                                                    
looking at  impacts to the  economy. He did not  have anyone                                                                    
lined up to speak to  the impacts of individuals. He offered                                                                    
that  41  other states  had  income  taxes with  neighboring                                                                    
states with  income taxes. The complexities  of in-state and                                                                    
out-of-state  income taxes  and filing  returns in  multiple                                                                    
states was a  very common process across  the United States.                                                                    
There were  only 7 states that  did not have an  income tax.                                                                    
He was  not sure who  he would  invite to testify  but would                                                                    
appreciate any suggestions.                                                                                                     
2:37:12 PM                                                                                                                    
Representative  Wilson   asked  if  there  was   any  income                                                                    
excluded from the  bill. Ms. Hansen responded  that the bill                                                                    
was  based on  federal  tax  liability. Therefore,  anything                                                                    
taxed  at the  federal level  would  be taxed  at the  state                                                                    
level with the  exception of things states  were not allowed                                                                    
to  tax.  For example,  income  from  federal bonds  was  an                                                                    
exemption in the bill.                                                                                                          
Representative Wilson  asked if a sole  proprietorship would                                                                    
be taxed  differently from a limited  liability corporation.                                                                    
The income from her sole  proprietorship was reported on her                                                                    
federal  income  tax  filing.  She  would  be  taxed  at  15                                                                    
percent. If  she were  a different entity  she would  not be                                                                    
taxed at the same level. She  asked if she was accurate. Ms.                                                                    
Hansen believed she was correct  but deferred to Mr. Spanos.                                                                    
Mr. Spanos  responded that  S corporations  and partnerships                                                                    
had pass  through income,  meaning that  the income  was not                                                                    
taxed at the partnership or  S corporation level. Rather, it                                                                    
was reported down to the  individual owners or shareholders.                                                                    
They reported  that information on  their federal  Form 1040                                                                    
and  paid taxes  on it  federally. It  would be  included as                                                                    
Representative  Wilson asked  if  an individual  and a  sole                                                                    
proprietor  would be  taxed in  the same  way. She  asked if                                                                    
there  was a  difference. Mr.  Spanos answered  that a  sole                                                                    
proprietor would fill  out a Schedule C  form showing income                                                                    
and business  deductions. A business partnership  would file                                                                    
Form 1065 and would report  it to the individual. Income and                                                                    
deductions would  be reported  proportionate to  a partner's                                                                    
percentage   of   ownership.    The   rules   could   become                                                                    
complicated. If  a partner owned  50 percent of  a business,                                                                    
they  would report  50 percent  of  the income  and take  50                                                                    
percent  of the  deductions on  their individual  income tax                                                                    
Representative  Wilson wondered  if  a study  had been  done                                                                    
showing  that businesses  would  leave Alaska  because of  a                                                                    
sweeter deal  in another state  that did not have  an income                                                                    
tax. She  asked if there was  any data or a  map showing who                                                                    
would be  paying income taxes.  She thought the  same people                                                                    
who  were  already paying  property  taxes  and sales  taxes                                                                    
would be paying  income taxes. She wanted to  know who would                                                                    
be paying  income taxes and  other taxes in  different areas                                                                    
of the state.  She did not want the same  people being taxed                                                                    
over and over again.                                                                                                            
2:42:14 PM                                                                                                                    
Co-Chair  Foster wondered  if  there was  anyone wanting  to                                                                    
address Representative Wilson's question.                                                                                       
Representative Wilson  was not expecting that  someone would                                                                    
be able  to draw  her a  map quickly. She  wanted to  have a                                                                    
better   understanding.   She    mentioned   hearing   about                                                                    
high-income  and low-income  folks  but thought  all of  the                                                                    
bills targeted middle-income people.  She did not believe it                                                                    
was  anyone's  intention to  target  one  specific group  of                                                                    
people. She thought a map would be helpful.                                                                                     
Co-Chair Foster  asked if there  was anyone willing  to look                                                                    
into  it  and  get  back to  the  committee.  Representative                                                                    
Kawasaki  informed the  committee  that there  was a  report                                                                    
sponsored by the Rasmussen foundation  that came out in late                                                                    
April 2016. It discussed  exactly what Representative Wilson                                                                    
had brought  up. It  used a generic  income tax  model along                                                                    
with  a  PFD  testing  regressively.  There  were  documents                                                                    
specific to Alaska and specific to certain types of taxes.                                                                      
Co-Chair Seaton pointed out that  there were no other income                                                                    
taxes in  Alaska. He noted  that no local  jurisdictions had                                                                    
income taxes.  The proportion  of income  tax that  would be                                                                    
paid was based on a  person's income and location. If people                                                                    
worked on the North  Slope and were high-income individuals,                                                                    
they would  be paying on  their income. There were  no other                                                                    
state  taxes  except  the  fuel  tax.  The  taxes  at  local                                                                    
jurisdictions  that had  been voted  on to  pay for  special                                                                    
services  were  different  from  taxes  paid  to  the  state                                                                    
treasury to provide infrastructure  in Alaska. He thought it                                                                    
was important  to distinguish state  taxes from  local taxes                                                                    
and not refer to them as double taxes.                                                                                          
Representative Wilson did  not believe it was  the intent of                                                                    
any member to overburden any  one group. She agreed that not                                                                    
all taxes were state taxes.  However, they were all taxes on                                                                    
Alaska residents. She  thought it was important  not to lose                                                                    
sight  of the  burdens  being placed  on Alaskans.  Although                                                                    
some taxes were  not imposed by the state, they  still had a                                                                    
significant effect on Alaskans.                                                                                                 
2:46:19 PM                                                                                                                    
Representative Grenn  echoed Representative  Pruitt's desire                                                                    
for  a  more  detailed breakdown  regarding  individual  tax                                                                    
payers. He noted he had sent  out the tax matrix document to                                                                    
some  of  his  constituents.  It was  a  good  matrix  which                                                                    
included  single, married,  and married  with children.  The                                                                    
chart  was  a   good  starting  place.  He   wanted  to  see                                                                    
additional   detail  and   echoed  Representative   Pruitt's                                                                    
proposal to get more information.                                                                                               
Representative Tilton had a  technical question on taxation.                                                                    
She relayed that when a  person filed their taxes they could                                                                    
take  a  deduction  of  their state  income  tax.  From  her                                                                    
understanding,  though, a  person could  not deduct  a state                                                                    
income tax  and a  sales tax  at the  same time.  The person                                                                    
would be paying a tax on  the sales tax. She wondered if she                                                                    
was  correct.  Mr.   Spanos  clarified  that  Representative                                                                    
Tilton was saying that the  federal government did not allow                                                                    
a person  to deduct both an  income tax and a  sales tax. He                                                                    
thought she wanted to know if  they would be paying tax on a                                                                    
sales tax.  He asked her  if he had understood  her question                                                                    
Representative  Tilton  suggested  that a  person  would  be                                                                    
paying  a tax  on  a tax  that had  already  been paid.  Mr.                                                                    
Spanos  responded that  the deduction  for sales  tax was  a                                                                    
line  item deduction  on the  federal form  which allowed  a                                                                    
person to  receive a  benefit for taxes  paid to  the state.                                                                    
The income  tax and the sales  tax were not quite  the same.                                                                    
There had been  complaints from states that  imposed a sales                                                                    
tax  but not  an income  tax  about not  receiving the  same                                                                    
benefit as other  states with an income tax.  It was similar                                                                    
to  congress applying  the allowance  per deduction  against                                                                    
sales tax. If someone claimed  the income tax because it was                                                                    
a choice,  a person  could claim their  income tax  or sales                                                                    
tax,  whichever was  most beneficial  to the  individual. If                                                                    
someone were to choose to  claim their income tax because it                                                                    
was  more  beneficial,  they  would  not  be  really  losing                                                                    
anything and would not be paying the income tax twice.                                                                          
Representative Tilton  agreed that they would  not be paying                                                                    
an income tax  twice. However, their income  could be higher                                                                    
because  they  would  not have  the  deduction.  Mr.  Spanos                                                                    
responded, "Correct."  They would  have to choose  to deduct                                                                    
either  their  state income  tax  or  the local  sales  tax.                                                                    
Representative  Tilton also  wanted to  know more  about hoe                                                                    
the bill  would affect private  sector jobs and  the state's                                                                    
economy overall.                                                                                                                
Vice-Chair   Gara   referred  to   Representative   Wilson's                                                                    
question  about whether  companies  would come  to or  leave                                                                    
Alaska  if the  state imposed  an income  tax. He  suggested                                                                    
that every  business in the world  would be in the  9 states                                                                    
that  did not  have an  income  tax right  now if  it was  a                                                                    
company's goal to  locate to a place with  the lowest income                                                                    
tax. He mentioned  that Alaska had the  fourth lowest income                                                                    
tax in the nation. He  requested that Mr. Spanos address his                                                                    
2:51:27 PM                                                                                                                    
Representative Pruitt referred to a  question he had asked a                                                                    
prior day. He  had heard the answer but  was not comfortable                                                                    
with it. He  had asked about 401K plans and  the elderly. He                                                                    
noted 10 percent  would be added to capital  gains. He could                                                                    
not understand  the answer that  was provided. The  idea was                                                                    
that a  person could  offset their  taxes until  later. Many                                                                    
people operated under the understanding  that Alaska did not                                                                    
have  an income  tax and  they  planned on  retiring in  the                                                                    
state.  He  wanted  to  confirm  that  the  state  would  be                                                                    
imposing an additional  10 percent capital gains  tax on top                                                                    
of the federal capital gains  tax of 28 percent. He wondered                                                                    
if  he was  correct  about the  ramifications  for a  senior                                                                    
drawing  from their  401K.  He wondered  how  such a  policy                                                                    
would impact Alaska's senior  population which was currently                                                                    
growing. Ms. Hansen  responded that she was in  the midst of                                                                    
putting  together  a  list  of  how  the  different  pension                                                                    
disbursements  were  counted.  Some   would  be  counted  as                                                                    
capital gains and some would not.  She would be able to more                                                                    
cleanly answer his question once she completed the list.                                                                        
Representative  Pruitt  asked  for more  information  to  be                                                                    
provided. Mr. Spanos  added that most 401K  plans were taxed                                                                    
as ordinary  income at the  same income rate as  a paycheck.                                                                    
Co-Chair Seaton added that the  purpose of the capital gains                                                                    
tax was to  approximate the taxation on capital  gains as if                                                                    
it  were  ordinary  income.   There  were  some  calculation                                                                    
difficulties in the bill currently,  which he was looking at                                                                    
correcting. The  idea was for  all income to be  taxed about                                                                    
equally.  He   would  get  back  to   members  with  further                                                                    
Vice-Chair Gara  also had concerns  about capital  gains. In                                                                    
the bill he thought that the  10 percent tax only applied to                                                                    
long-term capital gains.                                                                                                        
Co-Chair Seaton wanted  to let people know  that in response                                                                    
to  public  testimony,  testimony  by  representatives  from                                                                    
APFC, and  some of the  modeling of the bill,  the co-chairs                                                                    
were posing some amendments to  the sections that related to                                                                    
the POMV  draw on the  ERA. As  soon as the  amendments were                                                                    
finalized, they  would be put  forward for  committee review                                                                    
and consideration.  It could happen  by the end of  the week                                                                    
as  long as  the amendments  were  drafted in  time to  give                                                                    
members 24 hours to review  them before they came before the                                                                    
committee. It would not be the final round of amendments.                                                                       
HB  115  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair Foster reviewed the agenda for the following day.                                                                      
2:56:32 PM                                                                                                                    
The meeting was adjourned at 2:56 p.m.                                                                                          

Document Name Date/Time Subjects
HB 115 Amendment Additional..pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 Amendment Pkt..pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 Answers to 2.21 questions_Alaska state-local tax_ITEP who pays_2.22.2017.pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 answers to 2.21 questions_Alaska taxable 2017.pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 Answers to 2.21.2017 committee questions_ISER- impacts_February 2017.pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 Opposition Documents PKT 7 3.1.17.pdf HFIN 2/21/2017 1:30:00 PM
HB 115
HB 115 Support Documents PKT 7 3.1.17.pdf HFIN 2/21/2017 1:30:00 PM
HB 115