The co-chairs of the House Finance Committee used an introductory hearing for their income tax/Permanent Fund restructuring bill to explain why they believe both are necessary parts of a sustainable fiscal plan.
HB 115, rolled out on Friday amidst much Sturm und Drang, would generate $2.25 billion from the Permanent Fund earnings reserve by calculating 4.75 percent of the whole Fund’s average value over five years. One-third of the draw would be used for a Permanent Fund dividend (PFD) of about $1,100.
The percent-of-market-value (POMV) draw would grow over time as the Permanent Fund grows through its investments.
A state income tax, equal to 15 percent of a taxpayer’s federal income tax liability, would generate $643 million in the first full year of implementation, according to a Department of Revenue fiscal note.
In total, HB 115 would produce $2.2 billion for non-PFD government spending, closing most of the $3 billion deficit.
In a sponsor statement, House Finance Co-chairs Paul Seaton (R-Homer) and Neal Foster (D-Nome) wrote, “Before we continue to cut the budget and reduce state services we must ask ourselves, what kind of Alaska do we want to live in?” (emphasis in original)
If the legislature cuts another $1 billion from the budget, Northern Economics estimates another 20,000 jobs will be lost by 2020. Local property taxes would have to increase by 71 percent to compensate for reduced State spending.
“If the legislature chooses to cut the budget drastically to meet our expected resource revenue, the first place that those cuts will be taken, and have been taken, are in the capital budget. We’ll likely see a growing list of deferred maintenance,” Hansen testified at Monday’s House Finance hearing.
The University of Alaska already has a $1 billion list of deferred maintenance, she said.
However, if the legislature restructures the Permanent Fund and institutes a broad-based tax, taking some of the PFD money and wages out of the economy will cause job losses, but the losses will be reduced. Northern Economics estimates that a plan like HB 115 would save 10,000 jobs and cause the recession to bottom out more than a year earlier than $1 billion in cuts.
“How big this recession ends up being will depend, in part, on the approach the legislature takes to address the deficit that we are facing,” Hanson told House Finance.
“If you were able to implement something along these lines, you would be able to stem the job losses,” House Finance Vice-chair Les Gara (D-Anchorage) said of HB 115.
Hansen noted that half of the respondents to an unscientific Senate majority survey say current State spending is either about right or too low. More than half support an income tax.
“If we do these things, are we going to see private jobs come back, private industry, or is most of it going to be in the public/government industry that we’re going to see the uptick?” asked Rep. Tammie Wilson (R-North Pole). “From my understanding, it’ll be mostly governmental.”
“Is that the kind of Alaska we want, or do we want more of a private sector-driven economy?” she asked, turning the co-chairs’ question back on them.
Even with the passage of HB 115, the State will still be facing deficits and restricted spending.
“I don’t believe that, under either of those scenarios, we would be hiring 10,000 extra State employees,” Hansen responded.
Senate Majority Agrees Deficit Reduction Necessary, Wary of Income Tax
“We’ve heard from business leaders throughout the state that uncertainty is freezing their investment decisions, and we also see the effect of volatility on the State’s credit rating,” Hansen told House Finance. “Without a stable and sustainable plan for the rating agencies, it’s hard for them to predict what the State finances will look like in the next few years.”
Hansen said the legislature needs a “comprehensive solution, not just a partial one, so we do not return with the same questions of uncertainty next year.”
But in a press conference Monday, Senate majority members said an income tax and a Permanent Fund restructuring should be considered individually.
“You’re throwing two very complex things together. We haven’t seen an income tax in this state in 35 years or better,” said Senate Finance Co-chair Anna McKinnon (R-Eagle River). “That’s why we have bills that have single-subject rules.”
While MacKinnon didn’t specifically endorse a 4.75-percent POMV draw, she said the 5.25-percent draw proposed by Gov. Bill Walker is a little aggressive. The Senate will probably reduce that, she said.
“It has some merit,” fellow Co-chair Lyman Hoffman (D-Bethel) said of HB 115.
But Hoffman did not back down from the plan to cut $750 million from the budget.
“Everyone needs to step up to the plate,” he said.
Hoffman, who is handling the operating budget this year, said he thinks that the budget will receive a vote in both chambers by mid-March, like last year.
However, he added, “This year, it isn’t about the budget. We need to work on the budget and get it behind us because, in five or ten years, when people look back at the first session of the 30th Alaska Legislature, they’re not going to want to know what we did with the operating budget; they’re going to want to know what we did to fix the fiscal gap that we have.”
Just restructuring the Permanent Fund would be a huge accomplishment, said Hoffman.
It’s important for the legislature to do what it can before moving on to the next thing.
Some House Finance Members Confused by Bill Details, Impacts
Hoffman’s comments, and his concern that an income tax would further burden rural Alaskans facing a cut to their PFDs, underscore the Senate majority’s reluctance to address an income tax.
Hansen acknowledged that the $1,100 PFD in HB 115 will have a disproportionate impact on low-income Alaskans.
“A progressive income tax… will offset this impact by collecting revenues from non-residents and also those with higher incomes,” she told House Finance members.
Hansen said the roughly 90,000 non-residents who work in Alaska will bring the State about $70 million in income tax revenue, based on 2015 data. New data from DOR has not been separated by residents versus non-residents.
A $25 minimum income tax payment is expected to generate $3 million of the $643 million total revenue.
“I totally agree that we have to raise revenue in this state,” Gara told Hansen.
Yet Gara worries about the message surrounding a 15-percent state income tax.
“I just don’t want anyone walking around saying this bill is imposing a 15-percent tax when it’s not,” he said.
A tax table prepared by Seaton’s office shows that a married couple with two children and $100,000 in income would actually pay 1.16 percent of their gross income.
A provision of the bill would also allow people to apply their PFD to their state tax liability. If the PFD exceeds their tax liability, the State would send a check for the balance, like a tax refund.
Multiple members noted that taxes are filed by April, while the amount of the PFD is calculated in September or October. How will people know the difference and avoid state tax penalties, they asked.
Brandon Spanos, Deputy Director of the Tax Division, explained that for those who choose to credit the PFD against their taxes, the PFD will be held by DOR as a pre-payment. That amount will then be applied to their taxes the following April.
Rep. Lance Pruitt (R-Anchorage) noted the legislature has the authority to spend the money that would otherwise be distributed as a PFD.
That is why HB 115 includes the POMV payout, responded Hansen.
“The intention of this structure is to make the amount that the General Fund receives stable, which would remove some of that need for the legislature, or desire for the legislature, to reconsider the dividend,” she said.
“I’m glad we’re presenting something simple to the public here,” Pruitt said sarcastically. “This is complex. If I’m asking questions, you can understand what the public’s going to ask on.”
Members were also confused by a ten-percent long-term capital gains tax in the bill and its impact on non-residents. Capital gains within Alaska are supposed to be taxed so that, like income, they are not also taxed by another state.
Since capital gains are already taxed by the federal government, the bill is designed so that, at worst, the combined state and federal capital gains taxes will equal a taxpayer’s federal income tax rate.
“I’m too confused to ask a question,” Wilson reacted.
Spanos gave examples of capital gains in Alaska: investment real estate in Alaska held over one year, then sold; or a trust incorporated with funds held in Alaska.
Wilson called the trust scenario a “nightmare.”
“This could have a huge negative effect,” Wilson said, suggesting people would take their trusts Outside.
If the taxpayer is an Alaska resident with holdings elsewhere, Alaska would only tax those holdings if that state is not one of the 41 states with an income tax, explained Seaton. If the other state has an income tax, it would be credited against the Alaska tax liability.
Undoubtedly, there will be more questions from House Finance members at HB 115’s next hearing Tuesday.