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No Shortage of Concerns as House Ponders Bill to Restructure the Permanent Fund and Revive a State Income Tax

Photo by NoHoDamon, Creative Commons Licensing.

House majority members tried Tuesday to address concerns about an income tax and Permanent Fund restructuring proposal, but they continued to insist both are necessary components of a sustainable fiscal plan.

“It’s been 40 years since we, as Alaskans, have had to look at ourselves and ask the tough questions about what it is that we want government to provide as important services and how we’re going to pay for them,” House Speaker Bryce Edgmon (D-Dillingham) said during a press conference. “It’s a big, difficult question.”

HB 115 would be at least part of an answer. The bill provides $2.2 billion for government spending through an income tax and a 4.75 percent-of-market-value (POMV) draw from the Permanent Fund earnings reserve.

In restructuring the Permanent Fund, HB 115 also cuts Permanent Fund dividends (PFDs) to about $1,100, which has a disproportionate impact on rural and low-income Alaskans. The bill seeks to counterbalance that impact with a progressive income tax.

“Having all of those components in one single bill provides us with the simplicity of dealing with the impacts to lower-income Alaskans, as well as impacts to higher-income Alaskans,” said Rep. Sam Kito III (D-Juneau).

“We wouldn’t pass an income tax by itself. We wouldn’t pass a PFD reduction by itself,” said House Finance Co-chair Paul Seaton (R-Homer). “What we’re trying to do is get something fair and balanced that is good for all Alaskans and fills our budget to maintain a vibrant economy.”

A separate component of the House majority’s fiscal plan is an oil tax bill that would drastically reduce the amount of tax credits, completely eliminating credits that the State pays in cash.

“They dig a huge hole of future liabilities,” Seaton said of the credits. “In other words, we can’t control that; it just depends on how much money [companies] spend, and we get a liability of 35 percent of basically all the money the oil companies decide to spend at a time.”

Edgmon said HB 115, as a major component of a fiscal plan, “really brings the fiscal challenge front and center.”

I think we’ve seen evidence — [from] Department of Labor statistics to the Chamber of Commerce representations to trade organizations to members of the business community that have been through Juneau already — that the economy at large is flattening in Alaska. It’s slowing down. The term “recession” now is being commonly used. We think, as a coalition, that we have to look at those major elements. We have to look at downsizing the budget in a smart way. We have to look at taking the unsustainable oil tax credit system and re-examining it and deciding what’s best for keeping the oil patch competitive, while at the same time treating the State Treasury in a fair manner. The bigger part of all that is going to be using some of the earnings of the Permanent Fund to bridge that gap of what today is, I think, about a $2.7 billion deficit.

The House majority is not considering a spending cap, seen as a priority by the House minority and Senate majority caucuses.

Rep. Cathy Tilton (R-Wasilla), who has already declared her intent to vote against HB 115, has sponsored both a statutory and constitutional spending limit.

“The spending cap seems to be directed at trying to control future legislatures, and our constitution doesn’t allow… that,” Seaton said.

“My opinion is that future legislatures need to be able to respond to the elements of the time,” he continued. “Requiring a future legislature to violate a law that we put in to be able to respond effectively to the conditions of the time doesn’t seem to me to be the way to go.”

Seaton noted that legislators were “surprised” by a presentation from Seaton’s aide showing current spending levels are already some of the lowest in decades when adjusted for inflation and population.

“So what does it mean when you are surprised by your own presentation?” Rep. Lance Pruitt (R-Anchorage), another vocal critic of HB 115, asked on Twitter.

Uncertainty Over Who Would Pay $25 Minimum Tax

Pruitt was one of several House Finance members confused by Monday’s introductory hearing of HB 115.

While a lot of time was spent Monday on the ten-percent long-term capital gains tax, committee members had more questions during Tuesday’s hearing about the $25 minimum personal income tax.

Pruitt asked if the Tax Division will be chasing military personnel who happen to be Outside over a matter of $25.

“We don’t have any real expertise on individual income taxes at the Department of Revenue. We haven’t had one in 35 years,” admitted Tax Division Director Ken Alper. “This is one of the things that we’re going to need to learn more about. I would hope that we don’t expend a lot of resources chasing after people that live out-of-state for $25.”

The Department of Revenue estimates that 100,000 of the 400,000 Alaska taxpayers will end up paying the $25 minimum, generating $3 million of the $643 million in tax revenue.

But Carl Davis of the Institute on Taxation and Economic Policy (ITEP) noted that a single person without dependents is not required to file a federal tax return until her income is over about $10,000. Some people choose to file when they don’t have to to claim refunds from tax credits or withholding, he said.

Rep. Tammie Wilson (R-North Pole) asked what happens if someone chooses to file a federal return to claim a refund.

The income tax in HB 115 is 15 percent of a taxpayer’s federal tax liability.

Alper said that anyone filing a federal return would then have to file an Alaska return, even if their only income is the PFD.

“By the act of filing the Alaska tax return, I think you would be triggering the $25 minimum,” he said.

“How could Alaska then come back and say, ‘You have to pay the $25,” when I didn’t have to [file]; I just chose to?” Wilson reacted.

She also noted that a child earning interest from an account established by a grandparent could be forced to pay the $25.

Alper said he believed that a child counted as a dependent would only require the family to pay a single $25 payment, rather than a $25 charge for each family member.

Seaton said these were good points and a good example of committee discussion. He said he would try to clarify bill intent.

Income Tax Would Be One of the Lowest in Nation

Davis testified that no other states have a minimum income tax payment, and some states allow tax liability to go negative through credits. However, Alaska may want to take a different approach because of the PFD, he offered.

If Alaska passes HB 115, Davis said the resulting income tax would be the fourth-smallest among the states. The average amount of income taxed in Alaska would be about 1.5 percent.

North Dakota, Arizona, and Louisiana would have smaller income taxes, but those states have among the highest sales taxes in the country. Louisiana’s sales tax is the highest.

“What we generally find is that the states that enacted income taxes, they were facing situations that, at least in broad strokes, are not so different from what Alaska is facing. They were facing a budget gap,” Davis told the committee.

“We recognize that Alaska is facing a fiscal challenge. There is no one solution that you can just enact, one policy change can close the entire gap; it’s likely going to have to be a package of changes,” he added, echoing the message of the House majority.

Pruitt noted that ITEP calculates the impact of state tax proposals on people of different income levels.

“What I don’t see in the mission statement is a conversation related to the impact on the private sector, the impact on the economy as a whole,” Pruitt told Davis.

Davis responded that the ripple effects of tax policy are difficult to model at the state level, and discussions surrounding those effects tend to be speculative.

ITEP does a lot of pro bono work with states that cannot afford to pay for tax consultation.

Davis said about half of the states that have recently changed their income tax structure have fared better economically after the change; about half have fared worse.

If Alaska wants to avoid being so closely tied to the federal system and subject to the vagaries of Congress, Davis recommended that HB 115 could adopt “fixed-date conformity,” fixing Alaska’s income tax to the federal code at a specific point in time, returning periodically to update as needed.

Permanent Fund Director Wants More Protection of Fund Value

Davis was not the only person who suggested changes to the bill.

Angela Rodell, Executive Director of the Alaska Permanent Fund Corporation, expressed worry about the deletion of inflation-proofing in the bill language.

Currently, the portion of the earnings reserve not distributed as PFDs is used to inflation-proof the principal of the Permanent Fund. Inflation-proofing builds up the Fund’s value, but it only exists in statute.

For the past two years, the legislature has exercised its power of appropriation, choosing not to inflation-proof the Fund.

Like Gov. Bill Walker’s POMV proposal, HB 115 would deposit in the corpus any amount in the earnings reserve that exceeds the annual POMV draw multiplied by four.

Rodell says having an irregular mechanism like this is not enough. She explained that when the Permanent Fund invests in something long-term, like real estate, the gains end up in the earnings reserve, but only the original amount of the investment is returned to the corpus, which then falls behind the rising cost of goods without inflation-proofing.

She said the existing formula is also not safe because the earnings reserve is subject to legislative appropriation at any time.

Absent a constitutional amendment, Rodell told Seaton she would be more comfortable with a mechanism that takes a fixed portion of the POMV draw every year for inflation-proofing.

“It seems to me, one of the bigger threats to inflation-proofing is the failure for the State to have a way out of this fiscal crisis,” said House Finance Vice-chair Les Gara (D-Anchorage). “The last two years, it’s caused the legislature from putting a penny into inflation-proofing, even though there’s a statute.”

Rodell also worries about the 4.75-percent draw.

“The benefit, I think, to this body will be that you will walk in on the first day of session knowing what one of your revenue streams is for certain for the upcoming fiscal year,” she told legislators.

However, “Now we’re using this for a budget stabilization fund,” Rodell said of the earnings reserve. “I at least want recognition that if we’re going to invest the way we always have, there needs to be a recognition that the Earnings Reserve Account will lose some years, and what does that mean.”

A volatile investment year that has flat returns will affect the POMV payout, Rodell said.

“We need to not be the only answer in some cases because we will have volatility,” she told the committee.

House majority members will see that statement as justification for including the income tax, which is a relatively stable source of revenue.

Department of Law Attorney John Hutchins told House Finance that having the income tax and POMV in one bill does not violate the constitution’s single-subject rule. The rule was designed so that doomed bills would not be tacked on to others in committee, he said.

“If you were looking at them individually, neither is the sort of thing you would say is a popular measure that is going to pull a weaker bill along,” Hutchins said of the income tax and POMV. “They’re both kind of millstones you would use to sink a measure, rather than the other way around.”

Hutchins said it actually makes sense to consider them together.

“They’re both common solutions to one problem, or they’re both part of a solution to one problem,” he said. “You’re addressing one problem, and that’s the budget.”

House Finance will consider modeling of HB 115 on Wednesday. The public will have its first opportunity to testify on the bill Friday afternoon.

Seaton said the committee won’t consider amendments until after public testimony. He will not try to move the bill to the floor this week.

“I think, in the end, we will move the bill out. Whether it’s in exactly the same form now or not, no one knows, because that’s the committee process,” he said.

Edgmon expressed Tuesday a similar mix of optimism and uncertainty about the House and Senate agreeing on a fiscal plan.

“Am I confident that, at the end of the day, we’re going to come up with something significant this session? Personally, I’m very confident,” Edgmon said. “What those pieces might be, I think time will tell.”

Tuesday was Day 29 of the 90-day session.