The House Finance Committee revised Thursday its deficit reduction plan, the State Revenue Restructuring Act, primarily focusing on income tax provisions.
The committee substitute for HB 115 adopted Thursday draws 5.25 percent of the average market value (POMV) of the Permanent Fund over five years. In FY 2020, the draw is reduced to five percent.
Permanent Fund dividends (PFDs) under the plan would be at least $1,250 in FY 2018 and 2019. Constituting 33 percent of the POMV draw, they are expected to start around $1,250 in FY 2020 and grow over time.
The biggest change in the CS is to the income tax portion of the bill.
Originally, the income tax was 15 percent of a taxpayer’s federal income tax liability. There would have been a minimum $25 payment.
The CS removes the tie to the federal tax system, but retains its progressive nature.
Taneeka Hansen, aide to House Finance Co-chair Paul Seaton (R-Homer), testified during a hearing that the change is in response to testimony the committee received. It removes the volatility associated with potential changes to the federal tax code.
Switching to the adjusted gross income allows the State to exempt PFDs from income, said Hansen, but does not allow for other itemized deductions, like mortgage interest or charitable donations.
“The limited list of deductions, I think, is the smarter way to go,” House Finance Vice-chair Les Gara (D-Anchorage) said. “The moment you go the federal way and start allowing a ton of deductions, this room gets filled with a bunch of people who want their special interest deduction, and it becomes a free-for-all.”
Adjusted gross income also includes capital gains, obviating a complicated section of the previous version of HB 115 where the House majority was trying to capture income from long-term capital gains.
Hansen said that Alaska is somewhat unique in not capturing income from S corporations, something HB 115 changes.
“This is only personal income tax, but that does apply to S corporations, which pass their money to individuals. The individuals receive that as individual income or partnerships,” Seaton explained.
The Institute on Taxation and Economic Policy (ITEP) estimates the income tax will generate about $680 million per year, though it would be the fourth-lowest income tax among the states.
A Look at the Income Tax Brackets
The first year for which the income tax would be collected would be 2019.
An individual making between $10,300 and $50,000 a year, not including a $4,000 personal exemption, would pay 2.5 percent of her income above $10,300. Those making between $50,000 and $100,000 pay $992.50 plus four percent of their income in excess of $50,000.
Alaskans making between $100,000 and $200,000 would pay $2,992.50 plus five percent of their income in excess of $100,000. Those making between $200,000 and $250,000 pay $7,992.50 plus six percent of income above $200,000, and those making over $250,000 pay $10,992.50 plus seven percent of income over $250,000.
For couples filing jointly, all the dollar figures are doubled.
The CS makes it clear an individual making less than $10,300, the federal threshold of income tax liability, pays no state income tax.
Taxpayers may file on paper, except for those who are paid to prepare taxes for others. Brandon Spanos, Deputy Director of the Tax Division, said that professional tax preparers in small villages without access to the internet can apply for a five-year waiver from the electronic filing requirement.
A section of the bill instructs the Department of Revenue (DOR) to biennially adjust the tax brackets listed above for inflation, ensuring Alaskans won’t gradually migrate toward the top brackets.
Hansen said Seaton intends to remove a provision in the CS that would require those who pay independent contractors to withhold their taxes. It is too burdensome, she said.
Whereas the original bill was unclear about whether trusts counted as taxable income, the CS stipulates that trusts that derive income from within the state are taxable.
“If those people leave, that will be a negative, not a positive,” Rep. Tammie Wilson (R-North Pole) warned of the trusts.
Wilson also expressed concern about the total number of changes in the CS.
“This is substantially changed,” she said. “This affects a lot of entities that the first one did not.”
Seaton assured her that he plans further public testimony on Wednesday afternoon.
House Finance will have the opportunity to question ITEP and DOR experts on Monday and Tuesday prior to public testimony. The committee could move the bill on Thursday, March 30.
Rep. Pruitt Introduces Separate POMV Bill Without Income Tax
While House Finance has held numerous hearings on its own deficit reduction plan, its first hearing on SB 26 — the Senate Finance Committee’s POMV bill that passed last week — will not be held until Tuesday.
Instead of taking up SB 26 last week, the House took a break from addressing the budget to amend its own plan to more closely align with SB 26 and a POMV provision in the House budget, drawing the ire of Senate leaders.
SB 26 steps the POMV draw down to five percent one year later than the CS for HB 115. But while SB 26 allows for a $1,000 PFD, House Finance amended HB 115 to include a $1,250 PFD.
Rep. Lance Pruitt (R-Anchorage) recognized neither amount is satisfactory for many Alaskans, particularly in the Mat-Su.
“The Mat-Su Valley is 100,000 people, and their representation here — I was feeling on this issue that they might not have actually been heard,” he said Thursday during a press conference.
On Wednesday, he and nine other members of the House minority introduced HB 192, a bill that has a 5.25 POMV draw in perpetuity.
Like SB 26, the bill includes a $4.1 billion spending limit, but it dedicates 50 percent of the POMV draw to PFDs. That equates to about $1,900 per eligible Alaskan.
By dedicating half the POMV to PFDs, HB 192 leaves a deficit of about $1.5 billion that would have to be filled using the diminishing Constitutional Budget Reserve (CBR) savings account.
The Legislative Finance Division demonstrated that a similarly-structured bill (SB 21) from Sen. Bert Stedman (R-Sitka) would ultimately reduce the value of the Permanent Fund because the legislature would have to take unplanned draws from the Fund.
HB 192 declares the legislature’s intent to close a portion of the deficit with $600 million in cuts over four years, similar to the Senate’s plan of $750 million in cuts over three years.
Pruitt’s goal — as it has been since the House majority introduced HB 115 — is to avoid an income tax.
“I would say there’s absolutely unanimity of opinion in the House Republican caucus that income taxes kick Alaskans who may already be down,” Rep. Chris Birch (R-Anchorage) told reporters. “The proposal that the House Democratic majority is bringing forward to advance an income tax is unwarranted, unnecessary, and is going to level a huge adverse impact on working Alaskans.”
“If we’re not careful, we’re going to have a discussion with more Alaskans because a referendum is going to come,” Pruitt warned.
Pruitt clarified he would not join a citizen referendum on HB 115. However, he hopes to avoid one with HB 192, which he argues is a compromise.
Since the House majority has its own plan and had not scheduled a hearing on SB 26 until Thursday, it is unlikely HB 192 will receive a hearing soon.
“I hope the majority really allows for a conversation. It’s on them to decide whether they want to have it,” said Pruitt.
House Minority Members Don’t Get Advisory Votes on HB 115
Much of the debate last week during amendments of HB 115 centered around the possibility of a referendum.
Wilson sought to make enactment of HB 115 contingent upon the positive outcome of a citizen advisory vote, but a legal opinion said that would rob the legislature of its constitutional lawmaking authority.
Instead, Wilson offered two other amendments that would have placed non-binding advisory votes on the primary ballot in August of 2018.
One would have asked, “Should the legislature appropriate money from the permanent fund earnings for a purpose other than a payment of a permanent fund dividend?”
The other would ask simply, “Should the legislature pass a law that imposes an individual income tax?”
Though Wilson said they would not actually delay passage of HB 115, Seaton said during a hearing that the votes put off the immediacy of the discussion. If people don’t like HB 115, they can put it on the ballot via a referendum, he said.
“They prevent us from leveling with the public,” Gara said of the votes.
There are politicians, I believe, in my party that don’t get it: the budget deficit is so big that an income tax can’t solve it. A reasonable use of earnings so that you can maintain a better dividend than we had last year — even that doesn’t solve it… Let’s say you wanted a sales tax — even that can’t solve it. And even radical cuts to education and the university and domestic violence shelters so we shrivel up the services the State provides — that can’t solve it. You’re going to run out of savings.
“We have to decide how to shorten this recession,” Gara said. “What we have right now is a math problem… and if we don’t solve it, there will be a ten-year recession, and I’m not wiling to do that to people just to get votes.”
“We cannot wait two more years,” added Rep. David Guttenberg (D-Fairbanks). “It is time to act now.”
Rep. Mark Neuman (R-Big Lake), filling in for Rep. Steve Thompson (R-Fairbanks), said the State has $15 billion in savings.
“To me, I don’t see the crisis in this,” he told House Finance members.
Neuman’s figure includes the CBR and the entire Permanent Fund Earnings Reserve Account. If the State spent down the latter, Gara noted, there would be no money for PFDs.
“Part of our job is to make sure we don’t fool the public,” Gara said. “It’s tough when you have to actually let your constituents know that there’s a problem that isn’t easy to solve with a bumper sticker.”
“We do have the money to wait,” Neuman insisted under discussion of the income tax.
“I think it is not very useful to put a blanket, non-specific issue on an advisory vote saying ‘an income tax’ because an income tax can be constructed in a number of different ways. So until there are some specifics people can react to, then you really aren’t going to be able to get anything other than a generalized opinion of something that people don’t really have an idea what you’re talking about,” said Seaton.
“Until you have those aspects of it, as well as whether it taxes non-residents as well as residents… it’s really not very useful. I think what it does is it gives an impetus to delay and not solve our fiscal problem,” he continued. “Most of us know we have to have more than just a single source of revenue.”
“Not specific? You’re going to tax my income. That’s pretty specific,” responded Wilson.
Pruitt said people have a visceral reaction to an income tax, so the specific structure does not matter in an advisory vote.
“Most people don’t say, ‘Oh, that’s cool. You’re only going to take four percent of my paycheck, but if you go eight percent, I’m not cool with it,’” said Pruitt.
Both advisory vote amendments failed along caucus lines.
“This isn’t a political football,” Wilson said of the advisory votes. “I don’t know when it became a crime to ask the public, who put us here, what they think.”
Finance Adopts Minority Amendments on APFC Procurement, CBR
Another amendment that failed would have established a revenue limit reducing the POMV draw on a dollar-for-dollar basis when volatile oil revenue exceeds $1.2 billion.
The revenue limit appears in SB 26. It has the support of Gov. Bill Walker’s administration because they believe it will hold down government spending when oil spikes and prioritize spending oil revenue over Permanent Fund earnings during those times.
“[T]he administration believes a ‘draw limit,’ or something similar, is a necessary component of any framework for using permanent fund earnings,” DOR Commissioner Randall Hoffbeck wrote to the House Finance co-chairs.
“You will find that this is a mechanism that ensures that the Fund grows,” Pruitt said, pointing to a supporting document. “The important thing is that the less you pull out of the Permanent Fund, the more that stays in the Permanent Fund to be able to grow, again, Permanent Fund dividends, but also the amount available to be spent in the future.”
“But to do that, you have to flat-line your budget between $75 a barrel and $105 a barrel, at least in FY ’18 numbers,” Gara responded, referencing a revenue limit diagram.
When it failed to pass House Finance, Pruitt added the revenue limit to HB 192.
Pruitt was able to pass two amendments, one of which exempts the Alaska Permanent Fund Corporation (APFC) from the State procurement code so they can receive swifter advice on investments.
Another amendment Pruitt carried for Thompson creates a subaccount in the CBR that can be invested more aggressively than the rest of the account.
Currently, the CBR is managed so that it is relatively liquid. It has a rate of return of about 2.8 percent, compared to the 6.95-percent return of the Permanent Fund.
Hoffbeck said if the Permanent Fund is restructured, the CBR will grow and will not need to be managed so conservatively. Money not expected to be needed within a couple years could be put in the subaccount and invested for higher returns.
“It’s a mindset on the amount of risk you’re willing to take in investing funds,” he told House Finance.
The amendment was adopted without objection.