House Republicans sought Thursday to negatively frame the origin of a House majority income tax proposal they are trying to kill. They aren’t the only caucus marshaling forces ahead of end-of-session negotiations.
There seems to be general agreement among legislators that the Permanent Fund needs to be restructured to address the State’s $2.7 billion structural deficit.
In a press conference Thursday, Rep. Steve Thompson (R-Fairbanks) called HB 115 “a mess.” He shared the frustration of his minority colleagues on House Finance, who are dissatisfied with answers Department of Revenue (DOR) officials and other experts have provided to their tax questions.
Rep. Dan Saddler (R-Eagle River) said the House minority has made it a priority to resist an income tax.
He added that HB 115’s “provenance is kind of suspicious.”
Saddler’s comments refer to the discovery that some of the income tax language in HB 115 was written by Department of Law consultant Richard Pomp, a University of Connecticut professor who previously served as a DOR consultant between 1999 and 2010.
Tax Division Director Ken Alper testified during a hearing Thursday that when Gov. Bill Walker introduced an income tax bill prior to the 2016 legislative session, the administration learned its tax language was obsolete.
Alper said the Tax Division prepared during the interim as if Walker would reintroduce an income tax.
“We didn’t know if the governor was going to want an income tax bill,” Alper told House Finance. “If he was going to want one, we wanted to have a good one. We wanted it to be, frankly, administrable, enforceable.”
Like the original version of HB 115, Walker’s bill relied on the federal income tax rate. The administration worried about the impact.
“The federal tax could change outright,” Alper warned. “We have a new administration in Washington. They’re talking about changes to the federal tax code. If everyone’s federal income tax were cut in half, then Alaska’s revenues from the income tax would simultaneously be cut in half.”
But in switching to an adjusted gross tax with brackets, the Department of Law realized it didn’t have the in-house expertise to draft the language. So they hired Pomp.
Tax Division Director Defends Use of Consultant
“In other words, Governor Walker’s Administration has been quietly working on developing new, more aggressive income tax legislation for months prior to the convening of the legislative session,” Alaska Republican Party Assistant Treasurer Suzanne Downing wrote Thursday on her website, Must Read Alaska.
“Walker would have needed a tax expert with the ‘progressive tax’ sympathies that reflect that of the Democrats, his current political allies,” Downing added.
“Where did the money come from to be able to pay this individual?” Rep. Lance Pruitt (R-Anchorage) asked, referring to Pomp.
Alper responded that a hiring freeze and subsequent Tax Division vacancies yielded the $85,000 for Pomp’s contract.
“We’re not of the habit of spending money on things we’re not going to need,” Alper told Pruitt. “This is useful knowledge. We need to have better income tax language. Most likely, someone will need it.”
Pruitt and Rep. Tammie Wilson (R-North Pole) echoed some of Downing’s comments, saying Pomp has not been available for committee questions. Wilson said she is being asked to submit amendments to HB 115 by Friday but doesn’t have access to the necessary expertise.
“The person that wrote aspects of this bill was not available to us,” complained Pruitt. “That’s the frustration.”
“Any suggestion that this person wrote this bill I think is patently untrue,” House Finance Vice-chair Les Gara (D-Anchorage) said of Pomp. “The accusations that have been suggested, even though they’ve been maybe unintentional, have bothered me. I don’t think anybody wrote this bill for anybody else.”
“No one even offered up that this person was out there and could maybe even answer the questions,” Pruitt said. “It feels like there was a secret being kept.”
Alper explained that Pomp’s contract was to deliver a draft income tax bill to the Walker Administration. He completed work on the bill in January, though Walker didn’t introduce it.
The State’s online checkbook shows that Pomp was paid $85,000 on February 9.
Alper said Pomp’s participation was not hidden.
“When the Finance Committee put out their own income tax bill, we let them know we had this language available,” Alper said. “All of those many pages of technical language — that’s what we got from Professor Pomp. The tax tables and the personal exemption and the amount of revenue side — that does not come from the administration.”
Both Gara and House Finance Co-chair Paul Seaton (R-Homer) said they have been conducting research on the issue of taxing trusts, which Wilson and Thompson worry could drive the trust industry out of Alaska. Gara noted that all legislators can similarly contact Alaska trust attorneys or conduct bill research without the aid of specific experts.
House Minority Concerns Not Supported By Numbers
Thompson expressed concern about the switch to an adjusted gross tax in HB 115, saying tax software like TurboTax will have to be redone to accommodate Alaska’s income tax.
“I see it as a major problem. Where does it benefit us?” Thompson asked.
“This is a bill that’s going to raise something approaching $700 million a year,” Alper said while explaining the fiscal notes for HB 115.
The Tax Division is requesting $14 million in capital costs, $10 million of which Alper estimated would be spent on a contractor to build a new database.
“This is going to be a very lengthy and extensive regulations project, and frankly… I expect there will be outside contractors to help with the regulations project,” he said.
Part of the cost will be outreach to companies like Quickbooks and TurboTax. But Alper said once the State has informed them of the changes to its tax policy, businesses will simply need to download the latest update to the software, a common practice.
The State will need to hire about 60 new people. 15 would be part-time workers needed to process some anticipated paper tax returns. Annual operating costs, including those salaries, are expected to be about $7.8 million.
However, Alper said all costs equate to 1.5 percent of the anticipated revenue from HB 115.
“That is a pretty good overhead number,” he said.
“It’s a heavy lift,” Alper said of the income tax implementation. “It is one we are going to be challenged by, but it’s one we believe is within our professional and intellectual capacity to be able to incorporate and add to the State of Alaska.”
Despite a tax chart showing that households making $100,000 or less will have their income taxes more than offset by the Permanent Fund dividend (PFD), Rep. DeLena Johnson (R-Palmer) told reporters Thursday that HB 115 will hit young people hard who moved to the Mat-Su Valley because it is less expensive.
“This is a difficult pill to swallow,” Thompson agreed. “We’re taking half of your Permanent Fund [dividend], and then we’re going to take the other half in taxes, or more than the other half.”
Saddler worried about the impact on pensioners.
“Somebody who’s earned a pension, especially in the military, has paid a large debt of service to the country already and has paid income tax on their income. We get a lot of people who retire in Alaska because of that lack of income tax, and a lot of Alaskans are able to make it their home because of a lack of income tax,” he said.
“This income tax might be the tipping point that puts one of my constituents who retired from the military in Eagle River to the point they’re going to move down to California or Oregon, and we lose the benefit of that person,” Saddler continued.
An analysis from the Institute on Taxation and Economic Policy shows that HB 115 would be the fourth-lowest income tax in the country. Oregon’s effective tax rate is the highest, while California’s is the third-highest.
Oregon only exempts military pensions for members with service prior to October 1, 1991. California has no military pension exemption.
Still No Senate Version of Budget on Day 73
Meanwhile, the Senate Finance Committee maintained consistency by canceling the remaining hearings on the operating budget this week. The committee canceled nine hearings on the budget after it received the House version Monday.
Senate Majority Leader Peter Micciche (R-Soldotna), a key member of Senate Finance, was in Anchorage Thursday touting the Senate’s deficit reduction plan (SB 26) at a forum jointly hosted by the Alaska Chamber, the Alaska Support Industry Alliance, and the Resource Development Council for Alaska.
The Senate hopes to avoid an income tax by simply restructuring the Permanent Fund, though that leaves an $800 million deficit in FY 2018.
Senate President Pete Kelly (R-Fairbanks) and Senate Labor & Commerce Chair Mia Costello (R-Anchorage) joined Micciche in Anchorage.
Senate Finance’s cancelations mean the committee won’t take up the budget until Monday, at the earliest. Monday will be Day 77 of the 90-day session.
Yet House minority members tried to strike a positive tone Thursday.
Rep. Chuck Kopp (R-Anchorage) admitted the legislature will probably go over the 90-day limit, but he hoped it wouldn’t be much beyond that.
“Probably our legislature, as a whole, is more solution-oriented and less blame-oriented than it’s been in a long time,” said Kopp.
Thursday was Day 73 of the 90-day session.