#1Corporate Income Taxes and Economic Growth House Ways and Means Committee#2Corporate Income Tax Alaska levies a corporate income tax (CIT) on certain corporations doing business in the state under AS 43.19 and 43.20. Corporate tax rates are graduated, with a maximum rate of 9.4% applying to Alaska taxable income above $222,000. S-corporations and limited liability companies (LLCs) that file federally as partnerships are generally exempt from Alaska's corporate income tax. A non-oil and gas corporation computes its tax liability based on the federal taxable income of its water's edge combined report (a measure of income earned in the United States), with Alaska adjustments - for example, Alaska tax code allows special treatment for certain dividends and royalties received from foreign corporations. U.S. income is apportioned to Alaska based on three factors - sales, property, and payroll. Alaska taxable income is determined by applying the apportionment factor to the corporation's modified federal taxable income. CIT for oil and gas corporations is calculated differently and reported separately in Chapter 6. Generally, a corporation is subject to tax on its current-year Alaska taxable income and any net operating losses may be carried-forward indefinitely to offset future tax liabilities. However, as part of the federal CARES Act passed in 2020, corporations could "carry back" net operating losses from tax years 2018, 2019, and 2020 up to five years and receive refunds for previous federal taxes paid. Alaska adopts most provisions of the federal corporate income tax code by reference, including the provision allowing the five-year carry back for net operating losses from tax years 2018, 2019, and 2020. Thus, this carry back provision applied to Alaska corporate income tax as well. For tax years 2021 and beyond, corporations are once again only able to carry forward net operating losses.#321 Corporate Income Tax FY22 FY23 FY24 112.2 105.0 125.0#4History Unrestricted Investment Revenue Investment Revenue 1 Permanent Fund 2 Investments FY 2022 3,069.3 -59.1 3 Total Unrestricted Investment Revenue Unrestricted Petroleum Revenue Petroleum Taxes 4 Petroleum Property Tax 5 Petroleum Corporate Income Tax 6 Oil and Gas Production Tax 7 Subtotal Petroleum Taxes Millions of Dollars Forecast FY 2023 FY 2024 3,360.6 35.0 3,526.1 74.5 3,010.2 3,395.6 3,600.6 122.4 116.3 114.0 297.5 390.0 320.0 1,801.6 1,610.4 1,228.7 2,221.5 2,116.7 1,662.8 Royalties (including Bonuses, Rents, and Interest) Mineral Bonuses and Rents 8 9 Oil and Gas Royalties 10 Interest 11 Subtotal Royalties 12 Total Unrestricted Petroleum Revenue 12.6 13.7 15.4 1,257.2 -10.5 1,249.7 1,183.4 0.0 1,259.3 1,263.5 0.0 1,198.8 3,480.9 3,380.1 2,861.5#5Current Law: AS 43.20.11 (e) If the taxable income is Less than $10,000 $10,000 but less than $20,000 $20,000 but less than $30,000 $30,000 but less than $40,000 $40,000 but less than $50,000 $50,000 but less than $60,000 $60,000 but less than $70,000 $70,000 but less than $80,000 $80,000 but less than $90,000 $90,000 or more Then the tax is: 1 percent of the taxable income $100 plus 2 percent of the taxable income over $10,000 $300 plus 3 percent of the taxable income over $20,000 $600 plus 4 percent of the taxable income over $30,000 $1,000 plus 5 percent of the taxable income over $40,000 $1,500 plus 6 percent of the taxable income over $50,000 $2,100 plus 7 percent of the taxable income over $60,000 $2,800 plus 8 percent of the taxable income over $70,000 $3,600 plus 9 percent of the taxable income over $80,000 $4,500 plus 9.4 percent of the taxable income over $90,000#6Alaska currently has the fourth highest tax rate and the highest graduation of rates in the nation. Only New Jersey, Minnesota and Illinois have higher rates. This bill would reduce Alaska's rates to a single 2% rate and the lowest rate in the nation for states with corporate taxes-for now. North Carolina currently has the lowest CIT rate at 2.5. They will phase out its tax by 2030.#7How High are Corporate Income Tax Rates in Your State? Top Marginal Corporate Income Tax Rates as of January 1, 2023 WAT MT 6.75% ND 4.31% VI NH 9.50% #9 7.50% #15 ME 18.93% N6 OR #22 #41 1.60% #14 II} 5.80% MN 9.80X #2 WI #30 SD 7.90% WY #13 MI 6.00% #27 NY 7.25% N10 IA NV NC 7.25% 9.40% РА 0.99% #5 #10 IL CA 8.84% UT 4.85% 010 #39 CO 4.55% #3 IN 4.90% #37 OH' MA 8.00% 012 WV 6.50% 17 #40 Kh 7.00% MO 4.00% KY 5.00% #73 VA 4.00% N27 RI 7.XXX. #20 #20 #42 #34 IN OK AZ 1.90% #37 6.50% #23 NC 2.50% #44 CT 7.50% #15 4.00% NM 5.90% 42 AR 5.308 SC 5.00% NJ 11.50% #33 #34 #29 AL GA #1 MS !x. 15% TX" LA 7.50% N15 5.00 #34 DE #23 #31 8.70% 8# AK 9.40% #4 HI 640% #76 MD 8.25% FL 5.50% #11 DC #32 8.25% (011) Note: In addition to regular income taxes, many states impose other taxes on corporations such as gross receipts taxes and franchise taxes. Some states also impose an alternative minimum tax and special rates on financial institutions. *Nevada, Ohio, Texas, and Washington do not have a corporate income tax but do have a gross receipts tax with rates not strictly comparable to corporate income tax rates. Delaware, Oregon, and Tennessee have gross receipts taxes in addition to corporate income taxes, as do several states like Pennsylvania, Virginia, and West Virginia, which permit gross receipts taxes at the local (but not state) level. Top State Marginal Corporate Income Tax Rates Lower Higher#8Graduated corporate rates are inequitable—that is, the size of a corporation bears no necessary relation to the income. levels of the owners; low-income corporations may be owned by individuals with high incomes, and high-income corporations may be owned by individuals with low incomes. A single-rate system minimizes the incentive for firms to engage in economically wasteful tax planning to mitigate the damage of higher marginal tax rates that some states levy as taxable income rises.#9Proposed Law: AS 43.20.11 (e) If the taxable income is Then the tax is: Less than $25,000 $25,000 Zero 2 percent of taxable income#10Proposed Amendment does not change: AS 43.20.014. Income Tax Education Credit. (a) For cash contributions accepted for direct instruction, research, and educational support purposes, including library and museum acquisitions, and contributions to endowment, by an Alaska university foundation or by a nonprofit, public or private, Alaska two-year or four-year college accredited by a regional accreditation association, a taxpayer is allowed as a credit against the tax due under this chapter (1) 50 percent of contributions of not more than $100,000; and (2) 100 percent of the next $100,000 of contributions. (b) [Repealed, Sec. 12 ch 71 SLA 1991]. (c) Each public college and university shall include in its annual operating budget request contributions received and how the contributions were used. (d) A contribution claimed as a credit under this section may not (1) be claimed as a credit under another provision of this title; (2) also be allowed as a deduction under 26 U.S.C. 170 against the tax imposed by this chapter; and (3) when combined with credits taken during the taxpayer's tax year under AS 21.89.070, 21.89.075, AS 43.55.019, AS 43.56.018, AS 43.65.018, AS 43.75.018, or AS 43.77.045, exceed $150,000.#11Why? Alaska's economy is lagging that of the nation. Our GDP (economic) growth over the past decade has been the worst in the country. Sixty-five thousand more people have left Alaska for, than have moved here from, other states. over the decade. In our modern economy, people are mobile, and will move for employment opportunities. The House Ways and Means Committee has been tasked with improving Alaska's economy and reducing the cost of doing business in Alaska is a good place to start.#12Alaska's Economic Report Card Has Failing Grades GDP Growth State Gross Domestic Product Cumulative Growth 2010-2020 -6.58% Rank: 50 8% - 6% AK U.S. 4% WORST IN THE NATION 2% 0% -2% -4% -6% -8% -10% '11 '12 '13 '14 '15 '16 '17 '18 '19 '20#13Absolute Domestic Migration Cumulative 2011-2020 (in thousands) 0 -2- -67,868 Rank: 34 -4 -6. -8 = -10 = -12- '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 People are leaving Alaska for other states#14Corporate income taxes are levied in 44 states, and twenty- nine states have single-rate corporate tax systems. While often thought of as a major tax type, states' corporate income taxes accounted for an average of just over seven percent of state tax collections and four percent of state general revenue in fiscal year 2021. And while these figures are not high, they represent a substantial increase over prior years, and are among the reasons corporations decide where to conduct business. Corporate income taxes accounted for 2.26 percent of general revenue in FY 2020.#15How High are Corporate Income Tax Rates in Your State? Top Marginal Corporate Income Tax Rates as of January 1, 2023 WA MT 6.75% ND VI 8.50% #9 NH 7.50% #15 ME N6 4.31% OR 1.643% #22 #41 MN נון 9.80* #14 5.00% #2 WI 1:30 SD 7.90% WY #13 MI 6.00% #27 NY 17.25% N10 LA NE PA 0.99% 9.40% #5 NV- 7.25% #10 IL UT 010 IN 4.90% OH' MA 8.00% 012 CA 8.84% N7 4.85% #39 CO 4.55% #3 #37 KS MO #40 7.00% 4.00% KY 5.00% WV 6.50% #73 VA 4.00% #27 RI 7.1X1% #20 #20 #42 #34 NC 2.50% CT TN OK #44 7.50% #15 AZ 1.90% 6.50% #23 4.00% NM 5.90% M412 #37 AR 5.30% #33 SC 5.00% NJ 11.50% #34 #29 MS 5.DXX% TX* LA 7.50% #15 #34 AL 6.50% #23 GA #1 לנו #31 9.70% #8 AK 9.403% MD 8.25% 6.40% #76 HI 5.50% #11 DC #32 0.25% (011) Note: In addition to regular income taxes, many states impose other taxes on corporations such as gross receipts taxes and franchise taxes. Some states also impose an alternative minimum tax and special rates on financial institutions. *Nevada, Ohio, Texas, and Washington do not have a corporate income tax but do have a gross receipts tax with rates not strictly comparable to corporate income tax rates. Delaware, Oregon, and Tennessee have gross receipts taxes in addition to corporate income taxes, as do several states like Pennsylvania, Virginia, and West Virginia, which permit gross receipts taxes at the local (but not state) level. Top State Marginal Corporate Income Tax Rates Lower Higher#16People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.#17The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax-the customers and workers of corporations-are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters.#18A low, flat-rate corporate tax will significantly level the playing field between C-corps and S-corps and limited liability companies. Low corporate tax rates have been proven to increase productivity which leads to improved economic output for the state.#19As time goes on, the corporate income tax will mean that a business hires fewer workers and/or moves the business out of the state because the income tax has made doing business in the state prohibitively high. As businesses leave the state, income tax revenue decreases in the years that follow. This makes revenue volatility for income taxes relatively high compared to that of sales and use taxes.#20Corporate income taxes are volatile, as they are taxes on production. When corporate income taxes get high enough, the business will produce less in that state. This is because the business, as opposed to the customers, are the less elastic side of the market. Customers, the more elastic side of the market, may decide to no longer buy from the business at the higher price. Elasticity also increases the more time passes after a price change.#21FIGURE 2 | STATE TAX REVENUE VOLATILITY, 1996-2020 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% Am 1996 1997 1998 1999 2000 2001 Sales & Use Tax 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Personal Income Tax 2016 2017 2018 2019 Corporate Income Tax 2020#22Economically competitive states, like North Carolina, have been reducing rates, flattening brackets, or phasing out their corporate taxes. South Dakota has no corporate tax. Why? Taxes have economic consequences!#23Taxes Have Consequences i.) In the two years following Trump's tax cuts, relative to the two years preceding Trump's tax cuts: Real GDP Growth: U.S. vs. Eurozone (quarterly, 1Q-16 to 4Q-19, qtr/same qtr previous yr) 3.5% Obama Trump 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Tax Cuts and Jobs Act December 2017 0.0% 1Q-16 3Q-16 1Q-17 3Q-17 1Q-18 3Q-18 1Q-19 3.5% 3.0% 2.5% U.S. 2.0% 1.5% 1.0% Eurozone 3Q-19 0.5% 0.0% Source: Eurostat, Bureau of Economic Analysis Real GDP: U.S. vs. Eurozone (quarterly, 1Q-16 to 4Q-19, indexed: 1Q-16=100)#24110 Real GDP: U.S. vs. Eurozone (quarterly, 1Q-16 to 4Q-19, indexed: 1Q-16=100) 108 Tax Cuts and Jobs Act December 2017 106 104 102 100 98 1Q-16 3Q-16 1Q-17 3Q-17 1Q-18 3Q-18 1Q-19 U.S. 110 108 Eurozone 106 104 102 Democrats win the House November 2018 100 3Q-19 98 Source: Eurostat, Bureau of Economic Analysis#2510% 11% 1990 12% 1994 13% 14% 1998 15% 16% 2002 U.S. Poverty Rate Trump Takes Office Taxes Have Consequences ii.) U.S. Poverty Rate, U.S. Real Median Income, and U.S. Unemployment Rate iii.) U.S. Unemployment Rates for Disadvantaged Groups 2019, 10.5% (lowest ever) 20 3% Jan-10 8% 13% Black Unemployment Rate 18% Trump чили Takes Office Jan-12 Jan-14 Aug. 2019 5.2% (lowest ever) Jan-16 Jan-18#26$70,000 $68,000 U.S. Real Median Income Hispanic or Latino Unemployment Rate 18% 2019, $68,703 (highest ever) Trump Takes Office $66,000 13% $64,000 $62,000 $60,000 8% $58,000 $56,000 Trump Takes Sep. 2019 4.0% (lowest ever) Office 3% $54,000 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18#273% 960 1990 1994 U.S. Unemployment Rate Less than High School Diploma Unemployment Rate 18% 10% Trump Takes Trump Takes 9% Office Office 8% 13% 7% 6% 8% 5% 4% Sep. 2019, 3.5% 3% July 2019 5.0% (lowest ever) Jan-10 Jan-12 Jan-14 Jan-16 Jan-18#28Government Receipts (billions of dollars) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Taxes Have Consequences iv.) Government Receipts (billions, seasonally adjusted at annual rates, values = average of 8 quarters of data) TCJA TCJA $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Government Receipts (billions of dollars) $0 $0 Federal Goverment Receipts Federal, State, and Local Government Receipts ■4Q-13 to 3Q-15 ■4Q-15 to 3Q-17 (Pre-TCJA) ■4Q-17 to 3Q-19 (Post-TCJA) Source: BEA#291981 1983 1985 1987 1989 1991 1993 v.) OECD Corporate Tax Rate vs. OECD Corporate Tax Revenues as a Percentage of Average Corporate Tax Rate 50% 45% 40% 35% 30% 25% 20% GDP (1981-2018, averages only include that year's member countries) OECD Equal- Weighted Average Corporate Tax Rate 3.8% OECD Average Corporate Tax 3.6% Revenues % of GDP 3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% Average Corporate Tax Revenues % of GDP 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: OECD, Cato Institute 2015 2017#3010% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1H-83/2H-09 2H-83/1H-10 1H-84/2H-10 2H-841H-11 1H-85/2H-11 2H-85/1H-12 1H-86/2H-12 2H-86/1H-13 6-Month Periods Since the Start of Each Recovery 1H-87/2H-13 Figure 2 6-Month Real GDP Growth Rates (Annualized): Reagan and Obama Compared (6-month periods, Reagan: 1H-83 to 1H-89; Obama 2H-09 to 1H-16) ■Reagan Obama 1911 2H-87/1H-14 1H-88/2H-14 2H-881H-15 1H-89/2H-15 1H-16 18 10% 9% 8% 7% 6% Reagan 5% 4% 3% Obama 2% 1% 0%#31How High are Corporate Income Tax Rates in Your State? Top Marginal Corporate Income Tax Rates as of January 1, 2023 WAT MT 6.75% ND 4.31% VI NH 9.50% #9 7.50% #15 ME 18.93% N6 OR #22 #41 1.60% #14 II} 5.80% MN 9.80X #2 WI #30 SD 7.90% WY #13 MI 6.00% #27 NY 7.25% N10 IA NV NC 7.25% 9.40% РА 0.99% #5 #10 IL CA 8.84% 17 UT 4.85% 010 #39 CO 4.55% #3 IN 4.90% #37 OH' MA 8.00% 012 WV 6.50% #40 Kh 7.00% MO 4.00% KY 5.00% #73 VA 4.00% N27 RI 7.XXX. #20 #20 #42 #34 IN OK AZ 1.90% #37 6.50% #23 NC 2.50% #44 CT 7.50% #15 4.00% NM 5.90% 42 AR 5.308 SC 5.00% NJ 11.50% #33 #34 #29 AL GA #1 MS !x. 15% TX" LA 7.50% N15 5.00 #34 DE #23 #31 8.70% 8# AK HII 640% #76 MD 8.25% FL 5.50% #11 DC #32 8.25% (011) Note: In addition to regular income taxes, many states impose other taxes on corporations such as gross receipts taxes and franchise taxes. Some states also impose an alternative minimum tax and special rates on financial institutions. *Nevada, Ohio, Texas, and Washington do not have a corporate income tax but do have a gross receipts tax with rates not strictly comparable to corporate income tax rates. Delaware, Oregon, and Tennessee have gross receipts taxes in addition to corporate income taxes, as do several states like Pennsylvania, Virginia, and West Virginia, which permit gross receipts taxes at the local (but not state) level. Top State Marginal Corporate Income Tax Rates Lower Higher