House committee reviews legislation to reinstate small-business corporate tax exemption

The House Labor and Commerce Committee heard testimony March 3 on House Bill 113, a measure to reinstate a corporate tax exemption for qualified small businesses that expired in 2023.

The bill, sponsored by Co-Chair Representative Hall, would restore the exemption previously created by the Legislature in 2012. "Restoring the small business tax credit will ensure revenue not collected by the state is returned several times into local communities," Representative Hall said during the committee presentation.

Committee staff said the exemption applies to corporations meeting the Internal Revenue Code’s small-business test — assets under $50 million and at least 80% of those assets used in active conduct of one or more trades or businesses — and that it would exempt qualifying firms from the state net corporate income tax. Tristan Walsh, staff to Representative Hall, told the committee that "in FY '23, according to the division of revenue, this amounted to approximately $2,500,000 across 47 beneficiaries." Walsh also referenced 26 U.S.C. §1202(e) and Alaska statutory cross-references included in the bill packet.

Brandon Spanos, Deputy Director of the Tax Division at the Department of Revenue, said the foregone state revenue would be deposited to the general fund under current law. "All of the revenue that's that would be foregone through the small corp exemption would otherwise be going to the general fund," Spanos said. Using an average of recent years, Spanos said the department estimated foregone revenue going forward of about $2,722,000.4.

Committee members pressed staff and the deputy director on several issues: why the original 10-year sunset was included, whether the exemption affects local governments, how qualifying categories (including certain fish-hatchery exemptions) were added to earlier versions of the law, and whether the department's tax IT systems can reprogram to reapply the exemption. Tristan Walsh summarized the legislative history for the committee and said the hatchery language was added previously to protect nonprofit hatcheries from adverse IRS treatment; he said he would need to "get back to committee" on whether that carve-out remains necessary.

Representative Colom asked whether the repeal primarily affected state revenue; Spanos replied that the foregone revenue would otherwise have been available in the unrestricted general fund. Representative Sadler asked for analysis showing the exemption’s effect on small businesses and the state; Walsh said staff would work with the department to provide the requested data and correspondence from small businesses that raised the issue.

On administrative costs, Spanos said the tax division recently upgraded its filing systems and that reinstating the prior exemption would not require a new system, only programming time: "We wouldn't need a new system. We would need to make some adjustments in the programming, but we wouldn't need a new system."

The committee did not take a final vote on HB 113. Co-Chair Hall said he would set an amendment deadline and noted the committee would share communications from the state chamber of commerce and a local business that raised the issue. He set an amendment deadline for 1 p.m. Tuesday, March 4, and indicated there would be an opportunity for public testimony the preceding Monday.

Why it matters: The exemption affects which small corporations pay Alaska's net corporate income tax and how much state general fund revenue is available for appropriation. Committee members asked for more data on the exemption’s effects and for the Department of Revenue’s administrative cost estimate before further action.

Ending: Committee staff committed to provide the requested revenue and correspondence data to members. No further action was taken on HB 113 at the March 3 hearing; the bill remains before the House Labor and Commerce Committee pending amendments and public testimony.