House panel advances income tax on large pass-through businesses

The Alaska House Labor and Commerce Committee voted Tuesday to advance a bill imposing a 9.4% income tax on large pass-through businesses, marking a potential shift in the state's tax policy.

HB 350, sponsored by Co-Chair Zack Fields, would tax S-corporations, limited liability companies, and partnerships with annual income exceeding $25 million. The bill passed out of committee 4-2 after members withdrew proposed amendments, including one that would have delayed the effective date to 2028. The $25 million threshold means the tax would affect only the largest pass-through entities operating in Alaska.

Under the current version, businesses would file their first tax returns in 2028 for income earned during the 2027 calendar year. The bill also repeals dormant tax credits for political campaign contributions that date to when Alaska had an individual income tax.

The committee adopted one amendment during the hearing, removing a requirement that businesses below the $25 million threshold file informational returns with the state.

"I see this as phishing. It's proprietary information," said Representative Calhoun, who sponsored the amendment. "Unless there's cause for DOR to go digging into their books, I don't want to require all LLCs and S corps and all the companies to just file so the state can get information on their business."

Fields withdrew his objection to the amendment. "I think the intent of this was in response to members' interest in who's affected. So if there's opposition to it, I'll happily accept this amendment," he said.

The bill also repeals three statutes related to tax credits for campaign contributions. Legislative Legal Services attorney Emily Nauman explained the credits have existed since Alaska repealed its individual income tax nearly 50 years ago.

"They've been around since the income tax was repealed and in fact do offer a refundable tax credit for campaign contributions for any individual willing to file an income tax return," Nauman said. "It's unclear to me whether or not the Department actually has a mechanism for paying out these refundable tax credits."

Nauman said the credits could potentially be applied against the new business tax because pass-through entities are taxed at the federal level as individual income. The credits, which were worth up to $100, are no longer used.

Co-Chair Hall said her office had considered an amendment to replace the fixed $25 million threshold with a standard tied to federal small business definitions under the Code of Federal Regulations. That amendment was not submitted due to time constraints.

Representative Sadler objected to moving the bill forward. "Don't like the bill, don't want it to pass, so I object to its passage from committee under any circumstances," he said.