Congress has recessed until after the November election. When it returns, it will have a full slate of legislation to pass: From a defense authorization to a farm bill to cyber security measures. Most of the attention, though, will be placed on looming tax increases.
The lower tax brackets put in place under President George W. Bush are set to return to original levels at the end of the year. And President Barack Obama’s payroll tax cut will expire, too.
There is one under-the-radar provision though, that could have a major effect on Alaska Native Corporations and their beneficiaries. APRN’s Peter Granitz looks at how ANCSA trusts may be taxed at a much higher rate – and that could mean lower payouts for some Alaska Natives.
Many Alaska Natives receive dividends from their village and regional corporations. Others receive extra dividend checks from ANCSA settlement trusts.
Many, but not all, Alaska Native Corporations have trusts.
They are separate entities from the Corporations altogether and are designed to create more revenue for shareholders. Those tax-free dividend checks shareholders receive come from a trust’s annual earnings.
The tax rate the trust pays on earnings is only 10 percent – far lower than typical corporate tax rates. Senator Lisa Murkowski says that’s because of the fundamental nature of just what an ANC is.
“It is not a corporation like Exxon. It is set up, established, unique under the law; a recognition that the Native people of the state of Alaska would, with their settlement with the federal government, it would be handled differently. And so their tax status has been recognized differently,” Murkowski said.
As part of the so-called Bush tax cuts, Congress lowered the corporate earnings rate on income from ANCSA trusts. It passed in 2001, again in 2003, and it’s set to expire Dec. 31.
If that happens, the earnings on a trust will be subject to a 38 percent tax for any money that’s not distributed. Maude Blaire is an attorney with the NANA Regional Corporation. She says there’s a fairly obvious result when the trust is smaller.
“There will be less money going to the beneficiaries. In NANA’s case, that’s shareholders over the age of 65,” Blaire said.
Last year, NANA gave out $2,000 checks. Blaire says that’s especially important in places like Kotzebue, where gas is about $8 a gallon. And it’s even more important to remote villages, especially when Permanent Fund Dividends are as low as this year’s.
Sheri Buretta also thinks a smaller pot of money means smaller dividends. She’s the chairman of Chugach Alaska. And she has another major concern that if the tax provision sunsets, beneficiaries could be taxed on the dividends. That’s never happened at Chugach, because the trust was established in 2007.
“The earnings the trust receives becomes taxable regardless of whether we distribute it. They call it a phantom tax. We would have to do a 1099 for any earnings. It would basically force us to distribute any earnings that came from the settlement, regardless of what policy we put in place,” Buretta said.
Trusts are meant to grow. Paying out the entire amount every year prevents the trust from gaining interest.
Buretta says Congress can’t let the provisions sunset, because it would affect the neediest Alaska Natives without pensions or retirement accounts.
Chugach paid out $200 to beneficiaries last year. Buretta says the corporation would like to increase its contribution to the trust, in turn creating larger payouts, but because of the uncertainty, it’s taking its time.
Alaska’s Congressional delegation is united in trying to preserve the current setup, the lower rate for earnings and keeping the dividends tax-free.
U.S. Senator Mark Begich says the plan costs next-to-nothing in federal money – about $41 million over the next decade. His argument is an economic one.
“In this case it’s either services or hard cash going to its members. And our goal is the faster you can get that cash in hand or in services, the better that’s going to be for them or the economy they’re attached to,” Begich said.
Some lawmakers are campaigning against the stimulus bill from four years ago, vowing to fight any government spending, regardless of how it could spur the economy.
When Congress returns in November, it’s poised to address looming spending cuts and the tax increases. The task is making a small one for Alaska Native Corporations just as relevant as a payroll cut that affects nearly everyone in the country.