Legislature(2015 - 2016)BARNES 124
02/15/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB253 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 253 | TELECONFERENCED | |
HB 253-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES
1:13:21 PM
CO-CHAIR TALERICO announced that the only order of business is
HOUSE BILL NO. 253, "An Act requiring the electronic filing of a
tax return or report with the Department of Revenue;
establishing a civil penalty for failure to electronically file
a return or report; relating to exemptions from the mining
license tax; relating to the mining license tax rate; relating
to mining license application, renewal, and fees; and providing
for an effective date."
1:13:43 PM
JERRY BURNETT, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), on behalf of the governor,
introduced HB 253 by way of a PowerPoint presentation entitled,
"Mining License Tax, HB 253." Turning to slide 2, "Mining
License Tax Increase, he explained that the bill would require
the electronic filing of a tax return or report [with DOR].
1:15:37 PM
The committee took a brief at-ease.
1:16:25 PM
MR. BURNETT stated that HB 253: would require the electronic
filing of a tax return or report with the Department of Revenue
(DOR); would establish a civil penalty for failure to
electronically file a return or report; relates to exemptions
from the mining license tax; relates to the mining license tax
rate; relates to mining license application, renewal, and fees;
and would provide for an effective date.
MR. BURNETT turned to slide 3, "Mining Tax History," and advised
that the state began taxing mines in 1913, that the tax has been
restructured several times, and that the original mining license
tax was 0.5 percent tax on mining net income over $5,000. The
tax is collected on both net income from mining operations and
mining-related royalties. So, the lessor of a mine, the owner
of a mine, pays the mining license tax on the royalties.
1:17:23 PM
REPRESENTATIVE SEATON observed the bill's title does not include
royalties, and asked whether the bill includes royalties.
MR. BURNETT replied the bill does nothing to change the
royalties that the state collects on mining operations. Most of
the large mines that would be affected by this bill are not on
state land, rather they are on federal lands, Native corporation
lands, or other lands. He said he is aware of only one large
operating mine on state lands.
REPRESENTATIVE SEATON surmised the bill relates to net income on
mining-related royalties. Therefore, he surmised, if a Native
corporation is receiving royalties from mines it will tax the
royalties, but not deal in any manner with royalties from state
land that would be paid to the state.
MR. BURNETT responded that Representative Seaton is correct. If
the owner of property that's leased to a mining operation
collects royalties, those royalties are taxed under the law.
1:18:44 PM
CO-CHAIR TALERICO requested Mr. Burnett to identify the six
large mines.
MR. BURNETT said these mines will be reviewed in a coming slide.
MR. BURNETT continued his discussion of slide 3. He explained
that the tax is primarily businesses engaged in coal and hard-
rock mining. He turned to slide 4, "Mining Tax History
(Continued)," and said that between 1915 and 1953 there were
numerous changes to the tax rates and the tax-free net income
base, and in 1951 a 3.5 year exemption was adopted for new
mining operations, and that the current tax structure has been
in place since 1955. He pointed to the chart and noted that the
tax under current law is as follows: no tax until at least
$40,000 net income; 3 percent over $40,000; 5 percent over
$50,000; and 7 percent over $100,000.
CO-CHAIR TALERICO pointed out that the history being discussed
is prior to statehood.
MR. BURNETT agreed, and said the tax was several years before
statehood and has continued in its same form since then.
1:20:20 PM
ED FOGELS, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), drew attention to slide
5, "Large mining projects in Alaska," and said the map depicts
the operating mines in Alaska, mines currently in permitting,
and the significant projects in pre-permitting status. He then
reviewed the six operating mines. The Red Dog Mine is an open
pit lead and zinc mine operated by Tech Alaska and is located on
NANA Regional Corporation land. It is one of the world's
largest zinc producing mines, employs 610 individuals, and is
the only taxpayer in the Northwest Arctic Borough. The Fort
Knox Mine is an open pit gold mine located near Fairbanks on
Alaska Mental Health Trust lands and private lands, is operated
by Fairbanks Gold Mining, employs 650 individuals, and is the
largest taxpayer in the Fairbanks Northstar Borough. The Pogo
Mine is an underground gold mine located near Delta Junction on
state land, employs 320 individuals, and is the only major hard-
rock mine located on general state land. The Usibelli Coal Mine
is a subbituminous low sulfur coal strip mine is located on
state land and employs 150 individuals. The Kensington Mine is
located north of Juneau on U.S. Forest Service land, is operated
by Coeur Alaska, is an underground gold mine, and employs 320
individuals. The Greens Creek Mine is an underground silver,
zinc, lead, and gold mine, employs 415 people, is located about
18 miles southwest of Juneau on U.S. Forest Service and private
lands, and is operated by Hecla Greens Creek Mining Company.
MR. FOGELS pointed out that the map also shows Nixon Fork Mine
which is an underground gold mine near McGrath. It is on U.S.
Bureau of Land Management (BLM) land, and since 2013 has been in
temporary cessation due to low commodity prices and it is
currently being maintained and monitored. The map also shows
mines in permitting that include: Donlin Gold Mine; Chuitna Coal
Mine; and Wishbone Hill Mine, although the Wishbone Hill Mine is
essentially permitted and is waiting for the markets to improve.
Other mines shown on the map include: Arctic and Bornite;
Livengood; Graphite 1; Pebble; Palmer; Niblack; and Bokan
Mountain. The state is currently working with the owners of
those properties regarding pre-permitting activities and none
have submitted formal applications for the large mine permits.
1:24:43 PM
CO-CHAIR TALERICO surmised Red Dog Mine and Fort Knox Mine are
major contributors to their local municipalities as far as their
tax base goes. He asked whether the other mines contribute to
their local municipal governments as well.
MR. FOGELS responded that they all do. He noted that the Greens
Creek and Kensington mines are very significant contributors to
the Juneau economy, and the Usibelli Mine is a huge contributor
to the Denali Borough and the Healy community.
MR. BURNETT added that Kensington and Greens Creek mines are the
top two local property taxpayers in Juneau, and that Usibelli
Mine is a major taxpayer for the Denali Borough in the
approximate amount of $100,000 a year in severance taxes. He
noted that the employees pay taxes, and a lot of the
infrastructure has been built for and by these mines. For
example, the Greens Creek Mine buys excess electricity from the
hydroelectric plant in Juneau, which has resulted in lowering
the utility bills for Juneau residents. He referred to the
discussion of another hydro plant that is proposed near Juneau
that would offer zone-area heating in downtown Juneau. This
proposed plant would only be made possible if Kensington Mine is
the anchor client for electricity. Mines are incredibly
important local infrastructure, local tax base, local jobs, and
economic engines to the communities where they are located.
1:27:04 PM
REPRESENTATIVE SEATON referred to the calculation of mining net
income, and asked whether it is net profit after corporate
income tax or just on expenses and revenue.
MR. BURNETT answered it is before the corporate income tax; the
corporate income tax has been allocated based on factors for
employment and so forth in Alaska to the company's national
income. In other words, he explained, when a mine pays
corporate income tax, it would be a deduction from the whole
company's corporate income tax, and then allocated back. The
state does receive a fairly significant amount of corporate
income tax from mines. He said he will be providing the
committee with a chart depicting corporate income tax by sector
for all the sectors in the economy. In many years the mines
could easily be the second largest sector, after oil and gas,
for corporate income tax depending on how commodity prices are
going during that time period.
REPRESENTATIVE SEATON referred to the base amounts that are
excluded from taxation and their different rates on net income.
He asked whether there is a comparison of how long it takes
mines to reach net income to where the mines are taxable versus
non-taxable because the tax is based on net income rather than
gross income.
MR. BURNETT replied he intends to provide some of that
information to the committee after this hearing. He said it is
highly variable because, like the oil and gas industry, these
companies are somewhat at the mercy of commodity prices. It
could be very profitable or not so profitable at any given
period of time; it as a relatively large gamble.
1:29:51 PM
REPRESENTATIVE JOSEPHSON understood that the mining-related
royalties are not directly a subject of the bill except when
looking at net income and the tax rate. He inquired whether the
administration considered adjusting the royalty rate itself.
MR. BURNETT deferred to Mr. Fogels because the Department of
Natural Resources (DNR) handles royalties. People are aware of
it and it was discussed, but it is not part of the proposal
here.
MR. FOGELS responded that DNR did not propose any adjustments to
the royalty structure this year.
REPRESENTATIVE JOSEPHSON noted that traditionally the tax for
oil is 12.5 percent, and asked what the amount is on royalty
and, if it is different, why the difference exists.
MR. FOGELS answered that mining royalties are 3 percent, and
only on general state lands which, currently, would only apply
to the Pogo Mine. The royalty structure for coal is different
for the Usibelli Mine, and basically the major hard-rock mine is
paying royalties currently, and there are royalties from smaller
placer operators in the state. He said he does not know why the
difference exists between oil and gas and the mining royalties.
1:32:24 PM
REPRESENTATIVE SEATON asked the definition of the royalty base,
and further asked whether it is on net profits, net income,
gross value of the material, or net smelter return (NSR), in
other words after the first wholesale value.
MR. FOGELS replied it is definitely on the net, but he is unsure
whether it is the value or the profit. He said he will get back
to the committee in this regard.
REPRESENTATIVE SEATON said he would like to receive an answer
because if there is a mine on state land, the royalty is the
state's ownership portion. He said his understanding from the
past is that the royalty was based on net profit; therefore, an
expensive and inefficient operation could write off a lot of
expenses against revenues. In that regard, he opined, Alaskans
receive very little or nothing from their royalty interests.
MR. FOGELS advised that he found the answer and said the
production royalties are established by AS 38.05.212(b)(1),
which reads:
(b) The production royalty
(1) is three percent of net income as determined
under AS 43.65; and
MR. FOGELS said it parallels the mining license tax.
REPRESENTATIVE SEATON stressed it is important to look closely
at the actual factors because some mines are 17 years into their
20-year life and have not reached that profitability point for
the state to receive any royalty for its ownership share.
1:35:06 PM
MR. BURNETT resumed his presentation and displayed slide 6,
"Mines in Alaska." He advised there are five large hard-rock
mines, one coal mine, and 200 small placer mines that, combined,
have an economic impact similar to one large mine.
1:35:19 PM
REPRESENTATIVE HAWKER noted that slide 6 totals 206 mines, yet
in 2015 there were 468 taxpayers. He asked why the difference.
MR. BURNETT explained that there are approximately 500 plus
taxpayers filing returns, and in 2014, 13 were in the highest
tax bracket. In 2014 the [highest tax bracket] had a total net
income of approximately $561 million and paid taxes on that
amount. The next group is much smaller with a total income net
on their tax return of approximately $1 million. He explained
that there are different brackets, with small placer gold miners
for example that pay low tax rates in the $40,000-$100,000
range. Some may be below the $40,000 range but still file a tax
return because they continue to operate and from year-to-year
they may be profitable to the level....
REPRESENTATIVE HAWKER surmised that while the state had 468
paying taxpayers in 2015, by taking the top paying 200 of the
468 there is a combination that aggregates to approximately one
large mine.
MR. BURNETT said that would be fairly close to being correct.
REPRESENTATIVE HAWKER asked whether that is the intent of the
slide.
MR. BURNETT agreed. The intent is to show there are big mines
and many little mines, and it takes many small mines to make up
the big mine. Plus, there are many little mines that do not
make any money at all.
REPRESENTATIVE HAWKER said there are 260 or more mines if the
chart is finished at the bottom, and these are fairly de minimis
in the whole equation.
MR. BURNETT replied exactly, and advised he will send the
committee a document showing the taxes paid and income by size
within those brackets.
1:38:13 PM
MR. BURNETT continued his presentation, turning to slide 7,
"Mining Tax Proposal." He advised that HB 253 proposes to:
increase the tax rate on the highest bracket of net income
greater than $100,000 from 7 percent to 9 percent; remove the
3.5 year exemption for startups; require electronic filing and
provide an exemption process; and add an application and renewal
fee for tax license which is a substitute for a business license
at the same rate as a standard business license. He noted that
currently mines are exempt from requiring a business license.
CO-CHAIR TALERICO asked the actual increase percentage of the
taxes themselves.
MR. BURNETT responded that dividing 2 by 7 equals 0.28, and
advised that it is accurate to state that it is an increase of 2
percent, but it is a 28 percent higher tax rate.
1:39:48 PM
REPRESENTATIVE SEATON queried about the efficiency of requiring
a separate mining license that costs the same amount as the
business license and exempting mines from the business license.
MR. BURNETT answered that he is uncertain whether there is a
particular efficiency other than the fact that these companies,
unlike other businesses, are paying a mining license tax anyway.
There would be the same financial effect by simply requiring
mining operations to have a business license and charging like
any other business, and currently mines are exempt from a
business license requirement.
REPRESENTATIVE SEATON asked for information regarding the
efficiency of having two different licenses, and further asked
whether the licenses are issued by two different agencies or by
the same agency.
MR. BURNETT replied that the Department of Commerce, Community &
Economic Development issues standard business licenses.
1:41:34 PM
REPRESENTATIVE HAWKER inquired about the role of the Department
of Commerce, Community & Economic Development on HB 253.
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community & Economic Development
(DCCED), responded that DCCED's role is around the business tax.
REPRESENTATIVE HAWKER noted that the business license costs $50.
MR. PARADY answered that he is before the committee to support
this effort.
REPRESENTATIVE HAWKER observed that Mr. Burnett's presentation
does not go into the Exploration Incentive Credit provision
under Title 27. He asked how that credit plays into the mining
tax as it exists in the state today.
MR. BURNETT deferred to Mr. Fogels.
MR. FOGELS replied that the Exploration Incentive Credit allows
a company to deduct up to $20 million from its tax burden once
production begins, and the company's deductions would be based
upon exploration expenses incurred to locate the deposit.
1:43:11 PM
REPRESENTATIVE SEATON requested that, at some point, the
committee be advised whether those credits are removed from
costs assessing net income or whether they are reused and those
same costs are then lowering net income.
MR. BURNETT responded that he would get back specifically in
this regard, but noted that these are expenditures occurring in
years prior to when the tax is being paid so it would be
difficult to double them up.
REPRESENTATIVE SEATON requested that Mr. Burnett let the
committee know whether exploration costs can be rolled forward
for subtraction from when development takes place, or whether
this is a totally single annual expenditure and income.
MR. BURNETT agreed to do so.
1:44:29 PM
MR. PARADY returned to previous Representative Hawker's
question, and advised that his presence is in support of HB 253
on behalf of the administration. He said his presence is
primarily driven by his background of 30 years in the mining
industry. Although DCCED is not the bill's home department, he
is present in support of the efforts in this regard.
REPRESENTATIVE HAWKER replied, "Acknowledging resident expert."
1:45:00 PM
CO-CHAIR TALERICO, in regard to the proposal to remove the 3.5
year exemption, presumed that those are typically development
costs and that development costs are deducted from the gross
revenue. He further presumed that operations and overhead costs
are part of what is deducted from gross revenue, along with
development costs for new locations and new pits. He asked
whether development costs of a mine are what is covered under
the exemption. He further asked how it got to one-half year on
the exemption.
MR. BURNETT replied that the one-half year occurred in 1955 and
has not been revisited. The tax is paid on an annual basis so
3.5 years is awkward to handle. He confirmed that development
costs are deductible as part of the net income calculation, so
the expenses on the mine site for the purposes of that mine will
be deducted. The 3.5 year exemption allows a mine additional
return on capital during the first few years, but since this is
a net tax it still would never bring a mine below zero profit
regardless of the size of the net profit tax.
1:47:14 PM
REPRESENTATIVE JOSEPHSON recalled that when he asked Mr. Fogels
about the establishment of the royalty rate, Mr. Fogels said it
was designed to mirror the tax rate. Since the current tax rate
goes up to 7 percent, he asked why it would not mirror the 7
percent where there was net money income over $100,000. He
mused that the answer could be that it was designed in the
culture of the 1872 Mining Act where there was an acceptance of
very low tax rates or great incentives to mine.
MR. FOGELS answered no, it is not mirroring the mining license
tax, per se, it is just that the manner the net income is
determined is the same determination as under the mining license
tax and has no bearing on the 1872 law at all.
REPRESENTATIVE JOSEPHSON said he thought that Mr. Fogels had
earlier said it was designed to be analogous to the 3 percent
rate for the $40,000-$50,000 mining net income. He reiterated
that he had asked Mr. Fogels where the 3 percent came from, it
is one-quarter of a royalty rate for oil.
MR. FOGELS responded that the 3 percent is in statute, and
statute says it is a 3 percent of net income as determined under
AS 43.65, which is the mining license tax. Therefore, the rate
is set at 3 percent but the way to determine the net income is
the same determination as for the mining license tax part of the
statute.
MR. BURNETT added that the royalty rate applies for all of the
income and is not bracketed at different incomes, unlike the tax
which is a progressive profits tax.
1:50:04 PM
REPRESENTATIVE HAWKER asked whether anyone could recall the name
of the lawsuit filed over royalties that was ultimately settled
by the establishment of this royalty structure, and when that
lawsuit was settled. He mentioned that he could only remember
that it was when Jerry Gallagher was head of mines, and that he
would try to track down the information.
MR. BURNETT answered that he would also try to locate the
information.
1:50:46 PM
MR. BURNETT returned to his presentation. He moved to slide 8,
"Relative Mining Tax Rate," and advised that relative to other
taxes, the mining taxes of most other states are based on value
or tonnage, not net income. For example: Wyoming is tax on
value that varies by resource, 2 percent on sand and gravel, 7
percent on surface coal; South Dakota is 10 percent on profits
or royalties, $4 per ounce of gold and not a percentage at all;
Wisconsin is 3 percent to 15 percent progressive tax on net
mining proceeds; and Colorado is 2.25 percent of gross income
exceeding $19 million. He said he will provide a document to
members showing the severance taxes in all of the other states.
REPRESENTATIVE HAWKER commented that it would be helpful to see
a multi-state comparison of total government take in that it is
an important distinction here.
MR. BURNETT replied that the Senate Resources Standing Committee
requested it be able to look at government take so it will be
part of what will be looked at.
CO-CHAIR TALERICO said, "We have kind of a percentage breakdown
on the actual minerals that are mined." Wyoming has a massive
amount of coal compared to metals, which may tweak things.
MR. BURNETT responded that it is fairly complex because the
government take, especially in Alaska, is largely local
governments, so it is not easy to get all of the information
necessary to perform that calculation. However, it should be
possible to calculate estimates that make sense.
CO-CHAIR TALERICO asked for the comparison of the actual taxes,
in that some [states] do not necessarily do the net tax as the
committee is discussing, they may just have a flat 5 percent
across the board on what they produce....
MR. BURNETT interjected that it could be $0.05 a ton. He said
the information will be provided to the committee quickly.
1:53:17 PM
REPRESENTATIVE SEATON requested that the structure of royalty be
looked at. He allowed it will be different in the Lower 48
where subsurface rights may not hold to the state, but the
comparisons would be helpful.
MR. BURNETT reiterated that it is fairly complex because, for
the most part, states do not hold mineral rights as in Alaska.
MR. PARADY added that whether royalty belongs in government take
is a debatable proposition in the context that royalties are
generally speaking of payment to ownership rather than a
taxation that goes to the state itself. Particularly, he added,
in a state that has a land ownership pattern either with split
estate where the subsurface estate is separate from the surface
estate. For example, the Union Pacific Railroad in Wyoming has
mineral rights to 4.4 million acres of ground and that royalty
rate is 8 percent, where on federal sections it is 5 percent,
and the difference theoretically is the difference in corporate
income tax that is paid by that royalty holder. There are huge
ranges of influences, such as whether discussing gross or net
income, what point of valuation is chosen, and the combination
of the rollup of local and state. He said the best summary
possible will be provided, but noted that it is still a very
arcane subject matter.
REPRESENTATIVE HAWKER advised that he and Representative Seaton
have a long history with this subject. He agreed with Mr.
Parady that royalty is usually what represents ownership
interest in the severed resource. It is unusual for it to be on
a net income basis rather than at some calculus that "when you
take the resource from me, you leave me something." He asked
whether the administration has a position on the propriety of a
cross-recovery net profits royalty structure.
MR. PARADY replied no, not to his knowledge, but it is an
interesting element of the debate.
REPRESENTATIVE HAWKER asked what "no" represented.
MR. PARADY responded that "no was a no position."
1:56:08 PM
MR. BURNETT turned to slide 9, "Impacts of Tax Proposal," and
resumed his presentation. He said that the effect of this tax
proposal on large and profitable mines, most of which have
incomes above $100,000, would be a rise in the effective tax
rate from 7 percent to approximately 9 percent. For small
mining operations, there would be little to no effect from the
tax rate change; however, removing the 3.5 year exemption might
have some effect on a startup mine. He allowed he is uncertain
as to that effect and suggested that if there is an exemption
that it be made in whole years because it is difficult to cut an
entity's annual tax in half.
CO-CHAIR TALERICO asked whether properties that are currently in
the process of permitting would be grandfathered in should the
3.5 year exemption be removed.
MR. BURNETT answered that HB 253 has no grandfather proposal,
but he understands why someone could believe that was a
reasonable issue to review. He pointed out that no large mines
are expected to come online in the next four to five years,
although, a number of mines are in the permitting process and
have made large investments at this point.
REPRESENTATIVE HAWKER pointed out that the state has quite a
history of retroactive implementation and assessment of taxes on
one of its industries, and obviously it is not being done here.
He asked whether the committee should consider a retroactive
implementation since the interest is really raising revenues.
MR. BURNETT replied that there has been absolutely no discussion
of retroactive tax implications here, nor does he believe anyone
has suggested that it would be a good policy in this case.
1:58:40 PM
REPRESENTATIVE TARR referred to the suspension of activity at
Nixon Fork Mine due to low commodity prices. She asked whether
low commodity prices were looked at when potential impacts of
the bill were being assessed. She surmised that some of [the
proposals] would become less of an issue if prices increased.
MR. BURNETT responded that this is a net profits tax; a company
must actually earn a profit in order for a tax to be paid. High
commodity prices cause higher taxes with higher income, so where
this tax has an effect is on the margin in between profitability
and lack of economic return. There will always be a financial
return on a profit and loss statement before paying this tax and
there may not be an economic return at low commodity prices.
The calculus, he explained, would be the difference between a
financial and an economic return on a specific project. Mining
in 2010 had a negative corporate income tax, in 2011 it
contributed over $80 million in corporate income tax, and in
2014 it was $15 million. It is based on a company's nationwide
profitability, so there is a tremendous variability.
REPRESENTATIVE SEATON asked if there is a slide of those years.
MR. BURNETT answered that a sector-by-sector comparison of
corporate income tax returns will be provided.
2:01:30 PM
REPRESENTATIVE JOHNSON inquired as the amount of revenue that
would be generated should the 3.5 year exemption be removed.
MR. BURNETT replied that, during the period of the fiscal note,
no revenue can be predicted. However, when the next larger, tax
paying mine comes onboard, the state would receive tax for 3.5
years that it would not have otherwise received.
REPRESENTATIVE JOHNSON asked whether it is conceivable that that
could be the push point of not starting a mine.
MR. BURNETT answered that it is economically conceivable, but he
does not know whether it would be likely.
REPRESENTATIVE JOHNSON said his question is whether the state
would be putting up a roadblock that it may not need to because
it is not generating any revenue for the foreseeable future. He
asked why remove the exemption now and run that risk if the
state could remove the exemption later.
MR. BURNETT allowed that that is a reasonable discussion point
as the bill moves in this committee. He said it is certainly a
concern that the mining industry has brought forth.
REPRESENTATIVE JOHNSON pointed to the Nixon Fork Mine being
suspended due to low commodity prices and stated that obviously
there is a balance to not produce that is fairly fragile and it
is a big decision - it takes a while to start up. He expressed
his concern that this proposed change might have that same
effect. He opined that the 3.5 years does not generate a lot of
revenue and could cause more doubts and discussion. If it would
generate millions of dollars, that would be one thing, but it
seems this is a gamble for not much [return].
MR. BURNETT replied that in the case of a large mine that is
profitable at inception, this would bring in a fairly large
amount of money. A large mine is not seen on the horizon during
the period of the fiscal note, so an estimate cannot be made on
what that would be.
2:04:12 PM
REPRESENTATIVE SEATON inquired whether waiting until a new mine
is on the horizon and then considering [removal of the
exemption] would give more pause to a company than would knowing
what the tax rates are at the time that the company is going
into exploration and development.
MR. BURNETT responded, "I think it would, I think you're correct
there."
REPRESENTATIVE SEATON asked whether the 3.5 year exemption is
only on the mining license tax or is also on the royalty.
MR. BURNETT answered that, to his knowledge, it is only on the
mining license tax. He deferred to Mr. Fogels for confirmation.
MR. FOGELS offered his belief that the 3.5 year exemption does
not apply to the royalty.
REPRESENTATIVE SEATON said it sounds like there is some
question.
MR. BURNETT replied, "No, there's no question."
REPRESENTATIVE SEATON asked whether deferring taxes for three
years while a mine is starting up and then the mine paying those
taxes after starting up and recovering its costs would aid in
the decision making of the companies while still providing money
to the state.
MR. BURNETT responded that the administration will have to look
at that issue. He said that is similar to how the 3.5 year
exemption works as a practical matter now. He suggested that
perhaps the rate could be set lower and not have the exemption,
or perhaps the rate could be set higher and exempt it in the
beginning so quicker cash flow would be achieved. It is a
calculus between all of those things.
REPRESENTATIVE SEATON said he thinks the rate is a different
calculation than a deferral, so that the state actually receives
the money but that the economics of the development would be
stimulated. He requested Mr. Burnett to review his suggestion
and get back to the committee.
MR. BURNETT agreed to do so.
2:07:12 PM
MR. BURNETT continued his presentation. Turning to slide 10,
"Revenue Impact," he said DOR estimates this would bring in an
additional $6 million per year beginning in fiscal year (FY)
2018 and would be highly variable over time due to commodity
prices. It would also bring in an additional $25,000 per year
from the license fee and renewal. He noted that this does not
account for any changes in mining activity that may occur either
as a result of the bill or other unrelated factors.
REPRESENTATIVE HAWKER asked whether the $25,000 increment on the
renewal fee would cover the cost of administering this program.
MR. BURNETT believed that DOR is estimating no additional costs
for administering this program on an annual basis.
REPRESENTATIVE HAWKER surmised that would be incremental costs
of administering this program. He asked what the costs are
today for administrating the tax program.
MR. BURNETT replied that he does not know off the top of his
head, but noted that the cost of administrating the program is
in DOR's annual report of tax operations and it shows the cost
per dollar of administering each of the tax types that DOR has
and how many full-time equivalents (FTEs). He said he will
provide the information to the committee.
REPRESENTATIVE JOHNSON recalled that when Governor Walker rolled
out his plan he said the mining tax or the license tax would
generate $11-$12 million. He observed that [page 2 of the
fiscal note] states $5.9 million in FY 2018 and asked whether
something has changed.
MR. BURNETT responded he believes that what has changed is the
expected values of mining, it is a commodity price issue. Like
other commodity industries, commodity prices have declined over
time, although gold has gone back up in value a bit in recent
days. This tax will be volatile based on commodity prices and
activity, he explained.
2:09:53 PM
REPRESENTATIVE HAWKER noted that currently the state does not
have a business license charge [for mines]. He inquired whether
the $50 fee, if implemented, would be administrated by the
Department of Revenue or moved over to the Department of
Commerce, Community & Economic Development where all other
business licenses are administrated.
MR. BURNETT understood it would be done along with the tax
filings, so would be under the Department of Revenue.
REPRESENTATIVE HAWKER surmised that with the additional fee the
state would not be incrementing the cost of providing services,
but would simply be adding a line on a tax returns.
MR. BURNETT answered, "Pretty much, yeah, I think that's a
relatively simple way to look at it, yes."
2:11:03 PM
MR. BURNETT returned to his presentation. Addressing slide 11,
"Implementation Cost," he said there will be a one-time cost
[$100,000] to reprogram the system, with no additional
incremental costs to administer the tax program.
MR. BURNETT turned to slides 12-13, "Closing the Budget Gap,"
and stated that the [FY 2017 baseline revenue after proposed
legislation] would be $4.285 billion based on the assumptions of
Governor Walker's program of the [proposed] Alaska Permanent
Fund Protection Act, revenue from existing taxes and fees, and
earnings on savings. Spending reductions in FY 2017 would total
$500 million. New revenues from the proposals would be as
follows: mining [starting in 2018] at $6 million; fishing at
$18 million; tourism at $15 million; motor fuel at $49 million;
alcohol at $40 million; tobacco at $29 million; oil & gas at
$200 million; and income tax [half in FY 2017; first full year
is FY 2018] at $200 million. The total with reductions and new
revenues would be $5.242 billion.
REPRESENTATIVE HAWKER observed from slide 12 that reformation of
the oil and gas credits is being characterized as a spending
reduction due to being refundable tax credits. He posited that
those are really a tax increase upon those companies that would
not be receiving the benefit of those credits.
MR. BURNETT replied that the refundable tax credits have been
shown as a budget item in the operating budget since the
inception of the refundable credits in approximately 2006.
Therefore, even though it is shown differently to the extent
that those are a budgetary item on an annual basis, it is
correct to characterize them both directions.
REPRESENTATIVE HAWKER quipped that Mr. Burnett offered that
explanation with almost a straight face.
2:13:47 PM
REPRESENTATIVE TARR referred to slide 10 and offered her
understanding that there currently is no mining license fee, so
the proposal is to go with [$50] because that is the other
established license fee, and that the [annual] renewal would be
$50. This fee is small, she posited, particularly in a net
profits based tax system where the only revenue the state might
receive would be through this license. She asked whether there
had been any consideration of something similar to 2016 pricing.
MR. BURNETT answered not at this time. He believed that the
discussion was to match this with any other business activity in
the state, because the state is going to tax their profits so
the state would license a mine just like any other business.
2:14:51 PM
MR. BURNETT resumed his presentation to provide a sectional
analysis of HB 253 as outlined on slides 14-16, "Sectional
Analysis." He explained the sections as follows. Section 1
would add the tax penalty for failure to file electronically
unless an exemption is received. Section 2 would require
electronic submission of tax returns, license application, and
other documents submitted. This would change the general tax
statutes so it would be applicable to all the taxes administered
by the Department of Revenue This section would also provide a
process to request an exemption. Section 3 would remove the 3.5
year exemption from the mining tax for new mining operations
until after production begins, and any persons engaged in the
business of mining would be required to obtain a license and
file an annual mining license tax return. He said he thinks
there is something wrong in this paragraph and he will fix it.
REPRESENTATIVE JOSEPHSON noted that the first sentence of
Section 3 implies that there would be a 3.5 year exemption once
production begins. However, the administration is proposing to
eliminate that exemption.
MR. BURNETT apologized that the sentences are written awkwardly
and said the sentences need to be rewritten to properly match
what he is trying to say.
2:16:16 PM
MR. BURNETT turned to slide 15 to continue his review of the
Sectional Analysis. He said Section 4 would increase the
highest tax rate from 7 percent to 9 percent for taxable income,
which is a 2 percent increase or 28 percent increase.
2:16:28 PM
REPRESENTATIVE SEATON understood that the mining and license tax
would be done at the same time the company files its tax return.
He inquired whether that means the company would be mining for a
year without a license or whether there would be an initial
license that must be applied for and then the state performs
renewals with the tax return.
MR. BURNETT offered his understanding that DOR would assess this
on the first tax return after the effective date of the bill,
not prior to going into business.
REPRESENTATIVE SEATON asked whether that is totally antithetical
to the state's business licenses, which is that a company must
have a business license before conducting business in the state.
He said it appears to be a mismatch even though the idea is to
treat them the same.
MR. BURNETT replied it would do two things: it would delay the
implementation of the business license until that time; and it
would make it possible for DOR to administer this program
without additional costs to the program. He agreed with
Representative Seaton that it would push out the time, but it
would make it a more efficient process to do the mining tax
license fee.
2:18:14 PM
REPRESENTATIVE HAWKER inquired as to how thoroughly DOR audits
the mining license tax returns.
MR. BURNETT responded that he will get back to the committee
with an answer. He said other than the large taxpayers it is
not something that would be a high priority relative to, say,
oil and gas, or corporate income tax. Audits are performed and
in the past taxpayers were identified as a result of activities
by DOR and the taxpayers were brought into compliance. It is
not like oil and gas where every return is audited.
REPRESENTATIVE HAWKER asked whether there is a provision in
statute that says the state is required to assess the cost of
whatever audit DOR performs against the taxpayer that DOR is
auditing.
MR. BURNETT answered that he cannot answer because he cannot
recall how that section reads.
2:19:31 PM
REPRESENTATIVE JOHNSON stated, "If we could carry the logic out
of what Representative Seaton said, if we just did that with all
business licenses we could get rid of the licensing division."
MR. BURNETT replied that it would be a very simple task if a
business tax was to be established on all businesses so that
sometime within the annual cycle they all have to file a tax
return. Currently they do not have to file a tax return.
REPRESENTATIVE JOHNSON said it might be something to look at.
REPRESENTATIVE OLSON suggested putting it on a calendar year.
2:20:16 PM
MR. BURNETT continued his presentation and review of the
sectional analysis. He returned to slide 15 and explained the
following: Section 5 would conform language related to the
requirement to submit tax returns or reports electronically. It
would delete the current requirement that taxpayers their submit
returns to the department in Juneau. Section 6 would establish
the mining license fee at $50 per year, a license renewal fee at
$50, and would change the due date for application and renewals
from May 1 to January 1.
2:20:42 PM
REPRESENTATIVE HAWKER surmised the intention is that this would
be assessed on the tax return regardless of whether the tax
return showed no taxes were owed due to any of the available
credits or exemptions in current statute.
MR. BURNETT responded that that is his understanding of it.
REPRESENTATIVE HAWKER asked whether under current law someone
with no liability is not required to file a tax return or
whether anyone with activity must file and demonstrate whatever
degree of taxable offset that the taxpayer might have.
MR. BURNETT understood that people engaged in a mining operation
are supposed to file a tax return. He noted that DOR has a
number of zero and below zero returns.
2:21:46 PM
REPRESENTATIVE OLSON asked what the cost is to DOR of handling a
$50 transaction every year.
MR. BURNETT answered he does not believe it will cost much at
all if it is handled electronically through the filing system
and assessed with all the other applications, so it should not
be anything that shows an incremental cost.
2:22:17 PM
MR. BURNETT resumed his review of the sectional analysis on
slides 15-16. He explained the sections as follows. Section 7
would conform language related to the repeal of the 3.5 year tax
exemption. Section 8 is the applicability language that would
clarify that the change in Section 3 would apply to all new
mining operations. Section 9 is transition language so that the
language that would be repealed in Section 7 would be read as it
was before the effective date while administering a tax credit
to a person who began a mining operation before the effective
date. Section 10 is transitional language that would allow for
regulations prior to the effective date of the bill. Section 11
would provide that Section 10 would take effect immediately for
the transitional language. Section 12 would provide an
effective date [of 7/1/16] for the rest of the bill, including
the tax rate change.
MR. BURNETT concluded by stating that he will provide the
committee with the documents and information requested.
2:23:27 PM
REPRESENTATIVE SEATON asked whether there are any other purposes
or implications, other than the fee, for having a business
license versus not having a business license. For example,
whether a company is required to have personnel withholdings or
workers' compensation.
MR. PARADY replied he will need to get a deeper answer to the
question relative to workers' compensation because DCCED has
roughly 67,000 business licenses in the Division of
Corporations, Business and Professional Licensing (CBPL) group.
REPRESENTATIVE SEATON commented that he is trying to understand
the mining license and how that corresponds with a business
license, and the implications of having a business license and
not having a business license.
2:24:41 PM
REPRESENTATIVE TARR referred to the issue of commodity prices
and requested that the committee receive more detailed
information regarding anticipated revenue as to the changes of a
25 percent to 30 percent increase in commodity prices, gold
probably being the most relevant.
MR. BURNETT agreed to do some of that, but pointed out the
highest value mineral in Alaska might be zinc or some other non-
gold mineral. Even though gold is thought of being valuable, it
does not have the volume that the others do.
REPRESENTATIVE TARR suggested that the mineral resource with the
most activity in Alaska be used.
2:25:38 PM
REPRESENTATIVE JOSEPHSON referred to Bob Loeffler's previous
presentation regarding the impact of mining, tourism, and
fisheries on Alaska's revenue. He stated he is still curious
about the derivation of the 28 percent increase or 2 percentage
points. He related that from his tour of the Fort Knox Mine it
was obviously a massive capital expenditure investment and in an
amateur's eye it appeared to be more costly than oil and gas
although he is unsure of that. Purely anecdotally, he surmised
that the environmental residual risk in mining is greater than
that of oil and gas, although he could be wrong since it is
known from Alaska's legacy wells that there's environmental risk
that continues. He asked how the 2 percent figure was arrived
at rather than some other number.
MR. BURNETT responded that he cannot comment directly on that
specific number at this point, but will provide the information
that was used to make those decisions.
2:27:16 PM
REPRESENTATIVE SEATON observed the statement on slide 16
regarding Section 9 and understood that the 3.5 year transition
language would apply "while administering a certain tax credit."
He asked whether this is the mining exploration credit of $20
million carried forward. He further asked how long that would
be carried into a project.
MR. BURNETT answered he will get back to the committee on the
specifics, but the intention is to not change the rules
retroactively in this particular case so that it is read the
same as it was before.
REPRESENTATIVE SEATON asked how far into the future this could
apply and whether it means that this would apply to any mining
claim even if production is not started within the next three to
five years. He stated he does not understand the parameters of
Section 9.
CO-CHAIR TALERICO requested a clear definition of mining
production.
REPRESENTATIVE TARR requested that the committee also be
provided with the relative volumes of extraction on an annual
basis so members can think about how the price relates to that.
2:29:25 PM
REPRESENTATIVE HAWKER put forward that increased taxes are
something to seriously consider when reviewing the state's
current fiscal situation. He said what he sees here is that the
administration is looking at increasing taxes across the board,
basically, on the production of minerals. He inquired whether
the administration has considered reducing or compromising the
major tax credits that are taken and available against this; for
example, the education tax credit.
MR. BURNETT replied that serious consideration to removing the
education tax credit has not been done, although it is worthy of
discussions because the education tax credit is available on
just about all the forms of business taxation and therefore does
have an effect at times.
REPRESENTATIVE HAWKER recounted that the education credit on
mining expired in 2013 and was reauthorized through 2021. He
described it as something the legislature has done when times
are particularly good. He requested that this be considered in
regard to achieving parity amongst taxpayers in Alaska.
REPRESENTATIVE SEATON recalled, with regard to Representative
Hawker's statement, that members were specifically looking at a
mining program that wanted to have the tax credits go up to $10
million because there was an initiative to do a certain mining
school product. He agreed that times were good, the state had
money and wanted to stimulate things, but within this current
fiscal situation the question is whether the state can still
afford to have those credits on the books and being used. He
explained that education tax credits are a redirection of taxes
that the taxpayers would be paying to the state to another
institution. He said that he looks forward to the department
coming back to the committee with ideas.
REPRESENTATIVE HAWKER clarified that the 2010 increase moved the
education tax credit up from $150,000 annually to $5 million
annually, not $10 million.
REPRESENTATIVE SEATON recalled that the $10 million was actually
put forward on the table at the time of the discussions, and it
was $5 million that was settled on.
[HB 253 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB253 ver A.pdf |
HRES 2/15/2016 1:00:00 PM |
HB 253 |
| HB253 Sponsor Statement - Governor's Transmittal Letter.pdf |
HRES 2/15/2016 1:00:00 PM |
HB 253 |
| HB253 Sectional Analysis.pdf |
HRES 2/15/2016 1:00:00 PM |
HB 253 |
| HB253 Fiscal Note-0924-DOR-TAX-01-13-16.pdf |
HRES 2/15/2016 1:00:00 PM |
HB 253 |
| HB 253 Tax presentation MINING 1-29-16 ka.pdf |
HRES 2/15/2016 1:00:00 PM |
HB 253 |