Legislature(2015 - 2016)BARNES 124
02/17/2016 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
1:35:19 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."
1:35:49 PM
JERRY BURNETT, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), advised that during this
presentation the department will respond to various questions
submitted during a previous presentation. He referred to the
Alaska Department of Revenue, Tax Division, 2015 Annual Report,
which is also provided online, and said that Brandon Stanos will
speak to mining issues contained within the report.
1:36:26 PM
BRANDON SPANOS, Deputy Director, Tax Division, Department of
Revenue (DOR), brought attention to the division's 2015 Annual
Report. He explained that slide 5, "TAX RETURNS FILED by Tax
Program during Fiscal Year 2015," shows the mining tax returns
received, which is the number of volume of returns, and that
corporate income tax receives more tax returns that can be
electronic. He pointed to the mining license tax, shown in
yellow, and said it accounts for 2.14 percent of all of the tax
returns received.
MR. STANOS moved to slide 6, "STATEMENT OF REVENUES Listed in
order of total amount Fiscal Year 2015," and said it shows the
revenues collected and offers an idea of where the mining
license tax fits into the picture of revenue received by the
State of Alaska. Oil & gas production tax is the largest piece
of the pie chart, and the mining license tax, shown in light
blue, is 3.24 percent of all of the revenues collected by the
Tax Division in fiscal year (FY) 2015. He noted that the
revenues depicted in later slides do jump around from year-to-
year. The mining tax is fairly unique in Alaska as it is based
on the net income of the taxpayer, and other states tax by
weight of the product, or by the sales, or by gross income.
Mining tax has been around for a long time and, because it is
based on the company's net income in a year, can vary from one
year to another.
1:39:00 PM
REPRESENTATIVE SEATON inquired as to whether net income is an
annual calculation. He further inquired as to whether the loss
is carry forward to a future year or whether a loss or
expenditure in one year is not further considered in the tax
calculation.
MR. SPANOS replied that the mining tax specifically is an annual
tax on a calendar year basis, or if a taxpayer reports fiscal
year federally then the taxpayer will report on a fiscal year.
With regard to corporate income tax, there is a net operating
loss carry back and carry forward. For the mining tax, if there
is a loss in one year the company will not pay a mining tax that
year, but there is no carry forward to another year.
1:40:00 PM
MR. SPANOS drew attention to slide 26, "Returns filed for FY
2015," and pointed out that it offers the description of mining
tax and rates. He noted that the $0-$40,000 income bracket has
no income tax and that the tax rate graduates with the net
income level. Governor Walker's bill, HB 253, proposes an
increase to the top bracket.
MR. SPANOS turned to the bottom of slide 27, "Tax Collections
Information from FY2012 - FY2015," and noted the graph is "the
meat of this part of the report for the mining tax." The graph
shows the general fund, Constitutional Budget Reserve (CBR)
Fund, and the tax collections. He explained that audits and
assessments generally get transferred into the CBR Fund, and
refunds from something that went into the fund also come out of
that fund. Tax collections for 2015 were $38 million in the
mining tax, but they do fluctuate from year to year depending on
the income reported on the tax returns for the state's
taxpayers. He added that the pie chart shows how that fits into
the overall tax collections, which is 3.24 percent of the total
collections received in the tax division, and 96.76 percent for
all others.
1:42:26 PM
REPRESENTATIVE JOSEPHSON requested Mr. Spanos to repeat his
comments regarding the CBR Fund and how it works in conjunction
with the mining tax.
MR. SPANOS answered that the CBR is for resource - mining, oil,
and gas. He offered his belief that the Alaska State
Constitution uses the word "disputed," but has been interpreted
as an administrative proceeding. He explained that it begins as
an audit or assessment in the form of a bill sent to the
taxpayer, who has appeal rights. There's a due process and if
there is a payment on an assessment it is transferred into the
CBR if it's related to the mining tax.
REPRESENTATIVE JOSEPHSON observed that in FY 2015, $38 million
came in statewide in an uncontested way, and $70,000 came in
through an adjudication and disposition after an audit.
MR. SPANOS answered correct.
1:43:53 PM
MR. SPANOS turned to slide 27, "Returns filed for FY 2015," and
advised that in FY 2015 there were 468 taxpayers and 616 tax
returns. He explained that the tax returns included amended tax
returns from previous years, which are counted as a return
received in FY 2015. He noted that the mining tax is a license
tax - a license must be obtained with the division before
beginning mining operations, which then requires the company to
file a tax return. In the event the company does not mine that
year, it must still file a zero tax return with the division.
He pointed out that many of those returns are under $40,000 net
income and the return shows no tax, but it does include
information on the face of the return. Most of the division's
information is confidential, although the licenses are public
and available online. The information on the slide regarding
credits is outdated, he said, as a couple more credits have been
added against the mining tax.
1:45:48 PM
REPRESENTATIVE SEATON requested a more detailed explanation
regarding the tax credits, how they are applied, and to the
extent of how they can be applied.
MR. SPANOS responded that the Education Credit can be seen [on
slide 27]. Additionally, there is the Film Production Credit
that's available to take against the mining tax, as well as the
Minerals Exploration Incentive Credit," which is also available
online.
REPRESENTATIVE SEATON referred to the Exploration Incentive
Credit under AS 27.30.010, which read:
(a) The commissioner shall grant to a person described
in (d) of this section an exploration incentive Credit
for the eligible costs of each of the following
exploration activities that are performed on or for
the benefit of land in the state for the purpose of
determining the existence, location, extent, or
quality of a locatable or leasable mineral or coal
deposit, regardless of whether the land is state-owned
land:
REPRESENTATIVE SEATON noted that the Exploration Incentive
Credit can be applied to any land within the state, whether
state, federal, Mental Health Trust, or privately owned lands.
He therefore asked whether the state is providing a tax credit
where the state would not receive a royalty.
MR. SPANOS said he will get back to the committee with an
answer.
1:48:20 PM
REPRESENTATIVE SEATON asked whether the Exploration Incentive
Credit applies to all lands within the state regardless of
whether the state owns them and whether the state receives any
credit against tax. He said there was also a question about
royalties for which he thought the answer was no. He expressed
his concern that it applies under the statute to both the mining
license tax and to royalties and during a tax year or a royalty
payment period, so it appears that the 50 percent royalty or 50
percent tax applies to both royalty and to tax. He said he
would like to receive some indication as to how these are
applied because as he reads 27.30.050 it can be applied for 15
years carry forward but it doesn't have to be. It can be non-
consecutive years, so it can be applied whenever the company
desires for 15 years. And, he continued, it seems like that has
$20 million dollars, which has a large fiscal implication to the
state's ability to receive revenue from any new mine, both
revenue and tax, and if it's a credit against royalties, 50
percent of royalties, then it is also a question there.
MR. SPANOS answered that the credit can be taken against both
royalties and tax, but there's no double-dipping. It can be
taken against both in the same year if a company chooses, but
the statute doesn't identify which one it must be taken against
first. It is not like federal statute that often requires that
the credit must be taken in a certain order against "this" first
and then "this" second. For this particular credit, he
continued, there is not an ordering, the taxpayer can choose to
take it against the royalties or against the tax, but cannot
take the same amount - the form that the taxpayer fills out
starts to chip away at the credit and the taxpayer can only the
credit once.
REPRESENTATIVE SEATON said that is how he read it, but said his
concern is that royalty is the state's ownership interest and
taking a tax credit against royalty actually means that the
state is not only taking its taxing authority and reducing that,
but also reducing the payment on ownership interest, or the
payment on ownership interest. He said he would appreciate a
discussion at a future time on the applicability of the
Exploration Incentive Credit.
1:52:12 PM
REPRESENTATIVE JOSEPHSON asked whether the administration
scrutinized AS 27.30 in advance of offering the mining tax
legislation increase and whether reform was called for.
MR. BURNETT responded that he was not aware of any specific
consideration to this, in that this Exploration Incentive Credit
has been in place a long time and its existence is not
necessarily an issue relative to the tax because the purpose of
this is to increase the tax over time. It is not something that
is looked at in terms of it reducing state taxes, but rather it
is looked at as more of an incentive to produce more revenue in
the future. He commented, "It's not a large amount of dollars
that are actually been taken against our taxes."
1:53:35 PM
REPRESENTATIVE JOSEPHSON, relative to Representative Seaton's
comments regarding using credits in places where royalty is
earned and whether that is inconsistent with what is done on
oil, said he thinks it's not. He pointed out that credits are
offered on state land. Whether the policy should be different
for mining versus oil and gas is worthy of discussion. He noted
that credits are offered on state land where the state earns a
royalty and asked whether Representative Seaton's view is that
there should be a different policy for mining.
REPRESENTATIVE SEATON responded that normally on oil and gas
there are oil and gas production taxes, but it generally doesn't
apply to the royalty amounts. In this case, it is saying that
it applies to the state's ownership amount, or can be applied to
the state's ownership amount. He said that while the section of
the statute is open, the committee should consider the
implications for the State of Alaska, and whether that should be
applicable.
REPRESENTATIVE JOSEPHSON said Representative Seaton clarified
that this really is a different application as it is against the
royalty interest itself.
MR. BURNETT referred to oil and gas production taxes and said
the credits there apply on state and other lands. Although most
of the production value is on state land, the tax credits would
still be a credit against production from non-state land because
the taxes are on non-state land as well, as long as it is
produced within the State of Alaska.
1:56:43 PM
EDMUND FOGELS, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), said that with regard to
questions previously asked, the committee was provided with two
documents of information: "Alaska Mine Production Figures,"
which is a simple spreadsheet showing a five year lookback on
all of the five major hard rock mines in Alaska, and the
production of the commodities depicting the amount produced. He
said there is also a five year lookback on the spot prices for
those commodities. He then related that Trustees For Alaska v.
State (1987) is the answer to Representative Hawker's question
relevant to production royalties. He said, "The elevator speech
condensation is that prior to this lawsuit we were not charging
royalties for our mineral production; after this lawsuit went to
the State Supreme Court we were forced to pass our law in 1989
that instead of the 3 percent royalty." There's a lot more in
this lawsuit than just that, he added, but it deals with Section
6(i) of the Alaska Statehood Act, [Public Law 85-508, 72 Stat.
339, July 7, 1958].
REPRESENTATIVE JOSEPHSON requested clarification as to whether
the state did not collect a royalty prior to instigation of the
aforementioned lawsuit.
MR. FOGELS replied, "We had some kind of system where we were
offsetting any kind of payments with annual labor and there was
no formal royalty. And so, that was challenged ... and then now
we have that royalty system in place."
1:59:19 PM
REPRESENTATIVE SEATON noted that the royalty itself was done by
statute by the State of Alaska. He understood that it came up
because the state had to do something and no one wanted to spend
a lot of time because there were not many large mines at the
time. Therefore, 3 percent of the net operating just mirroring
the tax was thrown as a placeholder until people would devote
more time to an adequate royalty system. He asked whether this
is Mr. Fogels' understanding as well.
MR. FOGELS replied he has not had the opportunity to look into
the legislative history on that and therefore cannot comment as
to how that number was derived or whether it was temporary in
intention, or too high, or too low.
2:00:34 PM
REPRESENTATIVE SEATON said in moving forward, looking at the
appropriateness of having a net income percentage representing
the royalty as opposed to something based on point of
production, or net smelter return, those kind of issues where
the state was receiving a return for the state's actual minerals
and not for someone's operating costs, and whether they are an
efficient or inefficient operator would harvest the same amount,
but it would very drastically change the state's royalty
picture. He said he was laying the issue of "what's an
appropriate royalty and an appropriate base for royalty" on the
table, and encouraged the department to contribute.
MR. FOGELS responded that over the years he has been at DNR he
has not been involved in any real hard discussions as to whether
3 percent was the right number, or whether the method of
calculation was the right number. He opined that possibly part
of the reason is that there is currently only one mine in Alaska
that that production royalty applies to in any meaningful way.
Pogo is the only mine currently on state land and there is not
anything in the pipeline for a hard rock mine that will come on
line any time soon on general state land.
REPRESENTATIVE SEATON explained his reasoning is that if the
committee is going to make a change it should be done long in
advance so the people know. He reiterated that the state is
better off in considering whether the royalty is an appropriate
calculation, and to put one in if it's not an appropriate
calculation, so everyone knows the game way ahead of time.
2:03:20 PM
REPRESENTATIVE HERRON referred to the decision in Trustees For
Alaska and noted that the number two plaintiff is from his
region, and then there is the rest of them. He said, "It wasn't
that this group of people necessarily were looking out for
everybody and figuring that the mining industry needed to pay a
royalty." He therefore asked what was beneath that and whether
it was because of fish versus mining.
MR. FOGELS said he is not familiar enough with the case to know
the nuts and bolts of what drove it, but he was never under the
impression that an environmental issue was a stake; his
impression is that it was a fiscal issue.
2:04:22 PM
REPRESENTATIVE JOSEPHSON referred to page 4, "Proceedings
Below," and said it describes that indeed this was about the
plaintiffs' assertion that the state didn't follow Section 6(i)
[Alaska Statehood Act] and needed to collect a royalty. He
explained it wasn't a mining versus fishing dispute that was
presented to the court.
MR. FOGELS replied that is his understanding as well.
REPRESENTATIVE HERRON said he brought up the point because he
believes it is [a fiscal issue], but it is interesting that this
group of plaintiffs would feel it was their responsibility to
point out that Section 6(i) is not equitable across the state.
2:05:26 PM
REPRESENTATIVE JOSEPHSON, relative to the 3 percent and other
major mining states, asked whether there is some comparable rate
to the one-eighths that applies somewhat nationwide on oil
fields. Setting aside deductions, and credits, and the like, he
further asked whether there is a figure that other Rocky
Mountain producer states are using that Alaska is not using.
MR. FOGELS answered he doesn't know because he has not spent a
lot of time looking at royalties in other states since Alaska's
land situation is vastly different than other states. He
explained that some states don't have state lands, and some
don't have the subsurface, so a comparison is apples and oranges
for the most part. He said he is willing to spend more time
looking into that if Representative Josephson desires, but said
he is uncertain how much good information could be obtained that
would be of use to the committee.
2:06:52 PM
REPRESENTATIVE TARR referred to the discussions regarding
adjustments to the royalty rate or tax changes with regard to
the mines in pre-permitting, such as Niblack and Bokan Mountain.
She inquired as to when those leases are up for renewal and
whether there might be an opportunity to make that adjustment at
the time that those leases are up for renewal.
MR. FOGELS responded that Niblack and Bokan Mountain are on
federal lands so the state would not receive royalty at all.
REPRESENTATIVE TARR posed an example of a mine located on state
land and asked how it would work in terms of the timeline of
when the state can actually make a change.
MR. FOGELS asked whether Representative Tarr is asking when
could the state change the law to change the royalty rate for
state lands.
REPRESENTATIVE TARR replied that that could be done at another
opportunity, and clarified that she would like to understand the
timeline on the leases, when the lease renewal would come up,
and how any underlying changes would impact that process.
MR. FOGELS replied the 3 percent is in statute and doesn't
change based upon lease renewals. There is no opportunity to
change it other than by statute.
2:08:55 PM
REPRESENTATIVE TARR clarified she is trying to understand
whether that would be a deterrent for someone at the time of
lease renewal in terms of re-evaluating the opportunity. She
asked whether that might be when the state might see something
if people were going to depart from the activity they were
engaged in right now.
MR. FOGELS suspected that once someone invests a lot of capital
in a mine operation there is a lot of momentum there, and
therefore the company is going to keep operating it as long as
the economic conditions are favorable. There are probably a
multitude of factors and the primary factor could be commodity
prices at the time, and those factors will drive the company's
decision whether to continue. The renewal of a lease or claim
is an insignificant cost compared to operating the project.
Even if a company had to temporarily shut down a mine, such as
the Nixon Fork Mine, the company will probably keep its property
position legal and up-to-date. So, he continued, he doesn't
think that would really have a bearing on this.
REPRESENTATIVE TARR surmised that the lease payments are so low
relative to the opportunity that these changes are not going to
impact the seven mines that are listed in pre-permitting and not
operational while they make calculations about the financial
viability of the project.
MR. FOGELS responded it is probably a very complex decision for
the person holding the property. He noted that there are about
35,000 mining claims in the state and said people stake new
claims and relinquish claims depending upon gold prices. People
make economic decisions every year when considering whether they
should maintain their claim position. He said he imagines that
if there is some change in the fiscal structure for the state it
would affect people's thinking on and some folks may be more
inclined to shed their claim should the fiscal structure change.
2:11:26 PM
REPRESENTATIVE SEATON noted there are claims that are just being
held without anything being done with the claim. He suggested
that maybe the state would actually get more mines created if
there is a 3 percent net smelter return royalty because the
aforementioned owners would shed their claims and other miners
would come in who would actually move forward and not just hold
a claim. He described it as a hard nut to decide on, whether a
small incremental amount that they have to pay the state is a
net negative or a net positive because it may loosen up some of
those claims and get those that are not going to be developed
relinquished.
REPRESENTATIVE SEATON requested that the department supply the
committee with what it knows about the other private royalties
in the state. Mental Health Trust's are not secret and it is 5
percent net smelter return or gross amount on the value of the
minerals, and there are mines occurring on Mental Health Trust
lands, and private lands where it's 4.5 percent net smelter
return. He said he would like to know the publically available
royalty terms and basis for the operating mines to assist the
committee in determining what the appropriate basis is. He
suggested that if the appropriate basis for most of the existing
mines to have up to 5 percent net smelter return, and the state
is not availing itself of those same economic conditions that
people go forward with and develop mines on, then it would seem
that the state is leaving a lot on the table.
MR. FOGELS replied that he will find out what is publically
available, but suspected that much of that is confidential
negotiations between the mining operator and the land owner.
2:14:19 PM
REPRESENTATIVE JOSEPHSON asked whether Canada, a pro-mining
country, uses a 10-15 percent net smelter return royalty or rate
and further asked how that equates with the 3 percent mining
license tax that Alaska uses on income. He said he is curious
about the relative comparison of those.
MR. BURNETT noted that DOR provided the committee with reference
material on Canadian mining taxes, and the materials may answer
his question. If not, he said he will provide information.
2:15:37 PM
CO-CHAIR TALERICO expressed his appreciation for the efforts and
information from the department in so far as it is nearly
impossible to create head-to-head comparisons when they are all
entirely different. He said one western state may charge a 5
percent net tax but have no corporate income tax or no royalty
associated with the product, while others just have corporate
income tax and not the net tax, and some are by tonnage. He
opined that Alaska is structured entirely differently than most
of the other western states.
MR. BURNETT replied that DOR has provided the committee with
comparisons of states' severance taxes, as well as non-petroleum
corporate income tax collections by sector for [Alaska] so it
can be seen how each sector over the past several years has
performed. He pointed out that the corporate income tax on the
mines in Alaska in 2010 was a negative $2.5 million but was $81
million in 2011, which really looks at the commodity price
worldwide and how it fluxuates. He said the department will
provide the committee with whatever information possible to
assist the committee in making decisions.
2:17:14 PM
REPRESENTATIVE SEATON requested an explanation of which credit
or which application got the state to a negative income tax.
MR. BURNETT explained he cannot be specific as to each one, but
corporate income taxes allow losses from previous years to be
carried forward. He said, "You're taxing on an allocation based
on the company's ... U.S. income, so it is one where the loss
could occur in Alaska, it could occur somewhere else in the
previous year." All of Alaska's corporate income taxes are an
allocation based on either worldwide or U.S. income.
REPRESENTATIVE SEATON inquired whether it is worldwide
apportionment, but most of the mines were U.S.
MR. BURNETT offered his belief that the mining is U.S. income,
and the oil and gas sector is worldwide.
MR. SPANOS added that there are sometimes very large amended tax
returns that are refunds because a taxpayer may choose to change
its method of expenses or some other claim. Normally the
department will refund those and then audit that at a later
period. So, it may be a large refund in one year, an audit, and
a claim in the next year or a future year. Or, potentially, the
taxpayer and department agree and so it remains as a refund.
2:19:22 PM
REPRESENTATIVE SEATON referred to the depreciation allowance
used in mining and the shifting from cost depletion to resource
depletion. He asked for an explanation as to how that affects
the taxes.
MR. SPANOS said he would like to have the statute in front of
him to provide details, but explained that there is a depletion
allowance depending on what type of mineral a company is mining
in that there is a set amount in statute for percentage
depletion which, interestingly, can go over the actual costs,
and then there is a cost depletion allowance which is usually
used in the industry.
REPRESENTATIVE SEATON requested an explanation of what is
depletion allowance and how it affects the taxes.
MR. SPANOS explained that the basic concept of depletion is that
there is a mineral in the ground and the company is depleting
that mineral, and the costs associated with getting at it so the
upfront expenditures, similar to depreciation, is taking the
costs off each year as the resource is depleted. In the event
it is known how much is in the ground, such as coal, it can be
depleted over the life of the mine. The statute allows for coal
a specific percentage depletion, so it's not a traditional
depletion method of saying it will last for 20 years and there
is this much and then a dollar limit is mathematically
calculated to deplete each year. He offered his belief that the
statute reads 10 percent, and that 10 percent is allowed each
year regardless of how much depletion has actually been
calculated on the company's books.
2:21:57 PM
REPRESENTATIVE SEATON posed a scenario of a hard rock mine with
operational costs of $50 million this year. He asked where the
depletion comes into that and whether it wipes out the company's
expenses or is in addition to expenses, such as the company has
$1 billion worth of minerals in the ground and will take 10
percent of that and these are the expenses, and the company
takes another $100 million of depletion and writes it off
against its income. He asked whether the discussion is
basically taking an additional reduction in profitability.
MR. SPANOS confirmed that it is in addition to the company's
other expenses. He said depletion is its own line item expense
that is used to calculate net income.
2:23:07 PM
REPRESENTATIVE SEATON said, "In our taxes we have cost depletion
which means that you expect to spend the $1 billion over 10
years, let's say, and so you'd take off $100 million a year off
what your income is before paying taxes, or you can do resource
depletion which is after you've like used up 50 percent of the
minerals that are estimated to be there, then you reduce your
tax liability by 50 percent because you've used up 50 percent of
the minerals." He asked whether that is the resource depletion
calculation."
MR. SPANOS responded that he will get back to the committee with
an answer.
REPRESENTATIVE SEATON stated he thinks the committee should have
a presentation on how cost and resource depletion factor into
the state's taxes. He opined that the state is losing a lot of
the taxable income because it is written off - not only the
expenses to get the net income and then there's either costs of
resource depletion applied to further reduce the taxable income
before paying taxes, and this could be huge portion. He offered
his belief that Alaska is the only state in the nation that
allows companies to switch annually from cost depletion to
resource depletion depending upon which is more advantageous to
reducing the company's tax liability to the state. He
reiterated that he would like the department to provide a slide
presentation with graphics so the committee has an understanding
when discussing whether the state is receiving its full revenue
that is due under the statute because the statute includes this
cost and revenue depletion allowance. He said that having an
understanding of how that works in the real world would be
helpful to him.
2:25:35 PM
CO-CHAIR TALERICO stated the committee won't ask for that
immediately in order to give the department some time.
MR. SPANOS noted that Alaska is one of the only states that uses
the net income tax liability on mining, so the depletion is
usually a corporate income tax number and "we do piggy back the
federal corporate income tax world" and the federal government
is very strict about not allowing a company to jump from one
method of depletion or depreciation to another. He related that
the mining income tax is a very old tax and he does not know
what the Internal Revenue Service code looked like back when the
mining tax was brought on, but it is certainly a different world
now. He said the department will put together a presentation
that goes over the mining methodology.
2:26:31 PM
REPRESENTATIVE TARR referred to the Alaska mine production
figures in the document provided by Mr. Fogels and said and
recalled that one of her earlier questions was that people are
trying to understand what impact the changes will have on future
development opportunities. She observed that in 2013 Fort Knox
almost doubled its production for that calendar year and
inquired whether that increase was reflecting a high point in
commodity prices or was due to some other reason.
MR. FOGELS replied that it could be a typographical error and
therefore he will get back to the committee. However, he
continued, such variations are typical and are based on a number
of factors such as what is going on in the mine, the deposit
itself, the kind of ore dug out, or issues with production.
Typically a company is constantly trying to optimize its milling
procedure and will find new ways to optimize to make it work
better. A change in the chemistry of the rock is another factor
that can cause things to change, or just the grade changes.
Every truckload of ore pulled out of a mine has a different
concentration of the metal in it.
2:28:24 PM
REPRESENTATIVE TARR referred to the oil and gas tax credits and
noted that a shortcoming in the legislature's work was that it
didn't model things along the whole range of prices and the
realities that are now being seen. Applying that thinking to
consideration of the mining tax, she recalled Mr. Fogels saying
that commodity price influences things more than any of the
other underlying issues. Given the great fluctuation in
commodity prices, she asked what resources are used by the
department to look forward and make predictions about what the
prices will be.
MR. FOGELS responded that, assuming a stable fiscal structure,
commodity prices are probably the biggest driver for the mines.
However, he advised, large changes to the fiscal structure could
easily over-shadow any changes in the commodity price. A number
of factors influence how much money a mine makes, with commodity
prices probably at the top of the list. Other factors include
fuel prices and the cost of rubber for tires. For example,
Usibelli Coal Mine spends a lot of money on truck tires and that
is a big cost driver in its operation. As far as what the
department does, he said most of DNR's work is environmental
with permits and regulating, so the commodity prices are not
that big of a factor in DNR's day-to-day work. Where the
department sees the fiscal side is in the production royalty.
He reiterated that there is not an ongoing discussion of how to
propose changes to that royalty structure based on what DNR sees
commodity prices doing in the future.
MR. BURNETT added that for purposes of modeling for the fiscal
note, DOR's economists have used the futures prices and markets
rather than any kind of formal modeling for future commodity
prices. He said DOR spends a lot of time on oil and gas prices
and doesn't get those right either, but DOR tends to do as well
as everybody else does.
2:31:46 PM
REPRESENTATIVE TARR commented that the $6 million looks to be on
the low side relative to some of the more recent years. She
asked whether that was an attempt to not get it wrong and be
over-optimistic of what that might be.
MR. BURNETT answered he did not make that estimate himself, but
commodity prices have been declining across the board over the
past several years. In 2014, the total income from the large
mines that would be subject to this tax, the 13 taxpayers that
were paying in the highest tax bracket, was $561 million net
income for tax purposes. He advised that $6 million would
represent about a $300 million net profit for the largest
taxpayers. That is certainly a difference in commodity prices
and costs because the other thing that affects these is that
costs of equipment and so forth have been going up at a rate
faster than inflation. The department does have access to
taxpayer confidential tax return information which is used for
estimating future costs, et cetra. The department's economists
look at a whole variety of things but that's the range of
estimated net profits under the state's tax regime, which will
vary widely year-to-year as it has in the past several years.
2:33:33 PM
REPRESENTATIVE JOSEPHSON recalled Mr. Burnett saying that the
2011 corporate income tax on hard rock mining was pretty sizable
because commodity prices were high. Theoretically, HB 253 would
generate about $6 million of new income for the state. He asked
how much [HB 253] would generate in a high-end commodity year
and what the impact would be on the industry.
MR. BURNETT replied he believes that information may have been
provided in a letter that came to the committee today.
REPRESENTATIVE JOSEPHSON confirmed that it was provided.
MR. BURNETT advised that the economist performing the modeling,
Will Bishop, is in the room.
2:34:52 PM
REPRESENTATIVE HERRON asked why the proposed increase is from 7
to 9 rather than from 7 to 8.5 or 7 to 10.
MR. BURNETT responded that tax policy is for a variety of
reasons. There was estimated income at various price points or
tax rate points. This was discussed with a group of people
within the administration, which included people from DNR and
the Department of Commerce, Community & Economic Development,
people familiar with the industry, and that's a decision that
these people came up with. As to why that particular number, he
said there's probably more art than science in some ways.
REPRESENTATIVE HERRON said that begs the question then - if a
group of people threw a dart toward a target on the wall and
that was the best shot. It seems that to increase the taxes on
any industry there has to be a justification and an ability to
articulate an understanding of the industry and that the
industry can bear an increase. He suggested that drilling down
and understanding the analysis will help in selling this tax to
the legislature. It's important to legislators and industry to
understand. He said it is important to be able to tell his
constituents, as well as his own conscience, that it wasn't just
a dart in a dart board.
2:37:29 PM
MR. BURNETT stated that the presentation is concluded and
offered his understanding that there will be public and other
additional testimony in the future.
CO-CHAIR TALERICO noted that Alaska's climate and the weather
can create huge issues for mines, particularly open pit mines.
For example, there was record-setting rainfall in 2013 where
many of the mines were located. Also, any level of earthquake
unnerves everyone working in underground mines and changes the
way a person works for a while. Mining is an interesting
industry that can be impacted with issues out of human control.
MR. FOGELS corrected the production figure for Fort Knox for the
year 2013 - it should be 428.822, not 728.822. He said he will
further verify the correct the number and send an amended
document to the committee.
[HB 253 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 253 DOR 2015 Tax Report.pdf |
HRES 2/17/2016 1:00:00 PM |
HB 253 |
| HB253 ver A.pdf |
HRES 2/17/2016 1:00:00 PM |
HB 253 |
| HB253 Sponsor Statement - Governor's Transmittal Letter.pdf |
HRES 2/17/2016 1:00:00 PM |
HB 253 |
| HB253 Sectional Analysis.pdf |
HRES 2/17/2016 1:00:00 PM |
HB 253 |
| HB253 Fiscal Note-0924-DOR-TAX-01-13-16.pdf |
HRES 2/17/2016 1:00:00 PM |
HB 253 |
| DOR Response to House Resources Committee - 2.15.16 (Part 1 of 2) signed JB.pdf |
HRES 2/17/2016 1:00:00 PM |
|
| AK Mine Production and Prices.pdf |
HRES 2/17/2016 1:00:00 PM |
|
| Trustees for Alaska v State.pdf |
HRES 2/17/2016 1:00:00 PM |