Legislature(2001 - 2002)
04/10/2001 08:07 AM House CRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 36-ENTERPRISE ZONES CO-CHAIR MORGAN announced that the first order of business would be HOUSE BILL NO. 36, "An Act relating to enterprise zones." Number 0081 REPRESENTATIVE JOE HAYES, Alaska State Legislature, testified as the sponsor of HB 36. Representative Hayes read the following sponsor statement: The idea of enterprise zones originated in England under Margaret Thatcher and was brought to the United States under the Reagan Administration. The basic idea is to stimulate the economy of depressed areas by offering incentives, such as tax breaks, to businesses. Enterprise zones have gained bipartisan support from lawmakers across the country. Thirty- eight states have passed enterprise zone legislation and in 1994 the Clinton Administration reshaped the enterprise zone idea into a federal program named Empowerment Zones/Enterprise Communities (EZ/EC). The purpose of HB 36 is to help reinvigorate Alaska's depressed urban and rural areas. By providing incentives, businesses will be more likely to develop in depressed areas. This will in turn provide more jobs for the community, increase the average household income and, therefore, ... also the standard of living. Enterprise zones work and have been yielding promising results for nearly two decades. Traditionally, enterprise zones rely on credits towards or exemptions from state taxes or fees. In Alaska, however, there is little in the way of state taxes. Therefore, in order to make this concept fit, HB 36 is based on a local control option. The backbone of the incentive package is the local control. The designation of an enterprise zone would authorize local communities to offer their incentives or incentives of choice from a short list, which would include reductions in permit or user fees, credits on or exemption from property taxes, flexibility in regulation or, lease or sale of real property to private persons. On top of authorizing greater flexibility in providing local economic development incentives, HB 36 would also establish statewide corporate income tax credits. The two statewide incentives are a 15 percent of the initial investment would count as a credit towards the state corporate income tax and after one year of operation within an enterprise zone, a business could qualify for a corporate income tax credit of $500 per new employee. HB 36 will also help facilitate access to federal grant money. Various grant programs are available through the federal Department of Housing and Urban Development. Most notable are the Community Development Block Grants and the federal EZ/EC program. The goal of HB 36 is to encourage business development and economic growth while providing new options to Alaskan communities to improve the quality of life. HB 36 will be good for economic development in Alaska. Please join me in [supporting this bill]. REPRESENTATIVE HAYES informed the committee that there should be a representative from the Department of Revenue, the Alaska Municipal League(AML), and the Barrow Economic Development Group. He pointed out that the committee packet includes a detailed sectional analysis and information with regard to what other states are doing with rural enterprise zones. Representative Hayes related his belief that in some areas in rural Alaska, enterprise zones would be doable. Number 0412 CO-CHAIR MORGAN inquired as to the difference between the state enterprise zones and the federal empowerment zones. REPRESENTATIVE HAYES explained that HB 36 would create a statewide program. Currently, Alaska has no avenue with which to gain the federal funds. Therefore, starting a statewide program would be the first step. He informed the committee that U.S. Senator Ted Stevens' office had informed him that at the federal level, grants amount to $40 million for rural areas and $100 billion for urban areas. REPRESENTATIVE HAYES, in further response to Co-Chair Morgan, said that Metlakatla is the only empowerment zone in Alaska. He clarified, "We have one enterprise community [Metlakatla] in the state of Alaska and then we have a renaissance zone in Anchorage." Number 0535 REPRESENTATIVE MURKOWSKI mentioned that part of her district is inside a renaissance zone. She asked if there is a difference between a renaissance zone and an enterprise zone. REPRESENTATIVE HAYES explained that renaissance zones are able to obtain funding from the Department of Housing and Urban Development(HUD) to incorporate for housing. However, an enterprise zone would open economic development by bringing businesses to the community. The two are very different. REPRESENTATIVE MURKOWSKI surmised, however, that an enterprise zone could be in a renaissance zone. REPRESENTATIVE HAYES agreed, but pointed out that a renaissance zone doesn't receive any federal funding. Number 0643 REPRESENTATIVE SCALZI asked if this legislation is necessary in order to allow for the creation of enterprise zones. REPRESENTATIVE HAYES replied yes, because it would be easier to have an enterprise zone program if there is a statewide program. He explained that under the proposed statewide program four communities would be accepted by the state each year. Those four communities would go through the process of obtaining a federal grant. Staff in U.S. Senator Ted Stevens' office said that this would be the step that bridges the gap to obtain federal enterprise zone funding. REPRESENTATIVE GUESS turned to the following language in HB 36: "The department may recommend to the governor and the legislature incentives to enterprise zones that include". She asked if that [language] refers to specific enterprise zones or the program overall. REPRESENTATIVE HAYES explained that the department can recommend what the communities have already recommended. Once the proposals of the communities have been accepted, then the department will [forward] those recommendations. Number 0771 REPRESENTATIVE MURKOWSKI inquired as to the reason for the cap, that is allowing only four enterprise zones each year. REPRESENTATIVE HAYES explained that starting with four enterprise zones per year, with a maximum timeline of 20 years, seemed to be a reasonable number that isn't too large or too small. REPRESENTATIVE MURKOWSKI then turned to the eligibility criteria and related her understanding that the area has to consist of one census tract. She inquired as to the number of census tracts in Anchorage or rather how many areas could qualify for this enterprise zone designation? REPRESENTATIVE HAYES answered that there are only three [census tracts] in the City of Anchorage. REPRESENTATIVE MURKOWSKI pointed out that Anchorage has half the population of the state. Therefore, she surmised that there will not be many areas that will make applications for an enterprise zone. REPRESENTATIVE HAYES said that this is a local option. Number 0992 REPRESENTATIVE MURKOWSKI related her understanding that a community would make a request to the department, which would prioritize the request and make recommendations, and the governor would designate up to four enterprise zones. However, the language in Section 2 mentions that the department may make recommendations to the legislature. Therefore, she inquired as to the role of the legislature in this process. Furthermore, she questioned whether the legislature really cares what the incentives are if the legislature isn't part of the process. REPRESENTATIVE HAYES said that he didn't have a definitive answer. REPRESENTATIVE HALCRO pointed out that the state mandates that all property be assessed at the full market value and no deviations are allowed unless there are legislative exemptions, such as the property tax referral bill for the McKay building. Therefore, he assumed that any deviation from the full market value assessment would require legislative action. REPRESENTATIVE MURKOWSKI asked then if that is why Section 1 includes four incentives and Section 2(d) only lists three incentives. Section 2(d) doesn't include the following incentive: "flexibility in the municipality's regulation of the area, including establishing special zoning districts, special processing for permits, and exemptions from local ordinances". She asked if that is due to Representative Halcro's point. REPRESENTATIVE HAYES replied yes. Representative Hayes clarified that the incentives listed in Section 1 pertain to municipalities, while those in Section 2 pertain to the state. REPRESENTATIVE GUESS returned to the subject of census tracts and clarified that there are more than three census tracts in [Anchorage]. Number 1224 NATE MOHATT, Staff to Representative Hayes, Alaska State Legislature, agreed that there are many census tracts across the state. However, this bill specifically limits each municipality to three enterprise zones. He indicated agreement with Representative Guess that there would be more than three census tracts that would be eligible in Anchorage. REPRESENTATIVE GUESS directed attention to page 1, line 11, and asked if census tracts could combine for this [program]. REPRESENTATIVE HAYES pointed out that a census tract must meet all the criteria listed in Section 1. REPRESENTATIVE GUESS asked if the language refers to "at least one or is it just one." REPRESENTATIVE HAYES specified that the language in HB 36 is in compliance with the federal program and thus wouldn't work with the federal program if the language is changed. Number 1332 REPRESENTATIVE KERTTULA indicated agreement with Representative Guess' point that the eligibility for designation language says that "the area must consist of one census tract", but it doesn't say "shall only" or "must only." REPRESENTATIVE MURKOWSKI agreed that the language could be interpreted to mean "at least." REPRESENTATIVE HAYES, in response to Representative Kerttula, said that he could provide information regarding how the federal program is applied. Number 1378 REPRESENTATIVE SCALZI asked if there are any negatives to this program. REPRESENTATIVE HAYES said that he hasn't found much opposition. Although the Municipality of Anchorage fears that this would erode their tax base, he wasn't sure how that could be since a community has the local control to choose what it wanted to use as its plan. The rural areas seem amenable to this and AML is supportive of this. In response to Representative Halcro, Representative Hayes explained that the Municipality of Anchorage is neutral on this matter because they feel that it would erode their tax base. However, those under the Mayor of Anchorage's chief of staff feel that HB 36 is an excellent piece of legislation. REPRESENTATIVE HALCRO expressed surprise with the Municipality of Anchorage's position because he had a meeting with the head of the Anchorage Downtown Partnership during which this idea was pitched. Number 1500 CO-CHAIR MEYER related his belief that if the Municipality of Anchorage is really upset about HB 36, the committee would have heard about it. Therefore, he surmised that the chamber may not understand how and where this could be used. He also recalled the flack that occurred with the McKay building because of the notion of preferential treatment of certain developers. CO-CHAIR MEYER turned to the fiscal note and inquired as to why this program would cost the state additional money. REPRESENTATIVE HAYES explained that the department felt that with a new program, it would need a development specialist for half of the first year of the program in order to run the program. CO-CHAIR MEYER pointed out that a reduction in property tax would impact the cities not the state. He surmised that the hope is that these zones will create more economic activity and thus gain more money in the long term. REPRESENTATIVE HAYES pointed out that there is a zero fiscal note from the Department of Revenue. He informed the committee that there would be a decline in state income if the option of 15 percent is chosen. He said that Deputy Commissioner Larry Persily, Department of Revenue, could speak to that if the committee wishes. Number 1649 REPRESENTATIVE MURKOWSKI addressed ensuring that this is truly a local option. She related her understanding that a neighborhood could approach a municipality for an enterprise zone and the municipality could refuse. She asked whether there was any way a neighborhood that qualified could circumvent the refusal of the municipality and [gain the ability to have an enterprise zone]. REPRESENTATIVE HAYES replied, "Not the way this bill is drafted." He agreed with Representative Murkowski that the municipality has to "sign on" [to the neighborhood's wish to have an enterprise zone]. Number 1729 REPRESENTATIVE KERTTULA inquired as to how necessary the additional departmental staff is for this program. She also asked if Representative Hayes felt that the department could administer this program under its existing budget. MR. MOHATT explained that the $33,000 in the first year would be for one half of a staff person's time. The department hasn't said whether it needs to hire a new position but rather [the fiscal note] reflects that someone [already on staff] would have to dedicate part of their time to reviewing the applications. REPRESENTATIVE KERTTULA inquired as to the sponsor's thoughts if the committee decided to have a zero fiscal note. REPRESENTATIVE HAYES said that he had no argument with a zero fiscal note. He emphasized that this funding will only be for four a year "at best." Number 1858 LARRY PERSILY, Deputy Commissioner, Department of Revenue, informed the committee that the Department of Revenue has a zero fiscal note because it won't cost the department anything to administer the program. However, there is a cost to the state for any tax credit program in that [the department] would forgive revenue that it would otherwise get. He clarified that he was referring to Section 5 of HB 36. Mr. Persily emphasized that the department cannot estimate the future loss of tax revenue to credits if enterprise zones were allowed. Therefore, he surmised that the choice for the legislature is: "How much revenue would you lose to credits versus how much new development, new business, new jobs would you create?" MR. PERSILY informed the committee that in Alaska only C corporations pay corporate income tax while S corporations, patrnerships, limited liability companies, and proprietorships don't pay corporate income tax. He pointed out that the largest corporate taxpayers in Alaska are oil companies. Therefore, he assumed that it isn't the intent of the supporters of this legislation to offer an incentive to oil companies. However, these facts are important to keep in mind because oil companies are the largest corporate taxpayers in Alaska and have the most to gain from any business incentive. MR. PERSILY related his understanding that under HB 36, if a corporate taxpayer cannot use the entire tax credit within one year, the tax credit would be lost. He posed an example in which a corporation invests $2 million and has a $300,000 credit at the 15 percent credit rate. If that corporation doesn't have $300,000 in tax liability, the corporation would only write off the credit to the extent of their liability and the unused credit would disappear because it cannot be carried over. Mr. Persily said the department believes that would be a good policy. Number 2059 REPRESENTATIVE MURKOWSKI posed an example in which Boeing moved its headquarters to Mountainview, Alaska. The Municipality of Anchorage would be concerned due to the potential loss of corporate tax from Boeing. She understood that the tax credit would be given for a 20-year period. MR. PERSILY agreed that the tax credit would be given for a 20- year period. However, he specified that the state rather than the municipality would be concerned about the potential loss of a corporate tax. Mr. Persily remarked that this would work well if a large corporation makes a large investment that it otherwise would not make. Although the state would lose X dollars in corporate income tax receipts, receipts that would not have otherwise been obtained would be obtained. Furthermore, jobs would be created and if there was ever an income tax, then there would be revenue from those jobs as well. Number 2145 REPRESENTATIVE HALCRO surmised that the legislature would have the final approval on any taxing incentives. MR. PERSILY turned to Section 5 and related his understanding that the 15 percent would not be subject to legislative or gubernatorial approval. However, as mentioned earlier, a property tax would require a statutory change. Mr. Persily likened this to the education tax credit, which doesn't require any legislative action because the statute already exists. Number 2209 REPRESENTATIVE SCALZI returned to the oil companies. He asked if this legislation would relate to any new facility or does it have to be a new business or new enterprise or would the mode of business have to be changed in order to obtain the tax credit. MR. PERSILY related his understanding that it would merely have to be a new facility. He explained, "It can be an existing business that's expanding, but it can't replace something." For instance, the headquarters on C Street cannot be closed and reopened on B Street and called a new business. If a tool and die maker wanted to expand and build a new warehouse, that would be a new business, a new facility, and thus they could qualify for the credit. REPRESENTATIVE SCALZI turned to the example of the tool and die maker and asked whether they would be changing their structure in order to qualify versus merely moving the business. Representative Scalzi wondered if this could be a tax credit loophole that really doesn't do anything for economic development, but creates a tax credit for an existing business. MR. PERSILY reiterated his interpretation that it would have to be a new [facility] and not a replacement. There would have to be an expansion that is new, something that adds value to the state. In further response to Representative Scalzi, Mr. Persily said that he would like to think that the Department of Revenue would be the entity that would quantify that. Number 2353 REPRESENTATIVE KERTTULA referred to Section 5(c), which says that a new business facility could replace another facility. Therefore, she surmised that there could be a situation similar to that described by Representative Scalzi. MR. PERSILY explained that [in such a situation] the company would receive credit for the additional value. REPRESENTATIVE KERTTULA then referred to Section 2(d)(2), which refers to the recommendation on state income taxes to go to the legislature. Therefore, she wasn't sure whether it would be automatic or it would go back for approval. MR. PERSILY said that the department interpreted that to refer to anything additional, such as the incentive packages cities offer to attract large sports arenas. REPRESENTATIVE KERTTULA returned to Section 5(a) that begins by saying, "In addition to any other tax credit allowed for the investment under this chapter". Although that may be true, she indicated the need to add clarifying language to address Mr. Persily's interpretation. She suggested that the clarifying language could say, "in addition to the credit allowed under Section 5". She acknowledged that it is a bit circular. MR. PERSILY pointed out that Section 5 refers to other credits available under that chapter, such as education credits and mineral exploration credits, and thus that language would be necessary to cover those credits. Number 2491 REPRESENTATIVE MURKOWSKI inquired as to the legislature's role in this other than considering recommendations for additional incentives under Section 2. From what she could see, everything is left to the governor in regard to what is granted as well as the incentives. She asked if under Section 5, the legislature could say that the tax credits shouldn't be given to a particular entity. She also asked whether the legislature has any role in this at all. MR. PERSILY informed the committee that Section 5 deals with AS 43, which addresses the Department of Revenue. Therefore, the department read this legislation as a definite tax credit of 15 percent plus $500 per employee. However, [Section 2] that deals with AS 44.33 addresses the Department of Community & Economic Development, which makes recommendations to the governor. The Department of Revenue is involved in the tax only. REPRESENTATIVE KERTTULA related her belief that Mr. Persily is correct because there are [two] different sections. REPRESENTATIVE MURKOWSKI pointed out that the legislature has no authority with this beyond receiving the recommendations that go to the governor. The governor makes the decisions in Section 1. She interpreted it to mean that if there are additional incentives, then the legislature would advise that these incentives are available. REPRESENTATIVE KERTTULA echoed Representative Halcro's earlier point that the legislature may have to enact a law if there were differing property taxes. The governor wouldn't be able to do that automatically and thus that language is present. MR. PERSILY related his interpretation that the governor can't do what is prohibited by statute. The governor can't grant exemptions on property taxes and the governor can't change corporate taxes. Mr. Persily emphasized that the governor is very limited in what he/she can do without legislative approval. Mr. Persily said that he wasn't aware of any tax laws that could be changed by the governor alone. REPRESENTATIVE HAYES informed the committee of his concern with regard to politicizing this outside of the community making the decision. Representative Hayes felt that it made sense for the legislature to authorize this, but beyond that the legislature would [not be involved]. Number 2776 REPRESENTATIVE GUESS asked Representative Hayes if he agreed with Mr. Persily that the reduction of state permit or user fees couldn't happen without coming to the legislature. REPRESENTATIVE HAYES replied yes. He anticipated the municipalities choosing one of their four choices unless there is a major entity entering the state in which case the legislature would be involved. Representative Hayes reiterated that this is a local control option. REPRESENTATIVE MURKOWSKI said that it couldn't hurt to be more definitive in Section 2(d)(2) and clarify that if legislative action is necessary, then the legislature would do what is necessary. Number 2878 REPRESENTATIVE MURKOWSKI moved a conceptual amendment to clarify Section 2(2)(d) by specifying that if legislative action is necessary that would be the purview of the legislature. REPRESENTATIVE HAYES said he wouldn't have any objections to that. There was no objection stated and thus the conceptual amendment was adopted. There was discussion regarding how this conceptual amendment would require some creative writing on the part of the draft. REPRESENTATIVE HAYES wondered if legislative intent should be included to add further clarity. TAPE 01-19, SIDE B REPRESENTATIVE MURKOWSKI indicated that the sponsor could provide the committee with some intent language that it could review. REPRESENTATIVE HAYES said that he or the committee could talk with the drafter regarding the language [of the conceptual amendment]. He deferred to the will of the committee. CO-CHAIR MORGAN announced that HB 36 would be held to the next scheduled hearing in order to provide the committee with the new language in a committee substitute. REPRESENTATIVE KERTTULA said that she would like to hear from the Department of Commerce & Economic Development because she didn't see the need for their fiscal note. If there is no case for that fiscal note, then she announced that she would recommend there be a zero fiscal note. CO-CHAIR MEYER noted his agreement with Representative Kerttula. He commented that HB 36 is a good bill and he hated to see problems arise due to the fiscal note, which he didn't agree with either. The committee took an at-ease from 8:58 a.m. to 9:01 a.m.
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