Legislature(2011 - 2012)HOUSE FINANCE 519
04/07/2011 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB118 | |
| HB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 104 | TELECONFERENCED | |
| + | HB 118 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 118
"An Act relating to a tax credit for corporate income
taxes paid for qualified research and development
expenditures; and providing for an effective date."
8:40:00 AM
SUSAN K. BELL, COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT (DCCED), relayed that HB
118 worked to stimulate private sector investment, and
business activity and expansion. She discussed that the
bill would allow Alaskan corporate taxpayers to receive a
20 percent tax credit that would not exceed $10 million per
tax payer per year. The bill required either research and
development activity or the payroll of employees to take
place in Alaska. There was a "three year look-back" to
ensure that the credit was applied only to expenditures
above a base-line. The bill mirrored the federal definition
related to research, development, and allowable activities,
including, the discovery of technological information and
the development of new or improved business components
through a process of experimentation. Qualifying activities
included the development of new prototypes, processes, or
formulas; building or improvements of manufacturing
facilities; and the development of new technologies or
patents, etc. Customary market research and data collection
were excluded. Exploration activity used to determine the
existence or quality of any ore or mineral deposits was not
allowable and included mining and oil and gas exploration;
however, the industries were eligible for processes,
manufacturing, and patents under the legislation.
Entrepreneurial successes in the state included Alaska
berry growers that had been exploring the antioxidant rich
nutraceutical value of berries and sawmills that had been
turning mill waste into fuels. She discussed biofuels and
that the tax credit would help solve the high moisture
content that existed particularly in Southeast Alaska.
Other examples included the use of tidal energy to create
ice at sea that was currently being done at a university
outside of Alaska, and turning seafood processing
byproducts into valuable products. Forty other states had
established a similar tax credit, including North Dakota
that had one of the most aggressive tax credits in the
nation. She communicated that Alaska's universities had not
been as engaged.
Ms. Bell relayed that the University of Alaska Fairbanks
chancellor Brian Rogers had submitted a letter of support
for HB 118 and the university looked forward to increasing
its engagement on issues that faced Alaska and had created
an office of Intellectual Property and Commercialization.
8:44:44 AM
Vice-chair Fairclough asked whether the tax credit was in
the amount of $10 million. Ms. Bell responded that the
credit was up to $10 million per tax payer. She noted that
in many of the examples she had provided that the
applicable uses would be much less. Industries, including
aerospace, had indicated that their scale of research was
far above the $10 million limit; however, they encouraged
the passage of the legislation.
Vice-chair Fairclough wondered how the state would project
whether it had the funds to offer the credit in the future.
She discussed that the film credit had a cap of $100
million. Ms. Bell replied that the fiscal note from the
Department of Revenue was indeterminate. She suggested that
the committee could consider setting a ceiling. She noted
that DCEED did not anticipate any operational expenses.
Vice-chair Fairclough conveyed that the credit could
represent a substantial amount of money that the state may
have trouble forecasting. She thought that the committee
may want to consider a ceiling. She added that it would be
helpful to use other states as an example regarding a
potential ceiling and the use of the credit. She cited
concern that the ability to carry the credit forward for
seven years increased the state's liability. She also
wondered about language that did not allow the use of a
federal credit (Page 2, Line 10).
Co-Chair Stoltze noted that Vice-chair Fairclough's
questions would be addressed during the fiscal note
discussion.
Representative Wilson wondered how the $10 million figure
had been determined. Ms. Bell replied that the department
had mirrored the federal law in order to keep the concept
simple.
Representative Wilson asked for verification that a company
could not sell its tax credit. Ms. Bell answered in the
affirmative. She detailed that the credits were not
transferrable and had to be used by the company conducting
research and development.
Representative Gara wondered whether those conducting
explorational drilling would receive over 100 percent of
their cost with credits that included the 20 percent
taxpayer credit, a 20 percent capital expenditure credit, a
40 to 50 percent deduction, and a federal research and
development credit. He discussed that directional drilling
could be considered a new or improved component that would
apply under the research and development definition of the
credit. He explained that improvements were made on the
North Slope on a daily basis in order for the oil industry
to remain competitive. The legislature had devised
legislation that contained numerous credits and deductions
to impact the industry. He referred to charts that had
shown that with the combination of deductions, credits, and
oil prices above $80 a barrel that the state was paying
between 70 to 80 percent of the activity cost. He expressed
doubt that the taxpayer credit should be added to the list
of credits that the oil industry would potentially receive.
8:50:56 AM
CURTIS THAYER, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY, AND ECONOMIC DEVELOPMENT, replied that a company
would not receive both a federal tax credit and the state
tax credit for resource development. The bill had a three-
year look-back and the resource and development would be
over and above the normal resource and development that a
company would expend.
Representative Gara wondered why it would be a good idea
for the state to pay for the tax credit in addition to the
other credits and deductions that existed under the oil tax
law. He reiterated that a company could obtain an improved
component through directional drilling expansion. He stated
that the three-year look-back would be solved because costs
went up every year on the North Slope and the most recent
year would always be more expensive.
Mr. Thayer responded that the "exploration activity for the
ascertation of existence, location, extent, or quality of
ore or mineral deposit" did not qualify.
Representative Gara responded that some of the activity was
not related to exploration and there were many things that
happened on the North Slope that might qualify.
JOHANNA BALES, ACTING DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE, replied that there were currently oil and gas
credits including the qualified capital expenditure credit
and the annual loss carry-forward credit that could be used
in conjunction with the resource and development credit.
She opined that it was something that could occur but it
would be under limited circumstances. She noted that a
simple change could be made to the legislation to prevent
tax payers from receiving credits from multiple locations.
Representative Edgmon observed that there were two types of
corporate income taxes and he wondered whether the
fisheries business tax and mining license tax would be the
largest participants under the tax credit that did not
apply to the oil industry.
8:55:05 AM
Ms. Bales replied that the corporate income tax applied to
all industries, but there were minor differences in the
statute related to oil and gas companies. She explained
that all companies that paid corporate income tax would be
eligible for the credit for research and development
outside of exploration activities.
Representative Edgmon asked whether all industries would
have an equal opportunity to take advantage of the credit.
Ms. Bell responded in the affirmative. She relayed that the
intent had been to help stimulate investment,
manufacturing, and innovation.
Representative Doogan asked whether the credits would be
stackable with any other existing credits that a company
was eligible for. Ms. Bales responded that the credits
would not be stackable. She explained that if a company was
allowed a federal credit that it could choose either the
state or federal corporate income tax credit. In limited
circumstances the expenditures for the resource and
development credit could be utilized for some of the oil
and gas tax credits as well.
8:58:06 AM
AT EASE
8:58:38 AM
RECONVENED
Representative Doogan asked whether the credits were
stackable in some circumstances. Ms. Bales responded that
the credits were not stackable because there were two
separate tax programs involved. She expounded that the
corporate income taxes could only be used with one credit.
Representative Doogan wondered whether the tax credit could
potentially be an additional 20 percent on top of other tax
breaks that the state provided to the oil industry. Ms.
Bales responded in the affirmative. She read from Page 2,
Line 11 of the bill, "any federal credit that had been
apportioned to the state and claimed under AS 43.20.021,"
and explained that the removal of the words "AS 43.20.021"
and the insertion of the words "under this title" would
eliminate the ability to use the expenses in a separate tax
credit program. She expressed that the committee might
consider making the revision if it had strong concerns
about the issue, but she did not know how the
administration would feel about the change. She relayed
that the circumstances in which a company could use the
same expenditures for credits could only occur when a
company had a loss in the oil and gas tax.
Representative Doogan was concerned that Alaska could be
responsible for a $300,000 million per year program if
there were a high number of oil companies that could
potentially take advantage of the $10 million credit. He
stressed that he did not support the portion of the bill.
9:03:16 AM
Representative Guttenberg wondered how it would be possible
to know the tax credit was working in the intended way. He
asked whether there would be an audit or accountability for
the credits. Ms. Bales responded that the credit
piggybacked the federal definition that was relatively
strict. She detailed that tax payers would be required to
provide proof that research and development had been
conducted in Alaska and that it met the definition of the
federal law. The department would provide oversight and
would report how many people took advantage of the program.
The intent of the legislation was to bring in new
technology, industry, and research and development activity
into the state.
Representative Guttenberg wondered whether the research
would be public at any point. Ms. Bales replied that the
information may or may not be reported due to tax payer
confidentiality. Companies were hesitant to disclose
business processes that could help their competition. She
observed that there was a balance between a need to know
and public curiosity and that faith in the tax
administration was important.
9:06:11 AM
DAN WHITE, ASSOCIATE VICE CHANCELLOR OF RESEARCH,
UNIVERSITY OF ALASKA FAIRBANKS (UAF)(via teleconference),
supported HB 118 and believed that it would allow the state
to provide an incentive to businesses to take advantage of
new opportunities. The legislation helped contribute to the
university's mission to conduct resource and development
and move it into the private sector that was a critical
element of economic development in Alaska. He stated that
the bill would build a bridge between business and industry
and that funded research at the university would lead to
job growth and economic diversification. Businesses gained
competitive advantages in the global market when UAF
conducted applied research and licensed the technology to
the private sector. He detailed that the link was enhanced
when businesses were able to invest in resource and
development.
ALLAN JOHNSTON, ENCORE CAREER, TEAM NETWORK, (via
teleconference), voiced strong support of the legislation.
He was very supportive of economic development in Alaska.
He had been a sponsor of business plan competitions at
Alaska's universities. He discussed that Alaska had come in
last in the entrepreneurial capacity index that was listed
in the 2008 Milken survey. It was important to encourage
the ability to dream big in Alaska. He thought it was a
good idea to put a cap on the amount the bill would pay
out. He expressed that the state needed to take advantage
of the many opportunities that were available and to be
competitive on a national and global basis. He supported
the university's ability to commercialize and its tie to
the private sector.
9:10:16 AM
CHRISTI BELL, DIRECTOR, UNIVERSITY OF ALASKA CENTER FOR
ECONOMIC DEVELOPMENT (via teleconference), stated that the
university system was very supportive of HB 118 and of
greater private sector research and development and
opportunities through public and private collaborations.
With the tax credit the university could market the
incentives to private firms to encourage assets at the
university such as the super computing system. Research
helped the ability to offer scholarships and would help
students grow, to foster innovation, and to create jobs.
The National Science Foundation had found that 73 percent
of finance papers cited that industry patents were funded
through contracts with university research operations.
Alaska was struggling to bring new research to the economy
and needed to be competitive in new innovations and
processes. She emphasized that the state ranked between
43rd and 51st in a national survey. She discussed that many
states offered resource and development tax incentives to
attract corporations and businesses and to encourage
investment in resource and development facilities.
9:15:07 AM
PETER STITZEL, SITKA MEAL, OIL, AND GELATIN (via
teleconference), testified in strong support of the
legislation. He believed that supported research through
the resource and development tax credit could effectively
inspire firms to establish Alaska-based operations. He
expressed that wild Alaska salmon waste was a special and
rare opportunity and that its presence in Sitka had caught
the attention of nutraceutical, feed, and pet food
companies. He thought the Sitka facility would become an
incubator for the offshoots of many businesses,
particularly in the nutraceutical business.
BILL POPP, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ANCHORAGE
ECONOMIC DEVELOPMENT CORPORATION (via teleconference),
spoke in support of HB 118. He thought the bill would
diversify Alaska's economy by attracting new business and
innovation including tech transfer opportunities and
venture capital. He believed the legislation represented an
important component in a strategy to develop new industries
in information technology, renewable energy, life sciences,
biotech, and other.
Co-Chair Thomas CLOSED public testimony.
Vice-chair Fairclough asked whether the administration
objected to a CS that would eliminate the ability to
supplement other oil and gas credits. She cited that
Lockheed Martin had expressed interest in facility and
pharmaceutical companies could be big ticket items
interested in research and development.
9:19:55 AM
Ms. Bell responded that the department would discuss the
idea internally and would get back to the committee. She
explained that DCCED wanted to be as open as possible and
recognized the existence of technological challenges in all
industries and the opportunity for processes and patents,
etc.
Vice-chair Fairclough relayed that she had advocated for
the oil and gas tax credits and was open to economic
development; however, she believed that oil and gas tax
credits belonged in the oil and gas bill and not in HB 118.
She asked the department to provide information on how
other states used the tax credit. She expressed that in
terms of fiscal stability that it was important to know
what the limit was that the state could expend in a year,
but that job creation would help ease her concern about the
amount of the $10 million credit. She was interested in a
cap on the amount and did not want stackable credits. She
wondered why a seven-year carry-forward of the credit was
necessary for a large corporation that was not dependent on
stability and felt that the time period was too long.
Representative Gara wondered whether the credit would apply
to a new tobacco or liquor store because of the "new
component" definition and what would preclude them from
applying under the legislation. He was troubled that the
state would be incorporating a federal definition of
research and development and cited a portion of the
language: "for development of a new or improved component
of the tax payer." He added that he was a proponent of
incentivizing high tech and new innovative business.
Ms. Bell replied that the first threshold that research and
development was required to meet included the following
four items: "purposes discovering information technological
in nature; the application of which is intended to be
useful in the development of a new or improved component of
the tax payer; substantially all of the activities
constitute a process of experimentation; and, the
experimentation is for a qualifying activity or purpose."
9:25:08 AM
Representative Gara wondered whether seafood companies that
filed as C corporations would not be eligible for the
credit because they paid the raw fish tax and were not
corporations. Ms. Bell responded that in order to qualify
the company would need to be an Alaska tax payer as a C
corporation eligible for corporate tax payers.
Representative Gara recommended a sunset and a report to
allow the legislature to review the credit in three years
and to assess whether it had been working.
Co-Chair Thomas stressed that communities were dependent on
the raw fish tax and he hoped companies were eligible for
the credit.
9:27:59 AM
Representative Doogan requested a better explanation of
what would be allowable under the bill. He was concerned
about the use of federal tax codes because the information
was not very specific and the language was broad. He
wondered what was included under the federal code that
allowed development of new technology.
HB 118 was HEARD and HELD in committee for further
consideration.
9:29:49 AM
AT EASE
9:36:16 AM
RECONVENED