Legislature(2011 - 2012)HOUSE FINANCE 519

02/06/2012 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Moved CSHB 180(FIN) Out of Committee
Heard & Held
Heard & Held
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."                                                                         
1:42:58 PM                                                                                                                    
Co-Chair  Thomas   MOVED  to  ADOPT  a   proposed  committee                                                                    
substitute  for HB  118,  work  draft 27-GH1951\B.  Co-Chair                                                                    
Stoltze OBJECTED for purpose of discussion.                                                                                     
JOE  MICHEL, STAFF,  REPRESENTATIVE BILL  STOLTZE, explained                                                                    
changes to  the proposed  committee substitute.  He observed                                                                    
that  there   were  two   changes  on   page  2,   line  11:                                                                    
"apportioned  to   this  state"  and  "AS   43.20.021"  were                                                                    
deleted; and "this title was inserted.                                                                                          
Co-Chair  Stoltze WITHDREW  his  OBJECTION.  There being  NO                                                                    
further  OBJECTION,  proposed  committee substitute  for  HB
118, work draft 27-GH1951\B was adopted.                                                                                        
CURTIS THAYER, DEPUTY  COMMISSIONER, DEPARTMENT OF COMMERCE,                                                                    
COMMUNITY AND ECONOMIC DEVELOPMENT,  testified in support of                                                                    
HB 118.  He observed  that innovation  can be  an expensive,                                                                    
intricate and  time-intensive enterprise. But it  also could                                                                    
also  spark a  chain  of investments  in capital  equipment,                                                                    
workers, and spillover activities  in every economic sector.                                                                    
Nearly  40  other  states had  already  recognized  this  by                                                                    
establishing a  tax credit for  research and  development in                                                                    
addition to illustrated economic  benefits the credit brings                                                                    
to those states.  The tax credit also  brought a competitive                                                                    
benefit advantage over Alaska.                                                                                                  
Mr. Thayer  observed that House  Bill 118 would  address the                                                                    
issue by establishing a 20  percent tax credit for qualified                                                                    
research  and  development   (R&D)  conducted  by  corporate                                                                    
taxpayer in Alaska. In effect,  the research and development                                                                    
tax  credit   would  stimulate   private-sector  investment,                                                                    
entrepreneurial  activity  and  business  expansion  in  the                                                                    
state  that would  bring opportunity  and sustainable  long-                                                                    
term benefits to the state's economy.                                                                                           
Mr. Thayer  noted the  HB 118 tax  credit was  modeled after                                                                    
the  federal  R&D  established   in  1981  and  reauthorized                                                                    
fourteen times.  The credit  was reauthorized  through 2011.                                                                    
Legislation  was  introduced  to  make the  R&D  tax  credit                                                                    
permanent in order to help  companies create good jobs while                                                                    
growing future productivity.                                                                                                    
Mr.  Thayer  explained  that  the  legislation  would  allow                                                                    
Alaskan corporations  to receive  a 20%  tax credit,  not to                                                                    
exceed $10 million per taxpayer,  per tax year. The research                                                                    
and   development  activities,   or  the   payroll  of   the                                                                    
employees, must  take place in Alaska.  To qualify, research                                                                    
and development activities must meet the following:                                                                             
   · The purpose is 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                                                                      
   · Substantially all of the activities constitute a                                                                           
     process of experimentation; and                                                                                            
   · The experimentation is for a qualifying activity or                                                                        
Mr. Thayer reviewed what would qualify:                                                                                         
     •Developing new or improved products, processes, or                                                                        
     •Developing prototypes or models;                                                                                          
     •Building or improving manufacturing facilities;                                                                           
     •Developing or improving software technologies;                                                                            
     •Certification testing; and                                                                                                
     •Developing or applying for patents.                                                                                       
Mr. Thayer reviewed what would not qualify:                                                                                     
     •Exploration activity to ascertain the existence,                                                                          
     location, extent, or quality of any ore or mineral                                                                         
     •Duplicating an existing business component;                                                                               
     •Surveys and studies such as market research,                                                                              
     advertising, and routine data collection;                                                                                  
     •Research in the social sciences, arts, or humanities;                                                                     
     •Anything for style, taste, cosmetic, or seasonal                                                                          
1:48:13 PM                                                                                                                    
Mr. Thayer gave  examples of the type of  credits that could                                                                    
occur. He  referred to seafood processing  waste disposal in                                                                    
fisheries.  The  EPA  had  restricted  processing  effluent.                                                                    
Research  was  needed  to   reduce  sediment  piles  through                                                                    
process   innovation,  increased   protein  and   by-product                                                                    
utilization.  Tax   credits  meant  research   conducted  in                                                                    
Alaska,  jobs, vendor  payments,  increased experience,  and                                                                    
capacity  building in  process  and  product innovation.  He                                                                    
observed that some  of the research was  being down out-side                                                                    
of the  state of  Alaska for fish  processing plants  in the                                                                    
state of Alaska.                                                                                                                
Mr.  Thayer reviewed  potential  tax  credits for  minerals,                                                                    
rare  earth   deposit  processing.  There  was   a  need  to                                                                    
customize  the  process  for milling  and  recovery  to  use                                                                    
deposits to  the fullest potential. More  than 240 processes                                                                    
might be required  to reach all components in  a deposit. He                                                                    
observed the  work was being  done in Canada  and maintained                                                                    
it should be done in Alaska.                                                                                                    
Mr.  Thayer spoke  to timber  for use  in architectural  and                                                                    
building industries.  To be specified for  many building and                                                                    
architectural  uses, species  must have  technical standards                                                                    
set for each product form.                                                                                                      
Mr. Thayer observed that there were 38 states with a form                                                                       
of R&D tax credit or incentive available. He clarified that                                                                     
credits were not stackable against other industries such as                                                                     
oil and gas within the title of the legislation.                                                                                
1:50:08 PM                                                                                                                    
ALAN JOHNSTON,  WEDBUSH SECURITIES, ANCHORAGE,  testified in                                                                    
support  of the  legislation. He  noted he  had been  in the                                                                    
investment   business  for   35  years   and  stressed   the                                                                    
importance of the legislation.  He emphasized the importance                                                                    
of raising aspirations that R&D could occur in Alaska.                                                                          
1:51:44 PM                                                                                                                    
DAN WHITE,  ASSOCIATE VICE CHANCELLOR,  RESEARCH, UNIVERSITY                                                                    
OF ALASKA,  FAIRBANKS, spoke in  support of  the legislation                                                                    
and  stressed   the  importance   of  moving   research  and                                                                    
development from the university into the private sector.                                                                        
moving  R&D to  the private  sector was  seen as  a critical                                                                    
element  of economic  development in  Alaska, especially  in                                                                    
engineering. Businesses would  gain competitive advantage in                                                                    
national and global markets  from applied research conducted                                                                    
and  licensed by  the University  of  Alaska, Fairbanks.  He                                                                    
concluded that HB 118 would  provide a significant incentive                                                                    
to business to take  advantage of emerging opportunities and                                                                    
contribute  to  the  university's mission.  The  legislation                                                                    
would build a bridge between  the university and the private                                                                    
sector  that would  lead to  job growth  and diversification                                                                    
for the state.                                                                                                                  
1:53:38 PM                                                                                                                    
Representative  Guttenberg noted  that seasonal  items would                                                                    
not apply  and pointed  out that  "seasonal" could  apply to                                                                    
agriculture,   fishing,  or   timber;  and   questioned  the                                                                    
definition.  Mr.  Thayer  offered to  provide  a  definition                                                                    
under  the  tax code.  Co-Chair  Stoltze  asked for  further                                                                    
clarification  regarding agricultural  seasonal definitions.                                                                    
Mr. Thayer  observed that agricultural items  would qualify.                                                                    
He pointed  out that the peony  market was a product  of the                                                                    
university's research.                                                                                                          
1:57:03 PM                                                                                                                    
Representative  Gara  recalled  concerns  that  state  money                                                                    
would not displace  federal funds. He asked  the federal tax                                                                    
rate. Mr.  Thayer explained businesses could  not claim both                                                                    
a state and federal tax credit on the same percentage.                                                                          
Mr.  Thayer explained  that the  20 percent  tax credit  for                                                                    
qualified  research   and  development  that   exceeded  the                                                                    
average qualified  research and development  expenditures as                                                                    
defined in  26 U.S.C 41(d)  (Internal Revenue Code)  for the                                                                    
three  years immediately  preceding  the year  in which  the                                                                    
credit was claimed. Unused credits  might be carried forward                                                                    
for up  to seven years  after the expenditure for  which the                                                                    
credit  was  claimed.  In  order   to  prevent  a  corporate                                                                    
taxpayer from  claiming more than  one benefit for  a single                                                                    
expenditure,  the  bill would  also  provide  that a  credit                                                                    
could  not  be  claimed  for  expenditures  the  corporation                                                                    
deducted in calculating its tax  liability, or for any other                                                                    
credit,  including  any  federal   credits,  that  had  been                                                                    
apportioned  to  the state  and  claimed  under the  current                                                                    
Alaska Net Income Tax Act.                                                                                                      
Representative Gara asked  what would occur in  a case where                                                                    
there  was a  22  percent  state credit  and  an 18  percent                                                                    
federal credit  and questioned  if the  state would  pay the                                                                    
extra  2 percent  or the  entire credit.  He reiterated  his                                                                    
request for the federal tax rate.                                                                                               
1:59:19 PM                                                                                                                    
Representative  Guttenberg  reiterated  his  question:  What                                                                    
agricultural products qualify that would not be seasonal.                                                                       
BRUCE   TANGEMAN,   DEPUTY   COMMISSIONER,   TAX   DIVISION,                                                                    
DEPARTMENT  OF  REVENUE   (via  teleconference),  could  not                                                                    
respond but promised to provide the information.                                                                                
Representative Gara  asked the  federal tax  rate and  if it                                                                    
would be  replaced with state  credits. Mr.  Tangeman stated                                                                    
he would provide the information.                                                                                               
Co-Chair Stoltze  noted the bill  would be held in  order to                                                                    
allow the Department of Revenue  time to research answers to                                                                    
the member's questions.                                                                                                         
2:01:17 PM                                                                                                                    
Representative  Gara concluded  that  businesses could  take                                                                    
the state  or federal tax  credit and restated  his previous                                                                    
scenario. He thought  the state would pay the  entire tax if                                                                    
its tax credit was higher than the federal rate.                                                                                
Representative   Gara  noted   a  comprehensive   system  of                                                                    
deductions  and   credits  under  43.55  oil   and  gas  tax                                                                    
established  under   Alaska's  Clear  and   Equitable  Share                                                                    
(ACES).  He did  not see  the prohibition  for adding  these                                                                    
credits to  the proposed R&D  tax credit. He  wanted further                                                                    
assurance that  the tax  could not be  taken in  addition to                                                                    
the ACES credit.                                                                                                                
2:03:00 PM                                                                                                                    
Representative Neuman  asked equipment and  facilities would                                                                    
be allowed  if they supported  a new product  or technology.                                                                    
Mr. Thayer  affirmed that they  would be covered as  long as                                                                    
the business  was a taxpayer to  the state of Alaska  and it                                                                    
supported new  technology to bring  something to  market; it                                                                    
would qualify if  it had not been done  before. He clarified                                                                    
the  credit  would  apply for  developing  and  proving  the                                                                    
technologies   or   building  or   improving   manufacturing                                                                    
facilities to add or enhance a product.                                                                                         
2:05:08 PM                                                                                                                    
Vice-chair Fairclough  observed that  page 2  lines 5  and 6                                                                    
provided  for a  seven-year credit  carry forward  and asked                                                                    
why a past  tax liability would be allowed  for seven years.                                                                    
Mr. Thayer  explained that the  provision was  modeled after                                                                    
federal tax legislation.                                                                                                        
Vice-chair  Fairclough  referred  to  page 2,  line  9.  She                                                                    
shared concerns that  the state deduction would  be taken in                                                                    
lieu of another deduction  [federal] and questioned if there                                                                    
should  be  a  requirement  to   go  forward  on  the  other                                                                    
Vice-chair  Fairclough  observed  the  national  and  global                                                                    
recession  and questioned  what other  states were  doing in                                                                    
terms of R&D tax credits.                                                                                                       
2:07:09 PM                                                                                                                    
Representative Gara referred to subsections (c) and (d) on                                                                      
page 2:                                                                                                                         
     (c) If  the tax credit  under this section  exceeds the                                                                    
     taxpayer's tax  liability after  other tax  credits are                                                                    
     taken  under this  chapter for  the year  in which  the                                                                    
     expenditure is  incurred, the excess of  the tax credit                                                                    
     over the  liability may  be carried  forward for  up to                                                                    
     seven years. If an unused  credit is carried forward to                                                                    
     a tax year from an  earlier year, the credit arising in                                                                    
     the earliest year is applied first against the tax                                                                         
     liability for the year.                                                                                                    
     (d) A person may not  claim a credit under this section                                                                    
     for  qualified  research and  development  expenditures                                                                    
     that were deducted in the  calculation of tax liability                                                                    
     under AS  43.20.011(e) or for  which any  other credit,                                                                    
     including any  federal credit, has been  apportioned to                                                                    
     this state and claimed under AS 43.20.021.                                                                                 
Representative   Gara  thought   that  the   above  sections                                                                    
conflicted. He  thought that they implied  that credits were                                                                    
stackable  to 100  percent. Mr.  Thayer  responded that  the                                                                    
committee  substitute would  effectively prohibit  stacking.                                                                    
He  maintained that  the  legislation  prohibited a  company                                                                    
from claiming  R&D tax credits against  corporate income tax                                                                    
if  the expense  used in  calculating  the R&D  was used  to                                                                    
claim a credit against taxes  due on other types under Title                                                                    
43.  Testimony  in  previous   committees  during  the  2011                                                                    
session  expressed concern  that a  company subject  to both                                                                    
corporate income  tax and oil  and gas production  tax could                                                                    
receive a  credit against both  taxes for the  same expense.                                                                    
The  committee substitute  assured  that  the company  could                                                                    
only take a credit against one tax type for those expenses.                                                                     
Representative  Gara  reiterated  his concerns.  Mr.  Thayer                                                                    
noted that  an oil  company or subsidiary  that does  R&D on                                                                    
heavy or  viscous retrieval would  qualify as long  as there                                                                    
was  no other  tax  credit received;  the  credit would  not                                                                    
apply once production was begun.                                                                                                
2:09:23 PM                                                                                                                    
Representative Gara  provided a scenario based  on a company                                                                    
invested in  heavy oil technology that  received a deduction                                                                    
of their tax  rate, which could be 40  percent. He suggested                                                                    
that  the legislation  would not  prevent  the company  from                                                                    
getting a tax credit on top of the deduction.                                                                                   
Mr. Thayer  reiterated that the  legislation refers  back to                                                                    
the bill title, which indicated  that credits would only pay                                                                    
for  qualified  research  and development  expenditures.  He                                                                    
maintained that they could not take both.                                                                                       
Representative  Gara argued  that the  legislation spoke  to                                                                    
tax credits not  deducts, which were separate  under the oil                                                                    
and gas [tax] code.                                                                                                             
Mr. Tangeman  clarified that it could  not be used as  a tax                                                                    
credit  if  it were  used  as  a  deduction and  pointed  to                                                                    
Section (d), page 2, line 8:                                                                                                    
     A person may not claim  a credit under this section for                                                                    
     qualified  research and  development expenditures  that                                                                    
     were  deducted  in  the calculation  of  tax  liability                                                                  
     under AS 43.20.011(e).                                                                                                     
2:11:24 PM                                                                                                                    
Representative Gara  agreed with  the intent but  noted that                                                                    
AS  43.20.011(e)   referred  to   the  nine   percent  state                                                                    
corporate tax,  not the oil  and gas tax. Mr.  Tangeman felt                                                                    
that Section  (d) was clear  and maintained that  the intent                                                                    
was not to allow  stacking. Representative Gara suggested an                                                                    
amendment  was  needed  for clarification  that  the  credit                                                                    
could not be  stacked on credits and  deductions taken under                                                                    
AS 43.55, oil and gas tax.                                                                                                      
2:13:22 PM                                                                                                                    
Representative  Neuman asked  what discussions  had occurred                                                                    
regarding  transferable  and  non-transferable  credits.  He                                                                    
observed that  transfers had been enacted  to assist smaller                                                                    
companies  with  working  capital. He  recognized  that  the                                                                    
state  was  still  "on  the   hook"  for  100  percent,  but                                                                    
suggested they be transferrable.                                                                                                
Mr. Thayer  noted that only  the film incentive  program had                                                                    
transferrable  tax credits.  He observed  issues surrounding                                                                    
how  credits  would  be   transferred  and  evaluated.  Film                                                                    
industry  tax credits  sell  between  80 to  90  cents on  a                                                                    
dollar. Smaller companies would not  have a tax liability to                                                                    
the  state. The  credit would  be aimed  at large  companies                                                                    
that had the ability to do a lot of R&D in the state.                                                                           
Mr.  Tangeman  agreed   that  the  intent  was   not  to  be                                                                    
transferable  and  the  seven  year  provision  would  allow                                                                    
smaller  corporations  to  have  time  to  realize  the  tax                                                                    
Co-Chair Stoltze closed public testimony.                                                                                       
HB  118  was  HEARD  and   HELD  in  Committee  for  further                                                                    
2:17:41 PM                                                                                                                    
AT EASE                                                                                                                         
2:25:42 PM                                                                                                                    

Document Name Date/Time Subjects
Explanation of Changes _ HB 180.pdf HFIN 2/6/2012 1:30:00 PM
HB 180
HB 180 Military Discount List.pdf HFIN 2/6/2012 1:30:00 PM
SSTA 3/22/2012 9:00:00 AM
HB 180
HB 180 Sponsor Statement.pdf HFIN 2/6/2012 1:30:00 PM
HB 180
HB 198 SESA Presentation - House Finance 2012.ppt HFIN 2/6/2012 1:30:00 PM
HB 198
SESA's Funding comparison Charts.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
HB 198 SESA Responsibilities.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
HB 198 SESA Sunset EliminationFunding Request.docx HFIN 2/6/2012 1:30:00 PM
HB 198
HB 198 Sponsor Statement.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
SESA Audit 1994.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
CSHB142 FIN WORKDRAFT.pdf HFIN 2/6/2012 1:30:00 PM
HB 142
CSHB 142 FIN workdraft Summary of Changes.pdf HFIN 2/6/2012 1:30:00 PM
HB 142
CSHB 142 (FIN)Workdraft Sponsor Statement.pdf HFIN 2/6/2012 1:30:00 PM
HB 142
CS HB118 FIN Workdraft.pdf HFIN 2/6/2012 1:30:00 PM
HB 118
HB118CS(L&C)-NEW FN-DOLWD-UI-2-3-12.pdf HFIN 2/6/2012 1:30:00 PM
HB 118
2012 HB118-CCED-DED-PowerPoint.pdf HFIN 2/6/2012 1:30:00 PM
HB 118
CSHB 180 FIN WORKDRAFT-27-LS0589-T.pdf HFIN 2/6/2012 1:30:00 PM
HB 180
CSHB 180 Proposed Changespdf.pdf HFIN 2/6/2012 1:30:00 PM
HB 180
HB 198 SESA Agency Facts 022312.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
HB 198 SESA Answers to HFIN Questions from 020612.pdf HFIN 2/6/2012 1:30:00 PM
HB 198
CS HB198 SESA Av Daily Membership FY 88 to FY 11.pdf HFIN 2/6/2012 1:30:00 PM
HB 198