Legislature(2013 - 2014)HOUSE FINANCE 519

02/28/2014 09:30 AM FINANCE

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09:26:42 AM Start
09:27:21 AM HB204
09:55:07 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 9:25 a.m. Today --
Moved CSSSHB 204(FIN) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 204                                                                                                            
     "An Act relating to a product development tax credit                                                                       
     for certain salmon and herring products; and providing                                                                     
     for an effective date."                                                                                                    
9:27:21 AM                                                                                                                    
REPRESENTATIVE  ALAN AUSTERMAN,  SPONSOR, discussed  various                                                                    
fish  can sizes.  The small  can  of red  salmon was  $6.99.                                                                    
Other  competing  products  of  the  same  size  included  a                                                                    
Bumblebee  can  costing $0.88  and  an  Atlantic salmon  can                                                                    
costing $3.99.  He spoke to  the importance of  reducing the                                                                    
salmon can size  to allow it to compete  in the marketplace.                                                                    
He detailed  that it would  take money and the  refitting of                                                                    
can machines to handle the smaller size.                                                                                        
9:29:04 AM                                                                                                                    
Vice-Chair  Neuman  pointed  to  page   2,  line  5  of  the                                                                    
legislation.  He  thought  the  addition  of  herring  would                                                                    
enable a  company that had  received credits  for purchasing                                                                    
salmon equipment in the past  to purchase new equipment with                                                                    
the credit.                                                                                                                     
ANNA KIM, TAX DIVISION,  DEPARTMENT OF REVENUE, replied that                                                                    
recipients  would  receive  a  tax  credit  for  salmon  and                                                                    
herring  combined; a  double credit  was  not provided.  She                                                                    
pointed to a December 31, 2020 date.                                                                                            
Co-Chair  Austerman asked  for  clarification. He  discussed                                                                    
that if a  business added herring to its  canning and salmon                                                                    
processing it would need a  new piece of equipment to handle                                                                    
the  filleting of  herring. He  understood the  concern, but                                                                    
did  not  believe the  replacement  of  all other  equipment                                                                    
would  qualify.  He asked  for  verification  that the  bill                                                                    
would not allow a business to replace all other equipment.                                                                      
Ms. Kim replied in the affirmative.                                                                                             
Vice-Chair  Neuman appreciated  the clarification.  He spoke                                                                    
about recapturing product value.  He discussed that it would                                                                    
make sense  for a business  owner to use the  maximum amount                                                                    
of credits  available for equipment per  year. He elaborated                                                                    
that  a  savvy  business   owner  would  eventually  pay  no                                                                    
corporate taxes and would  replace equipment (e.g. freezers)                                                                    
that was  available for the credit.  He asked if it  was the                                                                    
way  the bill  would work.  Ms. Kim  answered that  it could                                                                    
work  that   way;  however,  the  recapture   provision  was                                                                    
included for instances  when business plans did  not work as                                                                    
9:32:47 AM                                                                                                                    
Vice-Chair  Neuman addressed  the  potential development  of                                                                    
powdered fish  products. He noted that  a significant amount                                                                    
of  money  was spent  on  research  to develop  machines  to                                                                    
process the new  products. He wondered what  would happen if                                                                    
the machines were unsuccessful in  producing the product. He                                                                    
asked  whether  a business  could  continue  to receive  the                                                                    
credits on new equipment to try to make new products.                                                                           
Ms. Kim  replied that  it depended  on whether  the business                                                                    
was  operating under  the  bill's  provisions. She  detailed                                                                    
that the purpose was to  incentivize new developments and to                                                                    
provide flexibility for the changing  market. A business may                                                                    
need to go back to  the drawing board. She communicated that                                                                    
as long  as a business  was fulfilling the  intent contained                                                                    
within  the  bill  it  would continue  to  receive  the  tax                                                                    
JOHANNA BALES, DEPUTY DIRECTOR,  TAX DIVISION, DEPARTMENT OF                                                                    
REVENUE  (via  teleconference), augmented  prior  testimony.                                                                    
She  shared   that  taxpayers   could  receive   credit  for                                                                    
investing  in  equipment that  was  part  of a  value  added                                                                    
process. She  believed it seemed  highly unlikely  a company                                                                    
would continue to  invest its own money  (the credit covered                                                                    
up  to 50  percent of  the equipment  cost). The  department                                                                    
believed  the  risk  was  low   for  taxpayers  to  continue                                                                    
investing in equipment  where 50 percent of  their money was                                                                    
also on the line.                                                                                                               
9:35:51 AM                                                                                                                    
Representative Wilson wondered  whether the fishing industry                                                                    
was being over  taxed. She asked about tax  credits versus a                                                                    
reduction in taxes to the industry.                                                                                             
Co-Chair Austerman  replied that  the industry was  not over                                                                    
taxed.  He believed  that industry  was probably  undertaxed                                                                    
when  it came  to  state taxes.  He  thought that  providing                                                                    
incentives was appropriate for  the economic development and                                                                    
expansion  of  industries in  the  state.  He spoke  to  the                                                                    
encouragement   of  reinvestment   in  Alaska   and  various                                                                    
industries including  timber, minerals,  and oil.  He stated                                                                    
that if the  goal was for an industry to  expand, many times                                                                    
it  was  necessary   to  help.  He  noted   that  all  other                                                                    
industries in the  state paled in comparison to  the gas and                                                                    
oil  industry;  however, no  one  hesitated  to think  about                                                                    
providing a  tax credit or  a zero tax  base to some  of the                                                                    
major  industries such  as Cook  Inlet. He  believed it  was                                                                    
important  to  continue  the incentive  programs  to  create                                                                    
jobs. He stressed that the  bill only applied to the process                                                                    
and money spent in Alaska.                                                                                                      
Co-Chair  Stoltze  added his  support  for  the industry  in                                                                    
Alaska.  He  pointed  to   competitive  forces  that  pushed                                                                    
industry  out  of  Alaska for  processing  including  higher                                                                    
labor and  fuel costs.  He surmised that  if a  company only                                                                    
went  off  what was  best  economically  it would  ship  the                                                                    
product frozen  to China for  processing. He noted  that the                                                                    
industry did not provide substantial  support to the state's                                                                    
general fund;  however, it was  a large employer.  He opined                                                                    
that  if incentives  were not  offered companies  would make                                                                    
different   economic   decisions   to  relocate   to   other                                                                    
jurisdictions. There  were a multitude of  other competitive                                                                    
costs;  everything  was more  expensive  in  Alaska. He  had                                                                    
learned more  about the  commercial fishing  industry during                                                                    
his  time on  the  House Finance  Committee.  He noted  that                                                                    
other fishing bills seldom reached the committee.                                                                               
9:39:34 AM                                                                                                                    
Representative Munoz asked about issues  that had led to the                                                                    
decline  in  permit activity  in  the  herring fishery.  She                                                                    
referenced  page 5  of a  Department of  Commerce, Community                                                                    
and Economic  Development presentation titled  "Alaska North                                                                    
to Opportunity: HB  204" (copy on file). She  asked what the                                                                    
impact of further herring commercialization  would be on roe                                                                    
and other  fisheries given that  herring was at the  base of                                                                    
the food chain.                                                                                                                 
Co-Chair  Austerman   answered  that  the   initial  concept                                                                    
related  to  herring had  pertained  to  Western Alaska.  He                                                                    
communicated that  Western Alaska  had much  forgone harvest                                                                    
of salmon.  He pointed  to the  region's remoteness  and its                                                                    
cost  of  operations;  it  was  prohibitively  expensive  to                                                                    
harvest  salmon in  the  areas. The  concept  was that  many                                                                    
potential herring  fishery opportunities existed  in Western                                                                    
Alaska;  once  there  was  a  combined  herring  and  salmon                                                                    
market, the  industry would invest  in the region.  The bill                                                                    
worked to  provide incentive for  the investment.  He stated                                                                    
that one loan would not stand  on its own. He explained that                                                                    
currently herring  was turned into  low value  products; the                                                                    
objective  was to  increase the  profitability and  value so                                                                    
fisheries would grow.                                                                                                           
Representative  Munoz  was  concerned about  the  change  in                                                                    
marketing  from  roe to  the  entire  herring. She  wondered                                                                    
about the ecological impact.                                                                                                    
Co-Chair Austerman saw no  ecological difference between the                                                                    
current practice  and what  would occur  under the  bill. He                                                                    
explained that roe had the  highest value and would continue                                                                    
to be  harvested. Currently  the problem  was that  all male                                                                    
herring  were discarded  or frozen  for bait.  The incentive                                                                    
would  be  to use  the  entire  fish, which  would  increase                                                                    
profitability.  He communicated  that several  years earlier                                                                    
the legislature  had provided  the Alaska  Seafood Marketing                                                                    
Institute with funds to market  herring in the international                                                                    
marketplace.  The  institute  had  shown that  there  was  a                                                                    
demand for  the high protein.  He shared that CDQ  groups in                                                                    
Western  Alaska   had  begun  to  enquire   how  they  could                                                                    
incorporate  herring  products  into  their  production.  He                                                                    
added that the incentive had already begun to work.                                                                             
Representative Munoz  surmised that the goal  was to utilize                                                                    
what was  not used currently. Co-Chair  Austerman replied in                                                                    
the affirmative.                                                                                                                
Co-Chair Stoltze referred  to Co-Chair Austerman's testimony                                                                    
that taxes  affected any industry's behavior.  He pointed to                                                                    
the  potential reduction  in state  revenue and  wondered if                                                                    
communities would absorb part of the tax loss.                                                                                  
Ms. Kim replied in the negative.                                                                                                
Co-Chair Stoltze wondered  whether it was good  or bad [that                                                                    
the communities would not share in the tax loss].                                                                               
9:43:52 AM                                                                                                                    
Co-Chair Austerman was unsure.  He stated that the objective                                                                    
was  to   create  economic  development   and  a   tax  base                                                                    
particularly in small communities.                                                                                              
Co-Chair  Stoltze  asked if  the  goal  was to  include  the                                                                    
communities   in   the  encouragement   quotient.   Co-Chair                                                                    
Austerman agreed.                                                                                                               
Vice-Chair Neuman stated that as  a woodworker he would like                                                                    
to  see  increased  product   development  in  the  forestry                                                                    
industry. He  stated that the  fishery industry was  huge in                                                                    
Alaska and  was worth  hundreds of  millions of  dollars. He                                                                    
referred  to  Co-Chair  Austerman's testimony  that  current                                                                    
taxes were  not where they  should be. He stated  that there                                                                    
were   many  industries   that  would   like  to   have  the                                                                    
opportunities. He  stressed that small loggers  needed help.                                                                    
He discussed  new product development, changes  in equipment                                                                    
and in product sizes. He  emphasized that one of the largest                                                                    
industries paid a  minimal amount in taxes to  the state. He                                                                    
remarked  that  $2  million  had  just  been  cut  from  the                                                                    
Department  of Health  and Social  Services  budget. He  had                                                                    
questions  about  how  the state  continued  to  create  tax                                                                    
breaks for  industries. He wondered about  the expected cost                                                                    
and the  idea of measuring  it against other  industries the                                                                    
state may  want to  help. He questioned  where to  start and                                                                    
stop with incentives.                                                                                                           
Co-Chair  Stoltze  believed  the observation  was  fair.  He                                                                    
discussed that much  of the opposition to  mining and timber                                                                    
came from the fishing industry.                                                                                                 
Representative  Guttenberg  asked   if  the  enhancement  of                                                                    
product  value  would provide  a  return  to the  state.  He                                                                    
wondered  about cost  recovery.  Ms. Kim  replied that  over                                                                    
time the  change was  expected to boost  the economy  and to                                                                    
address market changes.                                                                                                         
9:47:01 AM                                                                                                                    
Representative  Guttenberg   wondered  if  the   success  in                                                                    
developing new products would enhance  the tax base. Ms. Kim                                                                    
referred to a handout  from the department titled "Fisheries                                                                    
Business  Tax  Revenue and  Tax  Credits  Claimed" (copy  on                                                                    
file).  She communicated  that in  2013 the  tax credit  had                                                                    
been $1.8  million [related to salmon  product development].                                                                    
She believed that the positive  impact could not necessarily                                                                    
be reflected  by dollars. She  believed the  overall benefit                                                                    
would be shared.                                                                                                                
Co-Chair  Stoltze  made  a  remark  about  free  market  and                                                                    
Co-Chair Austerman  highlighted that  creating value  for an                                                                    
unutilized  species  would help  offset  the  credit in  the                                                                    
Representative Edgmon  added that  a significant  portion of                                                                    
the bill was to take a  raw seafood product and make it more                                                                    
market  competitive.  The  outcome   was  meant  to  benefit                                                                    
fishermen  in  terms of  contributions  that  went into  the                                                                    
fisheries business tax that would  in theory increase the 50                                                                    
percent  going  back  to  communities   and  the  state.  He                                                                    
contended  that a  correlation existed;  if the  state could                                                                    
help the  industry provide more market  ready products there                                                                    
was a  multiplier effect back  to fishermen, the  state, and                                                                    
the  community.  He  stated  that it  was  not  possible  to                                                                    
provide  an exact  number or  know  what the  impact of  the                                                                    
credit would  be over  time. He noted  that the  fiscal note                                                                    
talked  about  unpredictability.   Since  the  tax  credit's                                                                    
inception in 2003  it had stimulated economic  value for the                                                                    
fishermen, industry, and the state.                                                                                             
Co-Chair Stoltze  remarked that there  had not been  a boost                                                                    
to the state treasury.                                                                                                          
Representative  Edgmon noted  that  the  discussion was  not                                                                    
about significant dollars. He  stated that the raw fisheries                                                                    
business tax was a separate issue.                                                                                              
Co-Chair Stoltze did not want to raise expectations.                                                                            
Representative Edgmon believed  the committee understood the                                                                    
significance  of  the  raw fisheries  business  tax  to  the                                                                    
9:50:33 AM                                                                                                                    
Co-Chair Austerman  referred to  the value-added  portion of                                                                    
the  waste  stream.  Ideally  the   waste  stream  would  be                                                                    
converted to  a high  protein, human-grade value  that could                                                                    
be  used  as a  global  food  source.  A phase  process  was                                                                    
expected; in the near-term the  waste stream could be turned                                                                    
into a product  such as pet food and as  the marketplace and                                                                    
process built  over time  it was  expected to  become human-                                                                    
grade  protein. He  believed the  human-grade product  would                                                                    
provide more value to the industry and the marketplace.                                                                         
Representative Costello  discussed the  previously published                                                                    
indeterminate fiscal  note from  the Department  of Revenue;                                                                    
the impact to  the operating budget was zero  and the impact                                                                    
in change of revenues to the state was indeterminate.                                                                           
Co-Chair Stoltze noted that the  bill continued and expanded                                                                    
a current program.                                                                                                              
Representative Costello MOVED to  REPORT CSSSHB 204(FIN) out                                                                    
of  committee   with  individual  recommendations   and  the                                                                    
accompanying fiscal  note. There being NO  OBJECTION, it was                                                                    
so ordered.                                                                                                                     
CSSSHB 204(FIN)  was REPORTED  out of  committee with  a "do                                                                    
pass"  recommendation  and  with  one  previously  published                                                                    
indeterminate fiscal note: FN1 (REV).                                                                                           
Co-Chair Stoltze  discussed the  schedule for  the following                                                                    

Document Name Date/Time Subjects
HB 204 PSOA Support.jpg HFIN 2/28/2014 9:30:00 AM
HB 204