Legislature(1995 - 1996)
04/27/1995 07:05 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 232 - ECONOMIC DEVELOPMENT TAX CREDIT Number 353 ROD MOURANT, Administrative Assistant to Chairman Pete Kott, said this legislation is an important part of the economic development package the legislature is considering this year. House Bill 232 empowers the Alaska Industrial Development & Export Authority (AIDEA) to review proposals from corporations in Alaska, either currently in Alaska or considering moving to Alaska, and their proposal would be to either expand an existing business and number of positions, or to create a new business and positions in-state. AIDEA would be able to determine if, in fact, that corporation is eligible to qualify for an economic development tax credit based on that presentation from the corporation and within the criteria laid out by the legislation. If they are, to what degree and to what amount they would be credited. The corporation then would receive a certificate of authorization and would have ten consecutive tax years in which to apply the credit toward their tax obligation. He said Section 1 defines the program. The more operative portions of the legislation are in Section 2 where the tax credit itself is talked about and the criteria that should be considered by AIDEA in establishing whether or not an entity is eligible for the tax credit and to what degree that tax credit could be. He referred to page 3 and said one of the criteria is that the applicant's project will upon completion provide a net increase of at least 25 percent in the number of new employees employed by the applicant. Likewise, value added processing should be encouraged in this type of expansion, so we could look for more value added processing, both in the timber and seafood industry in the state, as a result of HB 232. Page 4, lines 6-12 states, "The credit amount may not exceed the lesser of the amount of credit approved which may not exceed 5 percent of the amount of gross wages payable as compensation for the new employees created by this expansion effort, or 25 percent of the tax due and payable by the taxpayer under this chapter." He noted this chapter is the net corporate tax statute of the state of Alaska. He said in essence, that is the legislation and what it does. AIDEA will review the legislation on an annual basis. He added they have been working with both AIDEA and the Department of Revenue on this legislation. They have further changes they would like made, as you will hear from the representative from the Department of Revenue. They would like the reporting mechanisms and the monitoring mechanisms laid out in statute, rather than left to regulation. He stated they would be working with the Department of Revenue to develop the language in that regard. Mr. Mourant said he was available for questions. REPRESENTATIVE KUBINA asked if this bill had a Finance Committee referral? MR. MOURANT responded it does. The current fiscal notes are zero. He said he would anticipate in working out the arrangements with the Department of Revenue, especially on what their review and reporting requirements are, there may be a small fiscal note attached to the legislation before it is over. He reiterated that it does have a Finance Committee referral. CHAIRMAN KOTT said this bill has undergone a little surgery during the process. He believed this was the third committee of referral; the first two being the State Affairs Committee and the Special Committee on Commerce and Economic Development. Number 409 REPRESENTATIVE ELTON commented the legislation that he was familiar with that has done this in the past, is the fisheries business tax credit. He believed that tax credit was sunsetted after a certain period of time. He pointed out this bill does not have a sunset provision and wondered what the reasoning was behind not having a sunset provision. CHAIRMAN KOTT said first of all, there is a ten year provision in the bill which will allow corporations or companies to claim that tax credit, so any kind of a sunset will have to be factored it out ten years. Beyond that, he thought the importance of it is that as Alaska is starting to retract, at least in the oil industry, we want to ensure that we do other things that will attract new business to the state, and that message needs to be out there. He said if at some point in time it looks like it needs to be revisited, he was sure the legislature, at that point, will do so. Chairman Kott commented that he has never really been much in favor of a sunsetting clause. REPRESENTATIVE ELTON said he thought there were probably technical ways. Once a person is in the program maybe they are not taken away, but to preclude new people from joining. From what he remembered of the previous debate on the fisheries tax credit, there was some strong suspicion on the part of many people in the Department of Revenue, as well as others, that what the state was actually doing was forgiving taxes on either new businesses or business expansion that was going to occur anyway. He wondered if that issue had been considered. MR. MOURANT said page 2 of the legislation refers to the criteria for eligibility for the tax credit. In the first section of possible criteria to be applied against a project it states, "verification that at least one other state is considering the project and also determining through the best available data that the projected cost of the applicant's project in this state would exceed the cost in the competitive state." Likewise, as a third portion of just that one individual criteria, is we find that the receipt from the tax credit is a major factor in the applicant's decision to proceed. He explained there are several variables that would lead one to believe that something wasn't going to happen automatically if they have got to justify to AIDEA that these criteria have been met - that there is competition of a state, and the bottom line is they needed assistance through a tax credit. Number 446 REPRESENTATIVE PORTER commented on the four year sunset in the fisheries program, and said assuming that fisheries is not an infinite resource and that at some point in time, there's only so much you can do with x number of fish. Whereas business is business is business, if there are other opportunities that are around. REPRESENTATIVE ELTON said the response by Mr. Mourant essentially would preclude almost any resource based industry, because a resource based industry that is coming into the state, is making a decision based on where the resource is and the amount of the resource available, so you wouldn't have that criteria kick into place between what another state may be offering or not. If that is a rigid criteria that cannot be breached by AIDEA, we are essentially talking about service businesses only. He asked if that was correct. MR. MOURANT responded that was correct, if that particular portion of criteria were applied, but pointed out there are three independent possible criteria that could be applied independently. Not all three have to be met. The second criteria on page 3, line 9 states, "The applicant's project would upon completion provide a net increase of at least 25 percent in the number of new employees employed by the applicant." He noted that really isn't industry restrictive at all. Likewise, the third criteria states, "The applicant's project is economically sound and will upon completion benefit the people of the state by increasing opportunities for employment in the state and strengthening the economy of the state and significantly expanding existing facilities in the state." He explained that the criteria regarding the 25 percent and the third one regarding the substantial increase, are independent criteria. Meeting any one of those three criteria would qualify the program for consideration. REPRESENTATIVE ROKEBERG referred to the basic criterion and asked if it was conceivable that a new entry into the oil and gas industry would apply for this credit. MR. MOURANT said that would not be beyond the realm of comprehension. However, trying to justify, given Alaska's resource richness especially with oil and gas, that they were in competition in another state...although they would reach the criteria of the 25 percent increase perhaps, or the substantial increase of facility, this certainly could be taken under consideration by AIDEA, but the AIDEA board would have the ultimate authority. Number 483 REPRESENTATIVE ROKEBERG said that would be the question, that is why he said a new entry into the market. A case to be made is that a company that has a certain investment capital in the budget, looks in Alaska as well as another state, but will come to Alaska if they can get this break. He asked if that was the idea? MR. MOURANT responded that is exactly the idea. Number 489 REPRESENTATIVE ELTON said if he understood correctly, it seems that AIDEA is required to make these determinations, and yet there is a zero fiscal note for AIDEA. He could think of numerous businesses all of whom will look at this bill and say they were going to add another wing on, going to expand production capacity, etc. He felt that AIDEA and AIDEA staff were going to be overwhelmed with applications, and yet there is a zero fiscal note. MR. MOURANT acknowledged that had been a topic of conversation, but AIDEA is satisfied that under the current criteria, they will be able to do the elementary reviews. He had spoken with both the project manager for AIDEA and the executive director of AIDEA; both of them are comfortable with the zero fiscal note, at least with this version of the bill. REPRESENTATIVE ELTON said if that was the case, they must be overstaffed and underworked. He thought the staff would not only be reviewing, but assumed they would be doing some sort of checking up to make sure the corporation or company that is getting the tax credit is actually doing what they promised. MR. MOURANT said that having served on the AIDEA board, he could say, with certainty, that the staff works very hard, and wasn't sure if there was any slack in their budget. In conversation with both AIDEA and the Department of Revenue, part of the language that the department is desirous of amending into this bill at a future date, is language that lays out criteria for them to review the actual concurrence with the project proposed--whether or not they created the number of positions they were proposed, how much credit they really are due, how much expansion really took place. That monitoring wouldn't be conducted by AIDEA, but rather by the Department of Revenue. Likewise, the Department of Revenue would receive the certificate of tax credit along with the annual filing of the taxes from the entity. Number 524 BOB BARTHOLOMEW, Assistant Director, Division of Income & Excise Audit, Department of Revenue, said the division has been the bill through the first two committees and the focus in the first two committees, the original bill proposed that a new board be put together to administer the program, and the sponsor, in working with the Departments of Commerce and Revenue, agreed to have AIDEA step in and fill that role. The Executive Branch initially had some concern of creating another board, and we think it is an improvement to have AIDEA come in and fill that role. There are a couple of issues that the sponsors agreed to work with the Departments of Commerce and Revenue and AIDEA to address, which could be done before the next committee. One of those issues is the criteria for determining the tax credits which does need to be more objective. AIDEA feels they are going to need some guidance and they are working on some proposed language to do that. Mr. Bartholomew felt the scope of the credit also needs to be addressed. Initially, the eligibility requirement of competition between states was the focus and a big limit. If the focus is also going to be expanding current businesses that are in Alaska, that will have an impact and the department will have to look at that with the sponsor on what they really anticipate this legislation applying to. It was his understanding that it should be focused on bringing new economic development in to the state, and as Mr. Mourant indicated, it should provide significant new investment in employment increases. MR. BARTHOLOMEW mentioned the other issue the department tries to address in the policy of tax credits is a needs based incentive, similar to the Governor's royalty reduction. A justified need. He felt discussions could continue to determine if that can be accomplished in this legislation. There are some program administration adjustments that are being discussed between the Department of Revenue and AIDEA on how the appeal process and the compliance would work. He indicated they are working on some language on how the compliance would work which they will discuss with AIDEA and the sponsor. Mr. Bartholomew said, "One example AIDEA asked us to share where this would have applied, again this was back if it would be limited to just competition among states, one of the projects that they have been involved in where they think it did make a difference, the incentives that were provided, was the Federal Express cargo facility in Anchorage. The competition between Oregon, an Eastern state, and Anchorage -- that's when the focus was on competition among states, and incentives did make a difference in that case." In-state criteria would be different. REPRESENTATIVE ELTON said Fed-Ex decided to locate here without a tax credit in existence. MR. BARTHOLOMEW interjected he thought the incentives were worked out between the international airports and financing incentives, so it was not a tax credit; it was just where they did get incentives related to financing provided by AIDEA that had some tax exemptions. It was an example where they would have met the first criteria regarding the competition. REPRESENTATIVE ELTON referenced Mr. Bartholomew's comments regarding the proposed language from AIDEA and assumed he was talking about possible amendments to the bill. MR. BARTHOLOMEW responded that would be up to the sponsor. He said it could be done through regulations; however, the drift they have received from the legislature this year is that, if possible, don't leave it to regulations, put it in the bill. That is why we would be proposing that it be put in the legislation, before it goes to the Finance Committee. REPRESENTATIVE ELTON asked if anyone from AIDEA has testified on this bill. MR. BARTHOLOMEW responded they have not. He explained that AIDEA just became involved between the last committee and the Labor and Commerce Committee. Based on conversations he has had with AIDEA, they are supportive of the concept. He said it was just getting that objective criteria ironed out. Number 581 REPRESENTATIVE ELTON noted that the city of Juneau did an economic tax credit incentive on property tax, so it is somewhat different, but the incentive provided 100 percent forgiveness on the tax in the first year, 80 percent in the second year, and so forth over a five year period until it reached a zero percent tax credit. Representative Elton asked if that sort of a phase out was considered in this legislation or could it be. Related to that, he said in reading the bill, there is no upper tax credit limit and if AIDEA so decided, they could do dollar for dollar -- you invest one dollar, you get a one dollar tax credit. MR. BARTHOLOMEW said he thought the limitation on an annual basis is up to 25 percent of the tax liability. (Indisc.) huge tax liability still would be limited on an annual basis, to 25 percent of the liability; that would be the annual cap. He thought the limitations are the lesser of 25 percent of the expense for wages for new employees, or 25 percent of the annual tax liability. REPRESENTATIVE ELTON asked if that was corporate tax liability? MR. BARTHOLOMEW responded corporation tax. CHAIRMAN KOTT said he had been working with the departments, and with AIDEA since they became involved in the process, to refine the legislation as it is working its way through the system. It does have another committee of referral and he thought at that point, things should be developed to the point where they want it; however, issues will be addressed as they come up. He noted they are a cooperative partner working with the department and incorporating the suggestions as they come up. REPRESENTATIVE PORTER commented he liked the idea of aiding new business, as well as the idea of expanding existing business; however, he said we don't want to create incentives for new businesses that compete with existing businesses that have been here for years. He asked Chairman Kott if he was thinking this would be an interim project. CHAIRMAN KOTT responded that is correct. REPRESENTATIVE KUBINA noted he was supportive of the concept also. He referenced page 3, line 15, where it talks about strengthening the economy of the state and said just because of the way our tax base is right now, we actually end up subsidizing unintentionally, certain businesses and industries, because they don't bring back enough tax to pay for the increase in schools, roads, etc. He asked does strengthening the state's economy mean that? In other words, is that something we are going to be subsidizing and it will actually cost the state money because of the business coming here. CHAIRMAN KOTT said that strengthening the economy of the state can mean a number of things. (Indisc.) increasing the amount of jobs that is being created by whatever the entity is that comes to the state of Alaska as a new business, we recognize that unless it folds or is not performing up to its expectations, there is going to be a corporate tax return to the state. Obviously, the benefit will not be the entire amount for the first ten year period that the legislation provides for, but there will be some corporate tax return to the state of Alaska. If it is a viable business, and not a business that came up here to draw business away from another business, after the ten year period it should be around and we would then receive the full benefit. TAPE 95-47, SIDE B Number 001 REPRESENTATIVE KUBINA asked if it was envisioned that fish processors would be able to take advantage of the credit because they really are competing with Seattle processors, they are (indisc.) and floating processors; they are not new, but if they would add new things like surimi, salmon cakes, etc.? Number 017 MR. MOURANT responded the only restriction which would prevent that from qualifying is if perhaps they were taking advantage of another tax credit program of some type. He referred to page 2, line 1, which says it cannot be used in conjunction with another tax credit program. But if they were not qualified for another tax credit, they could certainty apply and perhaps receive authority under this legislation. REPRESENTATIVE ROKEBERG noted along that same line of questioning and also Representative Porter's concern about competition, on page 3 it speaks to whether the tax credit will result in a net increase in jobs. Therefore, the findings of AIDEA's determination that a tax credit would be forthcoming, would have to take that into consideration and he thought that was the leveling effect. It would have an impact on the competitive nature of the location and also what the activity was. REPRESENTATIVE KUBINA said he liked the sentence better because the net increase in jobs, in value added manufacturing or processing, or a fiscal gain to the state. He felt they needed to look out for the fiscal gain to the state more closely. REPRESENTATIVE ELTON asked if Mr. Bartholomew could recall how much tax forgiveness the state gave away in the last four years of the fisheries business tax credit. MR. BARTHOLOMEW said he did not have that information. REPRESENTATIVE ELTON referred to the language on page 2, "...cannot be used by a taxpayer in conjunction with any other tax credit program," and asked if a corporation was taking advantage of the city property tax forgiveness program in Juneau, would the language as it is written, preclude them from taking advantage of the state program. It is not delineated between whether it is a state tax or a municipal tax. MR. MOURANT stated that because the tax credit program speaks to Title 43.10, which is the state net corporate tax, he thought that would take care of the problem. He said amending the legislation to read, "...in conjunction with any other state tax credit program" would do no harm. Number 085 REPRESENTATIVE ROKEBERG referred to page 3, line 19 and said apparently this particular determination would be certified by the Office of Management and Budget (OMB). Does that mean it would go from AIDEA to OMB, involving two agencies? MR. BARTHOLOMEW said he thought it was AIDEA's hope to have that authority left with the AIDEA board, and not have to go to OMB. He believed it was one of the corrections AIDEA proposed to the sponsor. REPRESENTATIVE ROKEBERG responded that made sense to him. Number 101 REPRESENTATIVE SANDERS said in light of the fact that this legislation was going to be carried over to the interim and it is going to the Finance Committee for review, he made a motion to move CSHB 232 out of the House Labor & Commerce Committee with individual recommendations. CHAIRMAN KOTT said a motion was made to move CSHB 232 from committee with individual recommendations. REPRESENTATIVE KUBINA objected. He said inasmuch as this was Chairman Kott's bill, he may want to analyze what the best way to do this might be. CHAIRMAN KOTT said he was happy with the motion to move the bill and stated he would be working with the departments to incorporate any suggested changes they may have. If they don't, he reiterated he was happy with the bill the way it currently exists. REPRESENTATIVE KUBINA withdrew his objection. CHAIRMAN KOTT asked if there was further objection. REPRESENTATIVE ELTON stated he was not objecting. He said he liked what Chairman Kott is trying to accomplish, but he has some questions about it and thoughts he would like to put in, and he wanted Chairman Kott to know that if it goes the way it is, he would probably express his thoughts and raise some questions on the House floor. It is his opinion that it does need some additional work, and he especially thinks they need to hear from AIDEA, who is going to have to implement it. Number 143 CHAIRMAN KOTT asked if there was further objection. Hearing none, CSHB 232(STA) passed out of committee with individual recommendations, and accompanying fiscal note.