Legislature(1995 - 1996)

04/27/1995 07:05 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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               
 REPRESENTATIVE KUBINA asked if this bill had a Finance Committee              
 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               
 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           
 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                  
 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.                                

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