Legislature(2011 - 2012)CAPITOL 106

02/18/2011 03:15 PM LABOR & COMMERCE

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03:21:18 PM Start
03:21:51 PM HB118
03:49:03 PM Adjourn
* first hearing in first committee of referral
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= bill was previously heard/scheduled
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Heard & Held
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           HB 118-RESEARCH AND DEVELOPMENT TAX CREDIT                                                                       
3:21:51 PM                                                                                                                    
CHAIR OLSON  announced that the  only order of business  would be                                                               
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."                                                                 
3:22:16 PM                                                                                                                    
CURTIS  THAYER,  Deputy  Commissioner,  Department  of  Commerce,                                                               
Community &  Economic Development (DCCED), explained  that HB 118                                                               
would provide a 20 percent  tax credit for qualified research and                                                               
development conducted  by corporate  taxpayers in  Alaska.    The                                                               
research  and  development  (R&D)   tax  credit  is  intended  to                                                               
stimulate  private sector  investment, entrepreneurial  activity,                                                               
and business  expansion in  Alaska.   Other states  offer similar                                                               
credits and  this bill  would allow Alaska  to compete  with them                                                               
and bring  long-term benefits  to our  economy.   The cap  on the                                                               
research and  development tax credit  may not exceed  $10 million                                                               
per taxpayer per  year.  The research  and development activities                                                               
or the  payroll of the  employees must  take place in  Alaska, he                                                               
3:24:05 PM                                                                                                                    
MR.  THAYER related  that purpose  of the  R&D tax  credit is  to                                                               
discover  informational technologies  and  other R&D  activities.                                                               
In order to  qualify for R&D activities, a  corporation must meet                                                               
the purpose, which is to  discover informational technologies and                                                               
any  application  that  would  be useful  in  developing  new  or                                                               
improved components.   All of the R&D  activities must constitute                                                               
a process  of experimentation,  such as development  of a  new or                                                               
improved product,  process or formula, development  of prototypes                                                               
or  models,  building   or  improving  manufacturing  facilities,                                                               
development or improvement  of software technologies, certificate                                                               
testing, and development or application  for patents.  Activities                                                               
that  do  not  qualify  for  the R&D  tax  credit  would  include                                                               
exploration  activity  for   asserting  the  existence,  location                                                               
extent  or quality  of  ore or  mineral  deposit, duplication  of                                                               
existing business  components, surveys or studies  such as market                                                               
research, advertising,  or routine  data collection,  or research                                                               
in the social sciences, arts, or humanities.                                                                                    
MR. THAYER related  the R&D tax credit  could induce corporations                                                               
to conduct  independent research in  Alaska.  The R&D  tax credit                                                               
is supported  by the Department  of Commerce, Community,  and the                                                               
Economic Development  Advisory Council,  which has  been directed                                                               
to identify means  to induce investment and to  help increase the                                                               
viability of  business. Other  supporters of  the R&D  tax credit                                                               
include Alaska  businesses and chambers  of commerce, as  well as                                                               
municipalities   and   economic    development   councils.   This                                                               
initiative  also  parallels  efforts by  the  Anchorage  Economic                                                               
Development   Corporation   to   establish   relationships   with                                                               
corporations  looking  to  relocate  to  favorable  locations  in                                                               
3:25:20 PM                                                                                                                    
MR.  THAYER  stated   HB  118  would  also   impose  a  reporting                                                               
requirement   on  the   Department  of   Revenue  (DOR)   so  the                                                               
legislature and  the public  will be aware  of the  fiscal impact                                                               
and economic benefits of the R&D to the state.                                                                                  
MR. THAYER  explained that  the R&D tax  credit would  be offered                                                               
for  20 percent  of qualified  R&D expenditures  that exceed  the                                                               
average qualified R&D  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  is claimed.  Unused R&D                                                               
tax credits  may be carried forward  for up to seven  years after                                                               
the expenditure for which the credit is claimed.                                                                                
MR. THAYER related that in  order to prevent a corporate taxpayer                                                               
from claiming more than one  benefit for a single expenditure the                                                               
bill also provides  that a R&D tax credit may  not be claimed for                                                               
expenditures that  a corporation deducted in  calculating its tax                                                               
liability or  for which it  claimed a federal  credit apportioned                                                               
to Alaska.   This bill would  help put Alaska on  a level playing                                                               
field  since over  half of  other states  have similar  programs.                                                               
The  R&D tax  credit would  stimulate private-sector  investment,                                                               
entrepreneurial activity,  and business expansion in  Alaska that                                                               
will bring opportunity and sustainable  long-term benefits to our                                                               
economy.    He characterized  HB  118  as  good for  economy  and                                                               
Alaskan families.                                                                                                               
3:26:43 PM                                                                                                                    
WANETTA   AYERS,  Manager,   Office   of  Economic   Development,                                                               
Department of Commerce, Community  & Economic Development (DCCED,                                                               
provided background information  on HB 118.  She  stated that the                                                               
federal   research  and   development   (R&D)   tax  credit   was                                                               
established  in 1981,  has  been reauthorized  14  times, and  is                                                               
authorized through  2011 [slide 1].   There has  been substantial                                                               
interest  in permanently  extending the  R&D tax  credit to  help                                                               
companies create  good jobs and increase  future productivity and                                                               
3:27:47 PM                                                                                                                    
MS.  AYERS  outlined  the  four   part  test  to  determine  what                                                               
constitutes  R&D according  to  the Internal  Revenue Code  (IRC)                                                               
[slide 2], as follows:                                                                                                          
     Technological in  Nature    must fundamentally  rely on                                                                    
     the   principles   of  physics,   biology,   chemistry,                                                                    
     mathematics, and computer science.                                                                                         
     Level  of Technological  Uncertainty -  activities have                                                                    
     an  associated  level  of uncertainty  related  to  the                                                                    
     development or improvement of a product or process.                                                                        
     Process of Experimentation -  incorporates a process of                                                                    
     theoretical   and  physical   evaluation  designed   to                                                                    
     evaluate one or more alternatives.                                                                                         
     Permitted  Purpose  - requires  that  the  goal of  the                                                                    
     activity is to improve the  fit, form, or function of a                                                                    
     product or process for a business component.                                                                               
MS.  AYERS  commented that  much  of  the permitted  purpose  was                                                               
outlined by Mr. Thayer's information.                                                                                           
3:28:37 PM                                                                                                                    
MS. AYERS  discussed the Innovation  Agenda [slide 3],  which she                                                               
said  is being  discussed at  the  national level.   The  America                                                               
COMPETES Act  changes the approach  to economic  development, she                                                             
said.  A  large part of this seeks to  strengthen the capacity of                                                               
the U.S. Economic Development  Administration (EDA) to accelerate                                                               
the commercialization  of new technologies,  products, processes,                                                               
and services.  The EDA has  been restructured and the federal act                                                               
formally  establishes   the  EDA's   Office  of   Innovation  and                                                               
Entrepreneurship  at   the  Department  of  Commerce   to  foster                                                               
innovation  and   the  commercialization  of   new  technologies,                                                               
products,  processes, and  services  with the  goal of  promoting                                                               
productivity and economic growth in the United States.                                                                          
MS. AYERS related that U.S.  President Barack Obama wants to out-                                                               
build,  out-innovate,  out-educate,  and out-hustle  and  be  the                                                               
economic survivors [slide 4].                                                                                                   
MS. AYERS  referred to the  U.S. map  that highlight the  34 U.S.                                                               
states  that have  some form  of  R&D tax  credits or  incentives                                                               
[slide 5].                                                                                                                      
MS. AYERS related  that HB 118 would create a  new tax credit for                                                               
qualified  R&D development,  essentially for  every five  dollars                                                               
spent  by  the  private  sector  for R&D,  one  dollar  would  be                                                               
credited back  against the state's tax  obligation.  Corporations                                                               
are allowed  a total R&D  credit up  to $10 million  per taxpayer                                                               
per tax year  for the three years immediately  preceding the year                                                               
in which the credit is claimed, she said.                                                                                       
3:30:45 PM                                                                                                                    
JOHANNA BALES,  Deputy Director, Tax Division,  Anchorage Office,                                                               
Department of Revenue  (DOR), stated that the  governor is hoping                                                               
to  bring in  new  businesses  to Alaska  and  to  entice R&D  in                                                               
Alaska.   The  main focus  of  HB 118  is to  help diversify  the                                                               
economy, she said.                                                                                                              
MS.  BALES provided  a section-by-section  analysis of  the bill.                                                               
Section one would  allow a taxpayer 20 percent credit  on the R&D                                                               
expenditures  that are  incurred in  Alaska that  exceed a  three                                                               
year average of  R&D expenditures in the prior three  years.  She                                                               
said that any existing R&D would  not qualify for a credit unless                                                               
the  R&D  increased  or  if  new  R&D  activity  happened.    The                                                               
corporate  taxpayer would  be allowed  20 percent  credit not  to                                                               
exceed $10 million per year.   The corporate taxpayer could carry                                                               
forward any credit  towards tax liability for up  to seven years.                                                               
As Deputy Commissioner Thayer previously  pointed out, a taxpayer                                                               
could not  take a deduction  for the expenses in  the calculation                                                               
for  the corporate  income tax  liability.   She  related that  a                                                               
federal R&D  tax credit also  exists.  Currently,  under Alaska's                                                               
corporate tax  structure, companies can  apportion a part  of the                                                               
federal  credit for  business in  Alaska, but  they would  not be                                                               
allowed to take the federal credit,  as well.  She commented that                                                               
the  Department  of  Revenue  (DOR)  would  report  back  to  the                                                               
legislature any R&D activity.                                                                                                   
3:34:01 PM                                                                                                                    
REPRESENTATIVE  HOLMES said  it sounds  like  a good  idea.   She                                                               
referred  to state  and federal  credit.   She wondered  what the                                                               
advantage would  be since a  federal credit process exists.   She                                                               
asked for the necessity of allowing  a state R&D tax credit since                                                               
the  corporation would  not be  eligible for  both the  state and                                                               
federal credit.                                                                                                                 
MS. BALES  explained the  federal process.   Taxpayers  perform a                                                               
calculation  of all  the R&D  activity  conducted throughout  the                                                               
nation.  The corporate tax is  based on a "water's edge basis" so                                                               
even  though  the  activity  is  not  conducted  in  Alaska,  the                                                               
corporation can  take a credit in  Alaska.  She pointed  out that                                                               
the  credit is  generally very  small  since the  portion of  the                                                               
activity that  took place  in Alaska  is also  very small.   This                                                               
bill  would allow  a 20  percent R&D  tax credit  on expenditures                                                               
that  took place  in  Alaska.   The  state  is  hoping to  entice                                                               
corporations to  do R&D  in Alaska.   She  related a  scenario in                                                               
which  a  company  performs  cold regions  R&D,  which  might  be                                                               
conducted in  a northern  state such  as Minnesota  or Wisconsin.                                                               
She related  that if  those states offer  tax credits  and Alaska                                                               
does not,  that this bill  would help entice the  corporations to                                                               
do business  in Alaska.   She predicted  that the R&D  tax credit                                                               
offered credit directly  for those expenses would  be larger than                                                               
the federal credit the corporation is currently taking.                                                                         
3:36:16 PM                                                                                                                    
MS. BALES,  in response to Representative  Holmes, explained that                                                               
R&D tax credits  offered by other states  vary significantly from                                                               
state to state.  Some do not have  a limit and some have a credit                                                               
for the  amount of expenses  until the corporation  has exhausted                                                               
the credit.  Some offer six  percent tax credits and other states                                                               
offer 20  percent R&D tax  credit.  She  said it is  difficult to                                                               
find  an average.   The  DOR piggybacked  the federal  law, which                                                               
allows  corporations  R&D  tax  credits ranging  from  14  to  25                                                               
percent,   depending  on   whether  the   expenditures  are   new                                                               
expenditures  or  prior  expenditures.    She  stated  that  even                                                               
federal  calculation  is  complicated   and  diverse.    The  DOR                                                               
reviewed  other  states  and  took a  mid-range  approach  of  20                                                               
percent, but  only for expenditures  that were increasing  in the                                                               
3:37:57 PM                                                                                                                    
REPRESENTATIVE HOLMES said it would  be helpful to have something                                                               
in  writing  that outlines  the  exceptions.  She asked  to  what                                                               
extent these credits  are applicable to oil and  gas, and mining.                                                               
She offered her  belief that the R&D tax credits  would not apply                                                               
to oil and  gas but she thought perhaps  some technology research                                                               
might qualify.                                                                                                                  
MS.  BALES explained  that with  respect  to mineral  exploration                                                               
that  if  the  corporation  qualifies   for  federal  credit  the                                                               
corporation  would qualify  for the  proposed R&D  tax credit  in                                                               
Alaska.  She  noted that federal law does not  allow expenses for                                                               
exploration to ascertain the existence,  location, or extend of a                                                               
mineral  ore deposit.    The  reason for  this  is because  under                                                               
federal law  those activities are  allowed to use  an exploration                                                               
incentive credit.   Thus, the federal law would not  also offer a                                                               
R&D tax  credit.  She offered  her belief that would  be the only                                                               
limitation for  oil and gas companies.   She pointed out  that if                                                               
the oil  and gas  corporation also performed  other R&D,  such as                                                               
tertiary recovery or other activities,  the credit would apply in                                                               
Alaska so  long as it qualified  under federal law.   She offered                                                               
to  provide  research  on  the  types of  expenses  oil  and  gas                                                               
companies could use.                                                                                                            
REPRESENTATIVE HOLMES also  asked her to address  the extent that                                                               
this  would overlap  with existing  credits  in the  oil and  gas                                                               
arena.  She referred to the  zero fiscal note.  She asked whether                                                               
the   department  could   provide  a   ballpark  figure   on  the                                                               
anticipated credits,  and if it  would range from $10  million or                                                               
$10 billion.                                                                                                                    
MS.  BALES suggested  that the  state would  like to  attract new                                                               
corporations so any additional activity  would bring in increased                                                               
revenues from  corporate taxes.  She  said she was unsure  of the                                                               
level of current activity, but she  offered to try to provide the                                                               
committee with some ideas on the amount of projected activity.                                                                  
3:41:53 PM                                                                                                                    
MARK  MEYERS, Vice  Chancellor, Research,  University of  Alaska,                                                               
explained  that  the overall  research  at  University of  Alaska                                                               
(UA), is  approximately $123 million  per year,  largely stemming                                                               
from the  National Science Foundation  grants.  He stated  the UA                                                               
also conducts some  private research.  He related that  the UA is                                                               
interested in  stronger private public partnerships  in research.                                                               
He said  that his office  sees some significant  opportunities to                                                               
do  so.   Thus,  the UA  is forming  an  office for  intellectual                                                               
property  and  commercialization.   The  lab  capacity  is  quite                                                               
sizeable and  other states have  used that to their  advantage to                                                               
develop private/public partnerships.   He said that in developing                                                               
intellectual property, some of the  money returns to the state in                                                               
the  form of  royalties on  the developed  intellectual property.                                                               
Along  that  line,  there  are  many  opportunities  for  ongoing                                                               
research  in  biomedical  fields,  advanced  instrumentation  for                                                               
space  craft,  for  unmanned  aircraft,  and  unmanned  submarine                                                               
vehicles.  He  suggested a substantial work is  also performed in                                                               
engineering  design,  energy   technology,  aviation  technology,                                                               
transportation  infrastructure  and   construction.    Thus,  any                                                               
credit  the   state  could  offer  may   help  entice  additional                                                               
research.  Alaska  has a unique natural laboratory  for this type                                                               
of  research, including  the  ability  to use  air  space to  fly                                                               
unmanned vehicles since there are  few places in the country this                                                               
activity can happen.  He  said that the unique environment offers                                                               
opportunities to train  Alaskans at the UA to  use these research                                                               
capacities and  to develop the  research themselves.   He offered                                                               
his  support for  HB 118  as a  means to  strengthen the  state's                                                               
3:45:19 PM                                                                                                                    
CHAIR OLSON asked  whether his research at the UAA  is similar to                                                               
the  research   he  conducted  at   the  federal   United  States                                                               
Geological Survey (USGS).                                                                                                       
MR. MEYERS  answered yes, but  his research ranges  from biology,                                                               
water,  remote   sensing,  atmospherics  and  geophysics.     The                                                               
difference  at  UAA  is  that  his  research  also  involves  the                                                               
humanities, arts, and engineering.                                                                                              
3:45:52 PM                                                                                                                    
KATHRYN DODGE,  Economic Development Specialist,  Fairbanks North                                                               
Star  Borough  (FNSB),  stated  that  the  Fairbanks  North  Star                                                               
Borough (FNSB) supports HB 118.   She explained that the FNSB has                                                               
worked  with   the  University  of  Alaska   Fairbanks  (UAF)  to                                                               
strengthen  the   private  industry   funded  research   and  the                                                               
federally  funded research  in the  community and  in the  state.                                                               
This bill provides a tool to  help move that effort forward.  She                                                               
related that she works with oil  and gas recovery.  While the UAF                                                               
and  FNSB   have  developed   some  relationships   with  private                                                               
industry, additional  effort could be  made.  Big  companies tend                                                               
to conduct  research in their  headquarter areas and the  R&D tax                                                               
credits provide enough of an  incentive for companies to at least                                                               
consider conducting research  in Alaska.  She  offered her belief                                                               
that this  is a  very strong  and important  tool to  move Alaska                                                               
towards an innovative economy.   The state has struggled with low                                                               
numbers of patents.   She anticipated that HB  118 would increase                                                               
the number of patents, which  is indicative of an entrepreneurial                                                               
economy.    The  FNSB  has   also  worked  to  commercialize  the                                                               
technology but  the research doesn't  necessarily lend  itself as                                                               
well,  but she  thought this  bill could  help focus  on research                                                               
with  commercial potential.   She  concluded by  offering support                                                               
for HB 118.  She encouraged members to move the bill forward.                                                                   
3:48:20 PM                                                                                                                    
CHAIR OLSON stated his intention to keep the public testimony                                                                   
[HB 118 was held over.]                                                                                                         
3:49:03 PM                                                                                                                    

Document Name Date/Time Subjects
HB118 Ver A.PDF HL&C 2/18/2011 3:15:00 PM
HB 118
HB118 Sectional Analysis.pdf HL&C 2/18/2011 3:15:00 PM
HB 118
HB118 Sponsor Statement.pdf HL&C 2/18/2011 3:15:00 PM
HB 118
HB125 Fiscal Note - REVISED -DPS-ABC-2-15-11.pdf HL&C 2/18/2011 3:15:00 PM
HB 125
HB125 Opposing Documents - Email Kent Bowman 2-17-2011.pdf HL&C 2/18/2011 3:15:00 PM
HB 125
HB125 Opposing Documents - Letter Shirley Gifford 2-17-2011.pdf HL&C 2/18/2011 3:15:00 PM
HB 125
HB125 Opposing Documents - Email Scott Carson 2-17-2011.pdf HL&C 2/18/2011 3:15:00 PM
HB 125
HB125 Supporting Documents - Kalenka 2-18-2011.pdf HL&C 2/18/2011 3:15:00 PM
HB 125
HB118 Draft Proposed Amendment ver A.1.pdf HL&C 2/18/2011 3:15:00 PM
HB 118
HB118 Supporting Documents-CCED-DED-2-18-11-Powerpoint.pdf HL&C 2/18/2011 3:15:00 PM
HB 118