Legislature(1995 - 1996)
03/08/1995 08:04 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HRES 03/08/95 HB 197 - MINERAL EXPLORATION INCENTIVE CREDITS Number 199 JOHN WALSH, AIDE, REPRESENTATIVE RICHARD FOSTER, PRIME SPONSOR, stated there is a lot of competition for capital in the world market. The mineral development is a source of wealth generation in any country as it is in Alaska. He said available capital will flow to low cost operations often, but added Alaska is not a low cost operation. Alaska has very high costs due to its geographic location, labor, logistics, lack of infrastructure in the rural areas of the state where potential mines are located, and lack of electricity. He explained the ore bodies in Alaska are understood but specific bodies are still yet to be discovered. He stressed exploration is very expensive. MR. WALSH stated the sponsor would like to encourage additional exploration in the state which would benefit the communities. He added that Native corporations have massive land holdings which are worth an unknown total of dollars, but they need to explore that land. In an effort to create a hospitable environment in Alaska, the sponsor proposes an amendment to the tax statutes--basically an incentive against taxes due for exploration expenses which may occur. He explained the credit is released only upon the beginning of production. He said the sponsor feels if there is some reduction to state revenue, it is only that revenue which would come as a result of exploration and it is revenue the state does not currently have. He stressed to close the purse strings will keep exploration from ever coming to Alaska. MR. WALSH stated an incentive program, much like what the Governor is proposing with the oil and gas industry, is a positive step, gives a strong message to the industry and would yield benefits greater than just the tax benefits coming from current production. He stressed HB 197 is an effort to increase the exploration effort in Alaska and to increase the potential in producing mines that have to be in compliance with regulatory standards and environmental and local concerns. Those producing mines will yield greater than just the tax revenue, which would be a bit lower due to the credit which is proposed. Number 284 MR. WALSH said the state has a dependence on oil which is frightening. In the event that oil drops off, the state needs to have another source of income or at least blend its dependence so there are other resources contributing to the health of the economy. He explained HB 197 asks for a relief against AS 43.20 which is the state income taxes a corporation pays, and AS 43.65 which is the mining license tax, and if on state lands, the credit could be applied against the production royalty tax and the annual assessment fee for the claim. The legislation applies to all lands. If an operation is on state land, there are additional options on how to apply the credit. MR. WALSH told committee members there are no fiscal notes attached at this point, but the departments are pursuing those currently. There is some hesitation in regard to fiscal notes because HB 197 is a speculative suggestion as to what impact there may be eight years from now and it is difficult for the departments to assess that. He pointed out HB 197 is the number one recommendation of the Alaska Minerals Commission, which is appointed by the Governor. He said HB 197 is similar to legislation in the Eighteenth Legislature that passed through both bodies but failed concurrence in the last waning hours of the legislature. HB 197 parallels the Governor's efforts. He noted the Governor is clearly advocating for increased investment dollars in the oil and gas field. HB 197 is a similar effort with respect to the mining industry. He stressed if the state is going to stay involved in the global market, it needs to be considerate of the climate for the investment community. Number 358 EARL BEISTLINE, CHAIRMAN, ALASKA MINERALS COMMISSION (AMC), testified via teleconference and stated HB 197 is very important to Alaska's economy and the utilization of its mineral resources. He said Alaska is a resource state and its past, present, and future economy is based on development and utilization of its mineral resource. He noted the AMC was created by the Fourteenth Legislature and signed into law on June 6, 1986, and is an 11- member commission. The AMC is required to make annual reports to the Governor and legislature on ways to mitigate constraints, including governmental constraints, on the development of minerals, including coal, in the state. MR. BEISTLINE told committee members the 1995 AMC report on recommendations was submitted to the Governor and the legislature in January 1995. He said page 1 of the report contains recommendation 1 which states, "The Governor and Legislature should create economic incentives that will provide financial encouragement and help offset some of the real and perceived problems facing exploration and development in Alaska." He stressed the AMC enthusiastically endorses HB 197. Number 398 AL CLOUGH, MINING SPECIALIST, DIVISION OF ECONOMIC DEVELOPMENT, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT, stated the department has submitted a bill analysis with a zero fiscal note. He emphasized the zero fiscal note is for the Department of Commerce & Economic Development only. He said the DNR and the Department of Revenue (DOR) will have fiscal impacts in relation to HB 197. He reiterated that HB 197 does follow long-standing recommendations of the AMC. He stressed the overall purpose of HB 197 is to both help attract, and retain minerals exploration investment in Alaska. Without exploration, there eventually will be no new mine development. MR. CLOUGH stated HB 197 defers a short term small monetary gain to the state to improve the chances for future, much larger monies which would flow to the state, local governments and Native corporations. He said HB 197 builds upon current incentives the state offers for mineral exploration and development, such as the three and one-half year tax holiday of mining license tax for new production, the no taxation on resources in place implemented by the legislature several years ago, and the airborne geophysical program. MR. CLOUGH stressed the real utility of HB 197 will be in facilitating hard rock mineral exploration, which is the highest risk component of an exploration industry, an industry which is risky inherently. The incentives offered under HB 197 will allow exploration dollars to be stretched farther. He pointed out the $10,000 to $50,000 which could potentially go to the state by virtue of rents, royalties, etc., deferred by this bill could be the drill hole money that finds the ore body. He noted these are not big dollars to the state but are big dollars when an exploration program is being mounted and the dollars have to go into the ground. He stated if dollars are not invested in the ground, they do not qualify for the credits. MR. CLOUGH stated the presence of exploration credits will allow Alaska claim owners to be more competitive. A claim owner or someone who owns a mineral property who has existing mineral exploration credits would be in a stronger position to negotiate a joint venture or to bring more investment dollars in to help further develop a claim and bring it to a viable mine. Number 450 MR. CLOUGH said this type of activity is one small piece of the overall program trying to bring in more mineral exploration and development dollars to Alaska. He noted last year the country of Peru had over $200 million invested in mineral exploration which compares to Alaska which had $30 million invested. He stressed if Alaska is going to continue to be able to attract worldwide mineral investment dollars, and the state's geology certainly warrants that, there is a need to develop a climate more favorable for making high risk type investments. The state needs to be more competitive and have a permitting system that is based on science, not emotion. He stressed things such as the explorations credit program incrementally help that overall goal. Number 474 REPRESENTATIVE AUSTERMAN recalled that $80 million had been spent thus far trying to open the mine in Juneau. He clarified that situation is different than what HB 197 involves. MR. CLOUGH said that is correct. For example, there is a mine where exploration has been ongoing for many years. The mine is currently under exploration and is on both state and private lands. The company continued to go in joint ventures with various mining companies, but the joint venture eventually disbands. The company is looking for a new partner--a major mining company that has the eventual capital to develop it. He stated if the claim owner can say there is one-half year's exploration credits which will be received if the mine ever goes into production from previous work on the ground, that would be a big incentive for a company to put more money into the ground in a property that looks good but is still not there. He explained there has to have been work invested to get the credits. Once the credits are received, it is an inducement to bring someone in to spend more money. He noted it is rare for the claim owner who first starts with the property to be the one that actually brings the mine into production. REPRESENTATIVE AUSTERMAN clarified a large amount of money invested into a mine does not relate to HB 197. MR. CLOUGH replied no. He said HB 197 will relate to small claim owners. REPRESENTATIVE JOHN DAVIES recalled that Mr. Clough had indicated HB 197 is an incentive to attract new mines and also to retain mines. He thought the purpose of HB 197 was to generate new activity. He noted one of the arguments is the state would not be giving up existing revenues, but would be foregoing a portion of future revenues the state would not have if there were no exploration credits. He felt the word retain suggests existing properties. He asked if HB 197 applies to expanding an existing mine. Number 520 MR. CLOUGH said he was trying to imply retaining mineral investment that XYZ mining company in Alaska is currently exploring. He stated this type of incentive would give companies more reason to continue their presence in Alaska rather than going to Peru. He stressed his hope is that HB 197 will help attract investors to Alaska who currently are inactive in the state. He noted his understanding of HB 197 is that within the confines of a defined mining property under production, the credits would not apply. How the credits would apply in a satellite ore body is up for discussion. REPRESENTATIVE DAVIES asked Mr. Clough if he has any understanding how that works in regard to HB 197 as is currently. MR. CLOUGH responded if someone can prove it was a newly discovered ore body, it may qualify. He said when using the word retain, he meant retaining companies that are already in Alaska and encouraging them to stay in Alaska and invest more of their exploration dollars here rather than elsewhere. CO-CHAIRMAN GREEN noted for the record that Representatives NICHOLIA and BARNES had joined the committee. He also recognized that Representative WILLIAMS was present on the vote for HB 195 and had to leave again to attend a Finance Committee meeting. Number 550 STEVE BORELL, EXECUTIVE DIRECTOR, ALASKA MINERS ASSOCIATION, testified via teleconference and urged passage of HB 197. He stated HB 197 would mesh into the existing mining license tax system, would require a minimum of administration and if successful, would result in new mines that would pay new royalty streams to the state. He noted these mines will also mean new jobs, construction, facilities and other economic activity. MR. BORELL noted HB 197 does only apply to direct exploration costs. The incentives can be credited against only one-half of the taxes or royalty payable in any given year and the other one-half, remaining after the permanent fund amounts are taken out, is still due to the state. The computation would be the overall royalty is determined, the permanent fund gets its share, and then of the remaining portion not taken by the permanent fund, that is where the one-half credit takes place. He said the credits will be against new royalties that do not now exist, so there will be no effect on existing royalties. He told committee members the bill says that the credits would only accrue for companies with expenditures occurring after January 1, 1995. MR. BORELL explained HB 197 applies to all classes of lands (state, federal, private), just as all classes of lands have the potential to create new jobs, and just as all classes of lands are subject to the mining license tax. He said any questions regarding the definition of the site or applicability of adjacent areas would be on the same basis as the current mining license tax. If under the mining license tax a project qualifies as a new project or a new mine, then it would also qualify under the exploration credit. Similarly, if the mine does not qualify under the state mining license tax as a new mine, it would not qualify for the exploration incentive credit. Number 597 MR. BORELL stated HB 197 also requires the data generated be given to the state and after a 36 month period, the data would be open to the general public that would otherwise remain propriety. He noted HB 197 allows a company to apply for the credit at its own schedule. This will result in a minimum amount of paperwork for both the companies and the state, and a minimum number of applications will be processed because companies will not apply until they know their project is going into production. MR. BORELL stressed it is important HB 197 specifies that the credits apply to the site where the exploration occurs and the credits can be transferred to successor interests. He noted one potential change to HB 197 was recommended by a company and he will discuss the proposed change with the sponsor. He said the change relates to one of the definitions relating to consultants and independent contractors. He again urged passage of HB 197. He stressed the sooner the bill is passed, the sooner they can begin spreading the news and provide companies with more reason to come to Alaska and invest. CO-CHAIRMAN GREEN noted that Representative MACLEAN had joined the committee. Number 619 REPRESENTATIVE DAVIES asked Mr. Borell to briefly describe how the mining license tax regulations work in relation to the issue of defining a new mine. MR. BORELL responded there are three different tests including a geologic test, a mining system test and a how you approach...for example, if you have been mining underground for several years and you can do a bulk service mine because you had proved there is a low grade area adjacent, that would likely qualify. He noted it is not a straightforward approach. There are approximately four tests and three of the four have to be met. He said this information is based on his discussion with several companies who have been through the process such as Usibelli. CO-CHAIRMAN GREEN recalled that Mr. Borell had indicated that data would become a public matter. He noted in the oil arena, if there is unleased acreage next to acreage which has been developed or explored, there can be a request made to keep the data confidential until the acreage is leased. He wondered if HB 197 would provide the same or will the data automatically go public. MR. BORELL stated the data would automatically go into the public arena. He said companies have asked him about that fact and his reply is, "Well if you do not want the data to become public, do not apply for the credit." Number 650 IRENE ANDERSON, LAND MANAGER, SITNASUAK NATIVE CORPORATION, testified via teleconference and stated the village corporation in Nome selected land under the Alaska Native Claims Settlement Act (ANCSA) about 20 years ago. In the last ten years, they have been working with the regional corporation, Bering Straits, to allow large companies to explore for lode gold. She said over a period of time, they have seen the benefits provided by this exploration for the people in the community and region. There has been very good success with employment. She noted they have also supported the mining training program at the University. MS. ANDERSON stated HB 197 is an incentive to further explore Native lands and also further educate her own people in the region to meet the jobs available for drilling, geological work, and potential mill work. She noted her husband is a gold miner. She said the patented property he is working on is about six miles long and is a very narrow stream. She stressed it would take him years and years of placer mining to mine the property. This bill would allow him to consider looking at drilling, trenching or bulk sampling on this property. She expressed support for HB 197. TAPE 95-29, SIDE B Number 000 TOM SPARKS, RESOURCE MANAGER, BERING STRAITS NATIVE CORPORATION, testified via teleconference and stated HB 197 focuses on production. He noted the Bering Straits Native Corporation owns approximately 1.2 million acres of land currently. When all of the entitlements from the federal government are received, they will own about 2.3 million acres. The corporation currently has approximately 30,000 acres under an exploration agreement with Kendicott. MR. SPARKS said the royalty and rental fees do not apply to Native lands, but the mining license tax does. While there is a grace period on the mining license tax on production, he felt anything the state can do to provide more incentives for companies to put hard rock into production, the better off everyone will be. He expressed concerns with HB 197. He stated one concern relates to the satisfactory documentation of exploration activity. His understanding is that a representative skeleton core or selected cuttings would be required according to HB 197. He voiced problems with that concerning the confidentiality segments of the agreements they form. He noted there had been testimony on the geophysical work. MR. SPARKS stated the Bering Straits Native Corporation formed a cooperative agreement with the Division of Geophysical and Geological Surveys last year and the corporation felt they could share nonsensitive geophysical data and geo-chemical analytical data. However, the corporation did not supply any representative core cuttings or samples from bulk samples or trenching. He felt there are ways to address his concern. Number 080 BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME & EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE, said the department is currently working on a fiscal note but has not completed it. He summarized issues which have not been raised. He stated HB 197 does not apply to oil and gas properties. The division had questions as to whether the bill applies to current mines as opposed to only new ones. He told committee members if the process the DNR puts applications through to determine whether or not a site is going to qualify is specifically tied into the statute reference, that would relieve the division's concern of existing mines applying for the incentive credits. MR. BARTHOLOMEW stated the department is in favor of the objective of encouraging exploration in Alaska. This legislation attempts to meet the objective by offering a credit against four separate revenue measures the state currently has -- two which are administered by the DNR and two which are administered by the DOR. He said he would only speak to the impacts on the DOR. He said the department's concern relates to why the fiscal note is not yet available. He pointed out that HB 197 impacts numerous legal, administrative, and technical tax issues and those tax issues have to be individually addressed for each of the programs. MR. BARTHOLOMEW said the department has concerns about the mechanics of trying to implement HB 197. Currently, the process which corporations or businesses go through to prepare tax returns would be different than the process they would go through as they qualify for this credit. Each year the gap between those two separate processes would have to be closed. He pointed out the department is not sure what all the hoops are or how complicated that will be. He noted there would be considerable issues with some of the large operations which may be involved. He stated the department feels additional work needs to be done at the staff level and the department is willing to be a part of that to ensure an administrative headache is not created. Number 143 REPRESENTATIVE EILEEN MACLEAN asked Mr. Bartholomew to be more specific. MR. BARTHOLOMEW responded he could give an example on the corporate income tax. The companies provide information on what is called a combined basis. All of their businesses and operations get grouped into one set of numbers on one tax return, which is provided to the DOR. Under the exploration incentive credits, all the qualification of costs and how the dollar amount of the credit is determined would be done at a site specific location. He stated the only way those credits could be taken against a tax return would be based on the revenue earned at a site specific location. Currently, there is no information provided which takes the combined number and takes it back to site specific. Therefore, the issues involve how that can be accomplished and how much additional work would be involved by the DOR or by the businesses applying for the credit. He stressed there needs to be input from industry to determine if they are going to be able to provide information that gets from the tax return back to the individual mine. Number 171 MR. BARTHOLOMEW stated a similar piece of legislation was debated last year in both the House and Senate. As a result of that debate, one of the two DOR programs, the corporate income tax AS 43.20, was removed from being eligible for the credit. He said the DOR encourages similar action be considered this year. He stressed that is one of the most complex areas the DOR would be trying to resolve. The other mining license tax, AS 43.65 -- the legislature has provided an incentive in the past which gives a new operation a three and one-half year exemption from the mining license tax. He felt that was a good encouragement and that encouragement could be continued by allowing companies tax credits against that once they went into operation. REPRESENTATIVE PETE KOTT wondered if the DOR had consulted or checked with other states who have mining operations happening in their states to determine if some of their methods could be utilized in Alaska. MR. BARTHOLOMEW replied the DOR has not done that yet but had talked briefly about it. He said the DOR does not have a good comparison of how it is handled in other states and that information would be sought from industry who may be doing business in multiple states. Number 205 JULES TILESTON, DIRECTOR OF MINING & WATER MANAGEMENT, DNR, stated the department has several concerns regarding HB 197. He recalled in previous meetings there were several questions raised about revenues involved and he encouraged people to look at the Alaska Mineral Industry Report 1993 and special report 48, pages 39-41 which summarizes the royalties paid to the state during 1991-1993. The report also identifies exploration expenditures. He said the report is a capsule but does not include the corporation income tax or the municipal taxes paid to municipal governments. He stressed next year's version will include the municipal information. He noted the report also explains, in lay terms, the production royalty tax, the mining license tax, and the rents and royalties. MR. TILESTON told committee members in 1993, there was a total of $3.4 million paid to the state from all mineral productions, excluding the corporate income taxes and taxes paid to municipalities. He noted of that $3.4 million, $720,000 was gravel sales. He said at the same time for the last three years, statewide for all activities, there was an expenditure of approximately $30.2 million each year. He pointed out when the life of a mine is being looked at, a very long period of time is involved and HB 197 sets a date to begin for which certain things can be credited. Therefore, some very hard looks need to be given to how the system is set up. Number 263 MR. TILESTON said some of the assumptions he made after consulting with several people is that the incentive credits will apply to only future mining ventures and will apply to primarily large mining ventures where there is some sort of trade-off between keeping documents which can be audited on actual exploration costs and the future anticipated combination of taxes, licenses, rents and royalties. He noted the credits would apply only to a mineral property at the time it went into production. He pointed out that of the $30 million expenditures each year relating to exploration, a good portion of that might never go to production. Therefore, the fact it is a big dollar figure does not necessarily mean it is a big write-off at some point in time. MR. TILESTON explained once a mine goes into production, whatever that definition is, the exploration incentives and credits would no longer apply. However, that begins to raise a series of questions such as what happens if the mine suspends, what happens if a mine was actually in production in 1929, suspended the operation, went back in and started an intensive exploration program based on new money, technology, new markets, a different mineral combination. He stated there will be a trade-off between creating new jobs and a future long-term reduction in direct revenue to the state treasury. He said the prediction on the number, the location, and new jobs from the mine development and the costs and revenue of the economic stream associated with a mine is purely speculative. He felt the past is a good starting point to look at. Number 310 MR. TILESTON said present decisions and procedures used to implement the mining license tax, the production royalty tax, the corporate income tax and the lease and rental fees involving all three departments probably provides a good starting point. He noted as indicated by the other two departments, there is not an understanding as to how the pieces piece together. He stated having worked as a manager without some of those pieces and not having strong guidance, there is an administrative nightmare which tends to involve the commissioner, the attorney general, etc. at some time in the future and everyone ends up in court or the issue ends up back in the legislature for clarification. MR. TILESTON told committee members he would make specific suggestions. He said the department suggests the exploration incentive credits under AS 27.30.010 (a) in HB 197 be preauthorized for credit before the work is done. The department recommends the data associated with cores, chemical and analytical data, and other things spelled out in the bill be provided to the department, in a timely manner, once the incentive credit has been applied for and approved. He stressed if that is done, there are things which should be reviewed such as whether or not the 36 month period of confidentiality is the right period of time. He stated the information is very valuable and a company should not be put at risk. REPRESENTATIVE OGAN joined the committee. MR. TILESTON stated the definition of term "site" on page 2, lines 8, 10, and 12, and page 3, line 10, should be clear on the intent. He said some mining companies hold numerous 40-acre claims and some mining leases are also 40 acres in size but many of them are substantially larger. The department believes it is not appropriate to suddenly have a large area of mining claims when the developable property is a smaller core. Number 359 MR. TILESTON said the requirement under AS 27.30.030 that the credit be used within 15 years after it is granted should be evaluated in terms of whether or not it is prudent to periodically preapprove credits. He wondered if it should be the first 15 years after a mine goes to production or if it should be the first 15 years of production, excluding any shut-down which is not the direct fault of the mining operator. MR. TILESTON emphasized there are other important things the legislature can and is doing to also encourage and promote the long term investment of mineral capital in the state. He said the first step is getting a handle on the state's long-range fiscal policy. There is nothing more upsetting to a large company coming in to spend a lot of money over a long period of time than to try to guess and suddenly be confronted with a large tax increase to make up the budget or to lose the key services from local and state agencies, which they must have in order to continue to operate. MR. TILESTON said there are other issues including the mental health issue, legislation which may create similar problems, outstanding unconveyed selections for the Native corporations, unconveyed selections to the state, access RS 2477, uncertain ownership of navigable waters, etc. Number 400 REPRESENTATIVE DAVIES stated something left off of Mr. Tileston's list was the problematic surveys which is something that can be done to further encourage mineral development. He noted there is a fair amount of money going out of the state treasury to accomplish those surveys. He wondered if Mr. Tileston has any suggestions on how things can be structured to get revenue back into the treasury, relating to mining activity, to help pay for those surveys. MR. TILESTON said his understanding is that in Nome, those surveys were in part funded and actively participated in by the Native corporations there, as well as several companies. He stated industry has participated in funding those studies and based on what is being seen in the Fairbanks area, industry will be more interested because there are some real and new things coming out of those studies. He noted that subject brings up another question--a person has a mine property and contributes $60,000 to a geographic area survey. Does that person get an incentive credit for that? He felt there were many unanswered questions regarding HB 197 and stressed there needs to be more guidance.
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