Legislature(2015 - 2016)BARNES 124

02/17/2016 01:00 PM RESOURCES

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01:34:15 PM Start
01:35:19 PM HB253
02:40:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 1:30 p.m. Today --
Heard & Held
-- Testimony <Invitation Only> --
        HB 253-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES                                                                    
1:35:19 PM                                                                                                                    
CO-CHAIR TALERICO  announced that the  only order of  business is                                                               
HOUSE BILL NO. 253, "An Act  requiring the electronic filing of a                                                               
tax   return  or   report  with   the   Department  of   Revenue;                                                               
establishing a  civil penalty for failure  to electronically file                                                               
a  return  or report;  relating  to  exemptions from  the  mining                                                               
license tax;  relating to the  mining license tax  rate; relating                                                               
to mining  license application, renewal, and  fees; and providing                                                               
for an effective date."                                                                                                         
1:35:49 PM                                                                                                                    
JERRY BURNETT,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department   of  Revenue   (DOR),   advised   that  during   this                                                               
presentation  the department  will respond  to various  questions                                                               
submitted during  a previous  presentation.   He referred  to the                                                               
Alaska Department  of Revenue, Tax Division,  2015 Annual Report,                                                               
which is also provided online,  and said that Brandon Stanos will                                                               
speak to mining issues contained within the report.                                                                             
1:36:26 PM                                                                                                                    
BRANDON  SPANOS, Deputy  Director,  Tax  Division, Department  of                                                               
Revenue (DOR),  brought attention  to the division's  2015 Annual                                                               
Report.   He explained that  slide 5,  "TAX RETURNS FILED  by Tax                                                               
Program during  Fiscal Year 2015,"  shows the mining  tax returns                                                               
received,  which is  the number  of volume  of returns,  and that                                                               
corporate  income  tax receives  more  tax  returns that  can  be                                                               
electronic.   He  pointed to  the  mining license  tax, shown  in                                                               
yellow, and said  it accounts for 2.14 percent of  all of the tax                                                               
returns received.                                                                                                               
MR. STANOS  moved to  slide 6, "STATEMENT  OF REVENUES  Listed in                                                               
order of  total amount Fiscal Year  2015," and said it  shows the                                                               
revenues  collected  and  offers  an idea  of  where  the  mining                                                               
license  tax fits  into the  picture of  revenue received  by the                                                               
State of Alaska.   Oil & gas production tax  is the largest piece                                                               
of the  pie chart,  and the  mining license  tax, shown  in light                                                               
blue, is  3.24 percent of  all of  the revenues collected  by the                                                               
Tax  Division in  fiscal  year  (FY) 2015.    He  noted that  the                                                               
revenues depicted  in later slides  do jump around  from year-to-                                                               
year.  The mining  tax is fairly unique in Alaska  as it is based                                                               
on  the net  income  of the  taxpayer, and  other  states tax  by                                                               
weight  of the  product, or  by the  sales, or  by gross  income.                                                               
Mining tax  has been around  for a long  time and, because  it is                                                               
based on  the company's net income  in a year, can  vary from one                                                               
year to another.                                                                                                                
1:39:00 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired as  to whether  net income  is an                                                               
annual calculation.   He further inquired as to  whether the loss                                                               
is  carry  forward  to  a  future  year  or  whether  a  loss  or                                                               
expenditure  in one  year is  not further  considered in  the tax                                                               
MR. SPANOS replied that the  mining tax specifically is an annual                                                               
tax on  a calendar year  basis, or  if a taxpayer  reports fiscal                                                               
year federally  then the taxpayer  will report on a  fiscal year.                                                               
With regard  to corporate  income tax, there  is a  net operating                                                               
loss carry back and carry forward.   For the mining tax, if there                                                               
is a loss in one year the company  will not pay a mining tax that                                                               
year, but there is no carry forward to another year.                                                                            
1:40:00 PM                                                                                                                    
MR.  SPANOS drew  attention to  slide 26,  "Returns filed  for FY                                                               
2015," and pointed  out that it offers the  description of mining                                                               
tax and rates.   He noted that the $0-$40,000  income bracket has                                                               
no  income tax  and  that the  tax rate  graduates  with the  net                                                               
income  level.   Governor  Walker's  bill,  HB 253,  proposes  an                                                               
increase to the top bracket.                                                                                                    
MR. SPANOS  turned to  the bottom of  slide 27,  "Tax Collections                                                               
Information from  FY2012 - FY2015,"  and noted the graph  is "the                                                               
meat of this part  of the report for the mining  tax."  The graph                                                               
shows  the  general  fund, Constitutional  Budget  Reserve  (CBR)                                                               
Fund,  and the  tax collections.   He  explained that  audits and                                                               
assessments  generally get  transferred  into the  CBR Fund,  and                                                               
refunds from something  that went into the fund also  come out of                                                               
that fund.   Tax  collections for  2015 were  $38 million  in the                                                               
mining tax, but they do fluctuate  from year to year depending on                                                               
the  income  reported   on  the  tax  returns   for  the  state's                                                               
taxpayers.  He added that the  pie chart shows how that fits into                                                               
the overall tax  collections, which is 3.24 percent  of the total                                                               
collections received in  the tax division, and  96.76 percent for                                                               
all others.                                                                                                                     
1:42:26 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  requested  Mr. Spanos  to  repeat  his                                                               
comments regarding the  CBR Fund and how it  works in conjunction                                                               
with the mining tax.                                                                                                            
MR. SPANOS answered  that the CBR is for resource  - mining, oil,                                                               
and  gas.     He  offered  his  belief  that   the  Alaska  State                                                               
Constitution uses  the word "disputed," but  has been interpreted                                                               
as an administrative proceeding.   He explained that it begins as                                                               
an  audit  or assessment  in  the  form of  a  bill  sent to  the                                                               
taxpayer, who  has appeal rights.   There's a due process  and if                                                               
there is  a payment on an  assessment it is transferred  into the                                                               
CBR if it's related to the mining tax.                                                                                          
REPRESENTATIVE JOSEPHSON  observed that  in FY 2015,  $38 million                                                               
came  in statewide  in an  uncontested way,  and $70,000  came in                                                               
through an adjudication and disposition after an audit.                                                                         
MR. SPANOS answered correct.                                                                                                    
1:43:53 PM                                                                                                                    
MR. SPANOS turned  to slide 27, "Returns filed for  FY 2015," and                                                               
advised that  in FY  2015 there  were 468  taxpayers and  616 tax                                                               
returns.  He explained that  the tax returns included amended tax                                                               
returns  from  previous years,  which  are  counted as  a  return                                                               
received in FY 2015.   He noted that the mining  tax is a license                                                               
tax  -  a license  must  be  obtained  with the  division  before                                                               
beginning mining  operations, which then requires  the company to                                                               
file a tax return.   In the event the company  does not mine that                                                               
year, it  must still file  a zero  tax return with  the division.                                                               
He pointed out  that many of those returns are  under $40,000 net                                                               
income  and  the  return  shows  no  tax,  but  it  does  include                                                               
information on  the face of the  return.  Most of  the division's                                                               
information  is confidential,  although the  licenses are  public                                                               
and available  online.   The information  on the  slide regarding                                                               
credits is outdated, he said, as  a couple more credits have been                                                               
added against the mining tax.                                                                                                   
1:45:48 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested  a  more  detailed  explanation                                                               
regarding  the tax  credits, how  they  are applied,  and to  the                                                               
extent of how they can be applied.                                                                                              
MR. SPANOS  responded that the  Education Credit can be  seen [on                                                               
slide 27].   Additionally,  there is  the Film  Production Credit                                                               
that's available to  take against the mining tax, as  well as the                                                               
Minerals Exploration  Incentive Credit," which is  also available                                                               
REPRESENTATIVE  SEATON  referred  to  the  Exploration  Incentive                                                               
Credit under AS 27.30.010, which read:                                                                                          
     (a) The commissioner shall grant  to a person described                                                                    
     in (d) of this section  an exploration incentive Credit                                                                    
     for  the  eligible  costs  of  each  of  the  following                                                                    
     exploration  activities that  are performed  on or  for                                                                    
     the benefit  of land  in the state  for the  purpose of                                                                    
     determining   the  existence,   location,  extent,   or                                                                    
     quality  of a  locatable  or leasable  mineral or  coal                                                                    
     deposit, regardless of whether the land is state-owned                                                                     
REPRESENTATIVE  SEATON  noted   that  the  Exploration  Incentive                                                               
Credit  can be  applied to  any  land within  the state,  whether                                                               
state, federal,  Mental Health Trust,  or privately  owned lands.                                                               
He therefore  asked whether the  state is providing a  tax credit                                                               
where the state would not receive a royalty.                                                                                    
MR.  SPANOS said  he  will  get back  to  the  committee with  an                                                               
1:48:20 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  whether  the Exploration  Incentive                                                               
Credit  applies  to all  lands  within  the state  regardless  of                                                               
whether the  state owns them  and whether the state  receives any                                                               
credit against  tax.   He said  there was  also a  question about                                                               
royalties for which  he thought the answer was no.   He expressed                                                               
his concern that it applies under  the statute to both the mining                                                               
license tax and  to royalties and during a tax  year or a royalty                                                               
payment period, so  it appears that the 50 percent  royalty or 50                                                               
percent  tax applies  to both  royalty and  to tax.   He  said he                                                               
would  like  to receive  some  indication  as  to how  these  are                                                               
applied because  as he reads 27.30.050  it can be applied  for 15                                                               
years carry forward  but it doesn't have  to be.  It  can be non-                                                               
consecutive  years, so  it can  be applied  whenever the  company                                                               
desires for 15 years.  And,  he continued, it seems like that has                                                               
$20 million dollars, which has  a large fiscal implication to the                                                               
state's  ability  to receive  revenue  from  any new  mine,  both                                                               
revenue  and tax,  and if  it's  a credit  against royalties,  50                                                               
percent of royalties, then it is also a question there.                                                                         
MR. SPANOS  answered that  the credit can  be taken  against both                                                               
royalties  and tax,  but there's  no double-dipping.   It  can be                                                               
taken against  both in the  same year  if a company  chooses, but                                                               
the statute doesn't  identify which one it must  be taken against                                                               
first.  It  is not like federal statute that  often requires that                                                               
the credit must be taken in  a certain order against "this" first                                                               
and  then  "this"  second.     For  this  particular  credit,  he                                                               
continued, there is  not an ordering, the taxpayer  can choose to                                                               
take  it against  the royalties  or against  the tax,  but cannot                                                               
take  the same  amount -  the form  that the  taxpayer fills  out                                                               
starts to chip  away at the credit and the  taxpayer can only the                                                               
credit once.                                                                                                                    
REPRESENTATIVE SEATON said  that is how he read it,  but said his                                                               
concern is  that royalty  is the  state's ownership  interest and                                                               
taking  a tax  credit  against royalty  actually  means that  the                                                               
state is not only taking  its taxing authority and reducing that,                                                               
but  also reducing  the  payment on  ownership  interest, or  the                                                               
payment on  ownership interest.   He said  he would  appreciate a                                                               
discussion  at  a  future  time   on  the  applicability  of  the                                                               
Exploration Incentive Credit.                                                                                                   
1:52:12 PM                                                                                                                    
REPRESENTATIVE   JOSEPHSON  asked   whether  the   administration                                                               
scrutinized  AS  27.30 in  advance  of  offering the  mining  tax                                                               
legislation increase and whether reform was called for.                                                                         
MR.  BURNETT responded  that he  was  not aware  of any  specific                                                               
consideration to this, in that  this Exploration Incentive Credit                                                               
has  been  in  place  a  long  time  and  its  existence  is  not                                                               
necessarily an issue  relative to the tax because  the purpose of                                                               
this is to increase the tax over  time.  It is not something that                                                               
is looked at  in terms of it reducing state  taxes, but rather it                                                               
is looked at  as more of an incentive to  produce more revenue in                                                               
the future.   He commented, "It's  not a large amount  of dollars                                                               
that are actually been taken against our taxes."                                                                                
1:53:35 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON,  relative to  Representative  Seaton's                                                               
comments  regarding  using credits  in  places  where royalty  is                                                               
earned  and whether  that is  inconsistent with  what is  done on                                                               
oil, said  he thinks it's not.   He pointed out  that credits are                                                               
offered on  state land.   Whether the policy should  be different                                                               
for mining versus oil and gas  is worthy of discussion.  He noted                                                               
that credits  are offered on state  land where the state  earns a                                                               
royalty and  asked whether Representative  Seaton's view  is that                                                               
there should be a different policy for mining.                                                                                  
REPRESENTATIVE  SEATON responded  that  normally on  oil and  gas                                                               
there are oil and gas  production taxes, but it generally doesn't                                                               
apply to  the royalty amounts.   In this case, it  is saying that                                                               
it applies to the state's ownership  amount, or can be applied to                                                               
the state's ownership amount.  He  said that while the section of                                                               
the  statute   is  open,  the   committee  should   consider  the                                                               
implications for the State of  Alaska, and whether that should be                                                               
REPRESENTATIVE  JOSEPHSON  said Representative  Seaton  clarified                                                               
that this really is a different  application as it is against the                                                               
royalty interest itself.                                                                                                        
MR. BURNETT  referred to  oil and gas  production taxes  and said                                                               
the credits there apply on state  and other lands.  Although most                                                               
of the production  value is on state land, the  tax credits would                                                               
still be a credit against  production from non-state land because                                                               
the  taxes are  on  non-state land  as  well, as  long  as it  is                                                               
produced within the State of Alaska.                                                                                            
1:56:43 PM                                                                                                                    
EDMUND FOGELS,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of Natural  Resources (DNR), said that  with regard to                                                               
questions previously  asked, the committee was  provided with two                                                               
documents  of  information:  "Alaska  Mine  Production  Figures,"                                                               
which is  a simple  spreadsheet showing a  five year  lookback on                                                               
all  of  the five  major  hard  rock  mines  in Alaska,  and  the                                                               
production of the commodities depicting  the amount produced.  He                                                               
said there  is also a five  year lookback on the  spot prices for                                                               
those commodities.   He then related that Trustees  For Alaska v.                                                             
State (1987)  is the answer  to Representative  Hawker's question                                                             
relevant to production royalties.   He said, "The elevator speech                                                               
condensation is that  prior to this lawsuit we  were not charging                                                               
royalties for our mineral production;  after this lawsuit went to                                                               
the State  Supreme Court we were  forced to pass our  law in 1989                                                               
that instead  of the 3 percent  royalty."  There's a  lot more in                                                               
this lawsuit than just that, he  added, but it deals with Section                                                               
6(i) of  the Alaska Statehood  Act, [Public Law 85-508,  72 Stat.                                                               
339, July 7, 1958].                                                                                                             
REPRESENTATIVE  JOSEPHSON requested  clarification as  to whether                                                               
the state did  not collect a royalty prior to  instigation of the                                                               
aforementioned lawsuit.                                                                                                         
MR. FOGELS  replied, "We had  some kind  of system where  we were                                                               
offsetting any kind  of payments with annual labor  and there was                                                               
no formal royalty.  And so,  that was challenged ... and then now                                                               
we have that royalty system in place."                                                                                          
1:59:19 PM                                                                                                                    
REPRESENTATIVE SEATON noted  that the royalty itself  was done by                                                               
statute by  the State of Alaska.   He understood that  it came up                                                               
because the state had to do  something and no one wanted to spend                                                               
a lot  of time  because there  were not many  large mines  at the                                                               
time.  Therefore,  3 percent of the net  operating just mirroring                                                               
the tax  was thrown  as a placeholder  until people  would devote                                                               
more time to  an adequate royalty system.  He  asked whether this                                                               
is Mr. Fogels' understanding as well.                                                                                           
MR. FOGELS  replied he has not  had the opportunity to  look into                                                               
the legislative history  on that and therefore  cannot comment as                                                               
to how  that number was  derived or  whether it was  temporary in                                                               
intention, or too high, or too low.                                                                                             
2:00:34 PM                                                                                                                    
REPRESENTATIVE  SEATON said  in  moving forward,  looking at  the                                                               
appropriateness of  having a  net income  percentage representing                                                               
the  royalty   as  opposed  to   something  based  on   point  of                                                               
production, or  net smelter  return, those  kind of  issues where                                                               
the state was receiving a  return for the state's actual minerals                                                               
and not  for someone's operating  costs, and whether they  are an                                                               
efficient or inefficient operator  would harvest the same amount,                                                               
but  it  would  very  drastically   change  the  state's  royalty                                                               
picture.    He  said  he  was laying  the  issue  of  "what's  an                                                               
appropriate royalty and  an appropriate base for  royalty" on the                                                               
table, and encouraged the department to contribute.                                                                             
MR. FOGELS  responded that over the  years he has been  at DNR he                                                               
has not been involved in any  real hard discussions as to whether                                                               
3  percent  was  the  right  number, or  whether  the  method  of                                                               
calculation was the  right number.  He opined  that possibly part                                                               
of the reason is that there  is currently only one mine in Alaska                                                               
that that  production royalty applies  to in any  meaningful way.                                                               
Pogo is  the only mine currently  on state land and  there is not                                                               
anything in the  pipeline for a hard rock mine  that will come on                                                               
line any time soon on general state land.                                                                                       
REPRESENTATIVE  SEATON explained  his  reasoning is  that if  the                                                               
committee is  going to make  a change it  should be done  long in                                                               
advance so  the people  know.   He reiterated  that the  state is                                                               
better off in  considering whether the royalty  is an appropriate                                                               
calculation,  and  to put  one  in  if  it's not  an  appropriate                                                               
calculation, so everyone knows the game way ahead of time.                                                                      
2:03:20 PM                                                                                                                    
REPRESENTATIVE HERRON  referred to  the decision in  Trustees For                                                             
Alaska  and noted  that  the  number two  plaintiff  is from  his                                                             
region, and then there is the rest  of them.  He said, "It wasn't                                                               
that  this  group of  people  necessarily  were looking  out  for                                                               
everybody and figuring  that the mining industry needed  to pay a                                                               
royalty."  He  therefore asked what was beneath  that and whether                                                               
it was because of fish versus mining.                                                                                           
MR. FOGELS said  he is not familiar enough with  the case to know                                                               
the nuts and bolts  of what drove it, but he  was never under the                                                               
impression  that   an  environmental  issue  was   a  stake;  his                                                               
impression is that it was a fiscal issue.                                                                                       
2:04:22 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON   referred  to  page   4,  "Proceedings                                                               
Below,"  and said  it describes  that indeed  this was  about the                                                               
plaintiffs' assertion  that the state didn't  follow Section 6(i)                                                               
[Alaska  Statehood Act]  and needed  to  collect a  royalty.   He                                                               
explained  it wasn't  a mining  versus fishing  dispute that  was                                                               
presented to the court.                                                                                                         
MR. FOGELS replied that is his understanding as well.                                                                           
REPRESENTATIVE HERRON  said he  brought up  the point  because he                                                               
believes it is [a fiscal issue],  but it is interesting that this                                                               
group of  plaintiffs would  feel it  was their  responsibility to                                                               
point out that Section 6(i) is not equitable across the state.                                                                  
2:05:26 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON, relative  to the  3 percent  and other                                                               
major mining states, asked whether  there is some comparable rate                                                               
to  the  one-eighths  that applies  somewhat  nationwide  on  oil                                                               
fields.  Setting aside deductions,  and credits, and the like, he                                                               
further  asked  whether  there  is  a  figure  that  other  Rocky                                                               
Mountain producer states are using that Alaska is not using.                                                                    
MR. FOGELS  answered he doesn't know  because he has not  spent a                                                               
lot of time  looking at royalties in other  states since Alaska's                                                               
land  situation  is  vastly  different than  other  states.    He                                                               
explained  that some  states  don't have  state  lands, and  some                                                               
don't have the subsurface, so  a comparison is apples and oranges                                                               
for the  most part.   He said  he is willing  to spend  more time                                                               
looking into  that if Representative Josephson  desires, but said                                                               
he is uncertain how much  good information could be obtained that                                                               
would be of use to the committee.                                                                                               
2:06:52 PM                                                                                                                    
REPRESENTATIVE  TARR   referred  to  the   discussions  regarding                                                               
adjustments to  the royalty  rate or tax  changes with  regard to                                                               
the mines in pre-permitting, such  as Niblack and Bokan Mountain.                                                               
She  inquired as  to when  those leases  are up  for renewal  and                                                               
whether there might be an  opportunity to make that adjustment at                                                               
the time that those leases are up for renewal.                                                                                  
MR.  FOGELS responded  that  Niblack and  Bokan  Mountain are  on                                                               
federal lands so the state would not receive royalty at all.                                                                    
REPRESENTATIVE TARR posed  an example of a mine  located on state                                                               
land and  asked how  it would  work in terms  of the  timeline of                                                               
when the state can actually make a change.                                                                                      
MR.  FOGELS  asked whether  Representative  Tarr  is asking  when                                                               
could the  state change the  law to  change the royalty  rate for                                                               
state lands.                                                                                                                    
REPRESENTATIVE TARR  replied that that  could be done  at another                                                               
opportunity, and clarified that she  would like to understand the                                                               
timeline on  the leases,  when the lease  renewal would  come up,                                                               
and how any underlying changes would impact that process.                                                                       
MR.  FOGELS replied  the  3  percent is  in  statute and  doesn't                                                               
change based  upon lease  renewals.  There  is no  opportunity to                                                               
change it other than by statute.                                                                                                
2:08:55 PM                                                                                                                    
REPRESENTATIVE  TARR  clarified  she   is  trying  to  understand                                                               
whether that  would be  a deterrent  for someone  at the  time of                                                               
lease renewal  in terms  of re-evaluating  the opportunity.   She                                                               
asked whether  that might be  when the state might  see something                                                               
if  people were  going  to  depart from  the  activity they  were                                                               
engaged in right now.                                                                                                           
MR. FOGELS suspected  that once someone invests a  lot of capital                                                               
in  a mine  operation  there  is a  lot  of  momentum there,  and                                                               
therefore the  company is going to  keep operating it as  long as                                                               
the  economic conditions  are favorable.   There  are probably  a                                                               
multitude of  factors and the  primary factor could  be commodity                                                               
prices at  the time, and  those factors will drive  the company's                                                               
decision whether  to continue.  The  renewal of a lease  or claim                                                               
is  an  insignificant cost  compared  to  operating the  project.                                                               
Even if  a company had to  temporarily shut down a  mine, such as                                                               
the Nixon Fork Mine, the  company will probably keep its property                                                               
position  legal and  up-to-date.   So, he  continued, he  doesn't                                                               
think that would really have a bearing on this.                                                                                 
REPRESENTATIVE TARR surmised  that the lease payments  are so low                                                               
relative to the  opportunity that these changes are  not going to                                                               
impact the seven mines that  are listed in pre-permitting and not                                                               
operational  while they  make  calculations  about the  financial                                                               
viability of the project.                                                                                                       
MR. FOGELS responded  it is probably a very  complex decision for                                                               
the person holding  the property.  He noted that  there are about                                                               
35,000  mining claims  in the  state  and said  people stake  new                                                               
claims and relinquish claims depending  upon gold prices.  People                                                               
make economic decisions every year  when considering whether they                                                               
should maintain their  claim position.  He said  he imagines that                                                               
if there is some change in  the fiscal structure for the state it                                                               
would  affect people's  thinking on  and some  folks may  be more                                                               
inclined to shed their claim should the fiscal structure change.                                                                
2:11:26 PM                                                                                                                    
REPRESENTATIVE SEATON noted there are  claims that are just being                                                               
held without  anything being done  with the claim.   He suggested                                                               
that maybe  the state  would actually get  more mines  created if                                                               
there  is a  3 percent  net  smelter return  royalty because  the                                                               
aforementioned owners  would shed  their claims and  other miners                                                               
would come in  who would actually move forward and  not just hold                                                               
a claim.  He  described it as a hard nut to  decide on, whether a                                                               
small incremental  amount that they  have to  pay the state  is a                                                               
net negative or  a net positive because it may  loosen up some of                                                               
those claims  and get those  that are  not going to  be developed                                                               
REPRESENTATIVE SEATON  requested that  the department  supply the                                                               
committee with  what it knows  about the other  private royalties                                                               
in the state.   Mental Health Trust's are not secret  and it is 5                                                               
percent net  smelter return or gross  amount on the value  of the                                                               
minerals, and  there are mines  occurring on Mental  Health Trust                                                               
lands,  and private  lands  where it's  4.5  percent net  smelter                                                               
return.  He  said he would like to know  the publically available                                                               
royalty terms  and basis  for the operating  mines to  assist the                                                               
committee  in determining  what  the appropriate  basis  is.   He                                                               
suggested that if the appropriate  basis for most of the existing                                                               
mines to have  up to 5 percent net smelter  return, and the state                                                               
is not  availing itself  of those  same economic  conditions that                                                               
people go forward  with and develop mines on, then  it would seem                                                               
that the state is leaving a lot on the table.                                                                                   
MR.  FOGELS replied  that he  will  find out  what is  publically                                                               
available,  but  suspected  that  much of  that  is  confidential                                                               
negotiations between the mining operator and the land owner.                                                                    
2:14:19 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  asked  whether  Canada,  a  pro-mining                                                               
country, uses a 10-15 percent  net smelter return royalty or rate                                                               
and  further asked  how that  equates with  the 3  percent mining                                                               
license tax  that Alaska uses on  income.  He said  he is curious                                                               
about the relative comparison of those.                                                                                         
MR. BURNETT noted that DOR  provided the committee with reference                                                               
material on Canadian  mining taxes, and the  materials may answer                                                               
his question.  If not, he said he will provide information.                                                                     
2:15:37 PM                                                                                                                    
CO-CHAIR TALERICO expressed his  appreciation for the efforts and                                                               
information  from  the department  in  so  far  as it  is  nearly                                                               
impossible to  create head-to-head comparisons when  they are all                                                               
entirely different.   He said  one western  state may charge  a 5                                                               
percent net  tax but have no  corporate income tax or  no royalty                                                               
associated  with the  product, while  others just  have corporate                                                               
income tax  and not  the net tax,  and some are  by tonnage.   He                                                               
opined that  Alaska is structured entirely  differently than most                                                               
of the other western states.                                                                                                    
MR.  BURNETT replied  that DOR  has provided  the committee  with                                                               
comparisons of states' severance  taxes, as well as non-petroleum                                                               
corporate income  tax collections  by sector  for [Alaska]  so it                                                               
can  be seen  how each  sector over  the past  several years  has                                                               
performed.  He  pointed out that the corporate income  tax on the                                                               
mines in Alaska  in 2010 was a negative $2.5  million but was $81                                                               
million  in  2011, which  really  looks  at the  commodity  price                                                               
worldwide  and how  it fluxuates.   He  said the  department will                                                               
provide  the  committee  with whatever  information  possible  to                                                               
assist the committee in making decisions.                                                                                       
2:17:14 PM                                                                                                                    
REPRESENTATIVE SEATON  requested an  explanation of  which credit                                                               
or which application got the state to a negative income tax.                                                                    
MR. BURNETT explained  he cannot be specific as to  each one, but                                                               
corporate income  taxes allow  losses from  previous years  to be                                                               
carried forward.  He said,  "You're taxing on an allocation based                                                               
on the  company's ... U.S.  income, so it  is one where  the loss                                                               
could  occur in  Alaska, it  could  occur somewhere  else in  the                                                               
previous year."   All of  Alaska's corporate income taxes  are an                                                               
allocation based on either worldwide or U.S. income.                                                                            
REPRESENTATIVE   SEATON   inquired   whether  it   is   worldwide                                                               
apportionment, but most of the mines were U.S.                                                                                  
MR. BURNETT  offered his belief  that the mining is  U.S. income,                                                               
and the oil and gas sector is worldwide.                                                                                        
MR. SPANOS added that there  are sometimes very large amended tax                                                               
returns that are refunds because  a taxpayer may choose to change                                                               
its  method  of expenses  or  some  other  claim.   Normally  the                                                               
department  will refund  those and  then  audit that  at a  later                                                               
period.  So, it may be a large  refund in one year, an audit, and                                                               
a claim in the next year or  a future year.  Or, potentially, the                                                               
taxpayer and department agree and so it remains as a refund.                                                                    
2:19:22 PM                                                                                                                    
REPRESENTATIVE  SEATON  referred  to the  depreciation  allowance                                                               
used in mining  and the shifting from cost  depletion to resource                                                               
depletion.   He asked for an  explanation as to how  that affects                                                               
the taxes.                                                                                                                      
MR. SPANOS  said he would  like to have  the statute in  front of                                                               
him to provide  details, but explained that there  is a depletion                                                               
allowance depending on  what type of mineral a  company is mining                                                               
in  that  there  is  a  set  amount  in  statute  for  percentage                                                               
depletion  which, interestingly,  can go  over the  actual costs,                                                               
and then  there is  a cost depletion  allowance which  is usually                                                               
used in the industry.                                                                                                           
REPRESENTATIVE  SEATON  requested  an   explanation  of  what  is                                                               
depletion allowance and how it affects the taxes.                                                                               
MR. SPANOS explained that the  basic concept of depletion is that                                                               
there is  a mineral in  the ground  and the company  is depleting                                                               
that mineral, and the costs associated  with getting at it so the                                                               
upfront  expenditures, similar  to  depreciation,  is taking  the                                                               
costs off  each year as the  resource is depleted.   In the event                                                               
it is known  how much is in  the ground, such as coal,  it can be                                                               
depleted over the life of the  mine.  The statute allows for coal                                                               
a  specific  percentage  depletion,  so it's  not  a  traditional                                                               
depletion method  of saying it will  last for 20 years  and there                                                               
is  this  much   and  then  a  dollar   limit  is  mathematically                                                               
calculated to deplete each year.   He offered his belief that the                                                               
statute reads  10 percent,  and that 10  percent is  allowed each                                                               
year  regardless   of  how  much  depletion   has  actually  been                                                               
calculated on the company's books.                                                                                              
2:21:57 PM                                                                                                                    
REPRESENTATIVE SEATON posed  a scenario of a hard  rock mine with                                                               
operational costs of  $50 million this year.  He  asked where the                                                               
depletion comes into that and  whether it wipes out the company's                                                               
expenses or is  in addition to expenses, such as  the company has                                                               
$1  billion worth  of minerals  in the  ground and  will take  10                                                               
percent  of that  and these  are  the expenses,  and the  company                                                               
takes  another  $100  million  of depletion  and  writes  it  off                                                               
against  its  income.    He   asked  whether  the  discussion  is                                                               
basically taking an additional reduction in profitability.                                                                      
MR.  SPANOS confirmed  that it  is in  addition to  the company's                                                               
other expenses.   He said depletion is its own  line item expense                                                               
that is used to calculate net income.                                                                                           
2:23:07 PM                                                                                                                    
REPRESENTATIVE SEATON said, "In our  taxes we have cost depletion                                                               
which  means that  you expect  to spend  the $1  billion over  10                                                               
years, let's say,  and so you'd take off $100  million a year off                                                               
what your income  is before paying taxes, or you  can do resource                                                               
depletion which  is after you've like  used up 50 percent  of the                                                               
minerals that  are estimated  to be there,  then you  reduce your                                                               
tax liability by 50 percent because  you've used up 50 percent of                                                               
the minerals."   He asked whether that is  the resource depletion                                                               
MR. SPANOS responded that he will  get back to the committee with                                                               
an answer.                                                                                                                      
REPRESENTATIVE SEATON stated he  thinks the committee should have                                                               
a presentation  on how  cost and  resource depletion  factor into                                                               
the state's taxes.   He opined that the state is  losing a lot of                                                               
the  taxable income  because it  is written  off -  not only  the                                                               
expenses to get  the net income and then there's  either costs of                                                               
resource depletion  applied to further reduce  the taxable income                                                               
before paying taxes, and this could  be huge portion.  He offered                                                               
his  belief that  Alaska is  the only  state in  the nation  that                                                               
allows  companies  to  switch annually  from  cost  depletion  to                                                               
resource depletion  depending upon which is  more advantageous to                                                               
reducing  the  company's   tax  liability  to  the   state.    He                                                               
reiterated that he  would like the department to  provide a slide                                                               
presentation with graphics so the  committee has an understanding                                                               
when discussing whether  the state is receiving  its full revenue                                                               
that is due  under the statute because the  statute includes this                                                               
cost and  revenue depletion  allowance.  He  said that  having an                                                               
understanding  of how  that  works  in the  real  world would  be                                                               
helpful to him.                                                                                                                 
2:25:35 PM                                                                                                                    
CO-CHAIR  TALERICO  stated  the  committee  won't  ask  for  that                                                               
immediately in order to give the department some time.                                                                          
MR. SPANOS noted that Alaska is  one of the only states that uses                                                               
the  net income  tax liability  on  mining, so  the depletion  is                                                               
usually a corporate  income tax number and "we do  piggy back the                                                               
federal corporate  income tax world"  and the  federal government                                                               
is very  strict about  not allowing  a company  to jump  from one                                                               
method of depletion or depreciation  to another.  He related that                                                               
the mining  income tax  is a very  old tax and  he does  not know                                                               
what the Internal Revenue Service  code looked like back when the                                                               
mining tax was brought on, but  it is certainly a different world                                                               
now.   He said  the department will  put together  a presentation                                                               
that goes over the mining methodology.                                                                                          
2:26:31 PM                                                                                                                    
REPRESENTATIVE  TARR  referred  to  the  Alaska  mine  production                                                               
figures  in the  document provided  by  Mr. Fogels  and said  and                                                               
recalled that  one of her  earlier questions was that  people are                                                               
trying to understand what impact  the changes will have on future                                                               
development opportunities.   She observed that in  2013 Fort Knox                                                               
almost  doubled  its  production   for  that  calendar  year  and                                                               
inquired whether  that increase  was reflecting  a high  point in                                                               
commodity prices or was due to some other reason.                                                                               
MR. FOGELS  replied that  it could be  a typographical  error and                                                               
therefore  he  will get  back  to  the  committee.   However,  he                                                               
continued, such variations are typical  and are based on a number                                                               
of factors  such as  what is  going on in  the mine,  the deposit                                                               
itself,  the kind  of ore  dug  out, or  issues with  production.                                                               
Typically a company is constantly  trying to optimize its milling                                                               
procedure and  will find  new ways  to optimize  to make  it work                                                               
better.  A change in the  chemistry of the rock is another factor                                                               
that  can cause  things to  change,  or just  the grade  changes.                                                               
Every  truckload of  ore pulled  out of  a mine  has a  different                                                               
concentration of the metal in it.                                                                                               
2:28:24 PM                                                                                                                    
REPRESENTATIVE TARR referred  to the oil and gas  tax credits and                                                               
noted that  a shortcoming in  the legislature's work was  that it                                                               
didn't  model things  along the  whole  range of  prices and  the                                                               
realities that  are now  being seen.   Applying that  thinking to                                                               
consideration of the  mining tax, she recalled  Mr. Fogels saying                                                               
that  commodity price  influences  things more  than  any of  the                                                               
other  underlying  issues.    Given   the  great  fluctuation  in                                                               
commodity  prices,  she asked  what  resources  are used  by  the                                                               
department to  look forward and  make predictions about  what the                                                               
prices will be.                                                                                                                 
MR. FOGELS  responded that, assuming  a stable  fiscal structure,                                                               
commodity prices are  probably the biggest driver  for the mines.                                                               
However, he advised, large changes  to the fiscal structure could                                                               
easily over-shadow any changes in  the commodity price.  A number                                                               
of factors influence how much  money a mine makes, with commodity                                                               
prices probably  at the top of  the list.  Other  factors include                                                               
fuel  prices and  the cost  of rubber  for tires.   For  example,                                                               
Usibelli Coal Mine spends a lot  of money on truck tires and that                                                               
is  a big  cost driver  in its  operation.   As far  as what  the                                                               
department  does, he  said most  of DNR's  work is  environmental                                                               
with  permits and  regulating, so  the commodity  prices are  not                                                               
that  big of  a  factor  in DNR's  day-to-day  work.   Where  the                                                               
department sees  the fiscal  side is  in the  production royalty.                                                               
He reiterated that  there is not an ongoing discussion  of how to                                                               
propose changes to that royalty  structure based on what DNR sees                                                               
commodity prices doing in the future.                                                                                           
MR. BURNETT  added that for  purposes of modeling for  the fiscal                                                               
note, DOR's economists  have used the futures  prices and markets                                                               
rather  than any  kind of  formal modeling  for future  commodity                                                               
prices.  He said  DOR spends a lot of time on  oil and gas prices                                                               
and doesn't get  those right either, but DOR tends  to do as well                                                               
as everybody else does.                                                                                                         
2:31:46 PM                                                                                                                    
REPRESENTATIVE TARR commented that the  $6 million looks to be on                                                               
the low  side relative  to some  of the more  recent years.   She                                                               
asked whether  that was  an attempt  to not get  it wrong  and be                                                               
over-optimistic of what that might be.                                                                                          
MR. BURNETT answered  he did not make that  estimate himself, but                                                               
commodity prices  have been declining  across the board  over the                                                               
past several  years.  In  2014, the  total income from  the large                                                               
mines that  would be subject to  this tax, the 13  taxpayers that                                                               
were  paying in  the highest  tax bracket,  was $561  million net                                                               
income  for tax  purposes.    He advised  that  $6 million  would                                                               
represent  about  a  $300  million net  profit  for  the  largest                                                               
taxpayers.   That is certainly  a difference in  commodity prices                                                               
and  costs because  the other  thing that  affects these  is that                                                               
costs of  equipment and  so forth  have been going  up at  a rate                                                               
faster  than  inflation.   The  department  does have  access  to                                                               
taxpayer confidential  tax return  information which is  used for                                                               
estimating future  costs, et cetra.   The department's economists                                                               
look  at a  whole  variety  of things  but  that's  the range  of                                                               
estimated net  profits under the  state's tax regime,  which will                                                               
vary widely year-to-year as it has in the past several years.                                                                   
2:33:33 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON recalled  Mr. Burnett  saying that  the                                                               
2011 corporate income tax on  hard rock mining was pretty sizable                                                               
because commodity prices were high.   Theoretically, HB 253 would                                                               
generate about $6 million of new  income for the state.  He asked                                                               
how much  [HB 253]  would generate in  a high-end  commodity year                                                               
and what the impact would be on the industry.                                                                                   
MR. BURNETT  replied he believes  that information may  have been                                                               
provided in a letter that came to the committee today.                                                                          
REPRESENTATIVE JOSEPHSON confirmed that it was provided.                                                                        
MR. BURNETT  advised that the economist  performing the modeling,                                                               
Will Bishop, is in the room.                                                                                                    
2:34:52 PM                                                                                                                    
REPRESENTATIVE HERRON asked  why the proposed increase  is from 7                                                               
to 9 rather than from 7 to 8.5 or 7 to 10.                                                                                      
MR.  BURNETT  responded that  tax  policy  is  for a  variety  of                                                               
reasons.  There  was estimated income at various  price points or                                                               
tax  rate points.   This  was discussed  with a  group of  people                                                               
within  the administration,  which included  people from  DNR and                                                               
the  Department of  Commerce, Community  & Economic  Development,                                                               
people familiar  with the  industry, and  that's a  decision that                                                               
these people came up with.   As to why that particular number, he                                                               
said there's probably more art than science in some ways.                                                                       
REPRESENTATIVE HERRON  said that  begs the question  then -  if a                                                               
group of  people threw  a dart  toward a target  on the  wall and                                                               
that was the best  shot.  It seems that to  increase the taxes on                                                               
any industry  there has to be  a justification and an  ability to                                                               
articulate  an  understanding  of   the  industry  and  that  the                                                               
industry can bear  an increase.  He suggested  that drilling down                                                               
and understanding the  analysis will help in selling  this tax to                                                               
the legislature.   It's important to legislators  and industry to                                                               
understand.   He  said it  is important  to be  able to  tell his                                                               
constituents, as well as his  own conscience, that it wasn't just                                                               
a dart in a dart board.                                                                                                         
2:37:29 PM                                                                                                                    
MR.  BURNETT  stated  that  the  presentation  is  concluded  and                                                               
offered his  understanding that  there will  be public  and other                                                               
additional testimony in the future.                                                                                             
CO-CHAIR  TALERICO noted  that Alaska's  climate and  the weather                                                               
can create  huge issues for  mines, particularly open  pit mines.                                                               
For  example, there  was record-setting  rainfall  in 2013  where                                                               
many of  the mines were located.   Also, any level  of earthquake                                                               
unnerves everyone  working in underground  mines and  changes the                                                               
way  a person  works  for  a while.    Mining  is an  interesting                                                               
industry that can be impacted with issues out of human control.                                                                 
MR. FOGELS corrected the production  figure for Fort Knox for the                                                               
year 2013 - it  should be 428.822, not 728.822.   He said he will                                                               
further  verify  the  correct  the number  and  send  an  amended                                                               
document to the committee.                                                                                                      
[HB 253 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB 253 DOR 2015 Tax Report.pdf HRES 2/17/2016 1:00:00 PM
HB 253
HB253 ver A.pdf HRES 2/17/2016 1:00:00 PM
HB 253
HB253 Sponsor Statement - Governor's Transmittal Letter.pdf HRES 2/17/2016 1:00:00 PM
HB 253
HB253 Sectional Analysis.pdf HRES 2/17/2016 1:00:00 PM
HB 253
HB253 Fiscal Note-0924-DOR-TAX-01-13-16.pdf HRES 2/17/2016 1:00:00 PM
HB 253
DOR Response to House Resources Committee - 2.15.16 (Part 1 of 2) signed JB.pdf HRES 2/17/2016 1:00:00 PM
AK Mine Production and Prices.pdf HRES 2/17/2016 1:00:00 PM
Trustees for Alaska v State.pdf HRES 2/17/2016 1:00:00 PM