Legislature(1997 - 1998)
02/26/1997 01:10 PM House TRA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 63 - AVIATION FUEL TAX EXEMPTION Number 061 CHAIRMAN WILLIAMS announced the first order of business to be HB 63, "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country; and providing for an effective date." Number 153 REPRESENTATIVE GENE THERRIAULT stated that he would defer to the committees wishes on whether they want to take action on the original bill or the committee substitute with the marine bunker fuel. He stated that although a number of years ago the legislature tried to put an incentive into statute to increase the amount of marine bunker fuel that was sold in the state of Alaska, the Department of Revenue has provided information that the actual amount sold in the state has dropped off significantly. He stated that in 1996, 99,553 gallons of bunker fuel was sold which derived $5,177 of tax to the state. He stated that adding marine bunker fuel will not impact the fiscal note very much, but hopefully it will lure sales back into the state of Alaska. There are a number of cruise ships that come into the state but they are buying their product out of state where they have a tax advantage. Number 304 REPRESENTATIVE JOHN COWDERY stated that it was his understanding that the bunker fuel or residual oil is also used to make coke in coal. He asked if there was anything that could be done to enhance the Beluga Coal Fields. Number 407 REPRESENTATIVE THERRIAULT stated that this is the first time he had heard of this and if the committee is uneasy about adding the bunker fuel onto the bill and would prefer not to,1 that would be fine. Number 453 REPRESENTATIVE KIM ELTON asked why is it limited just to passenger watercraft. Number 469 REPRESENTATIVE THERRIAULT replied that it is where the potential sales or utilization of this type of fuel is anticipated to come from. Number 493 REPRESENTATIVE BILL HUDSON asked if we were going to take up the original bill or the committee substitute bill. Number 507 CHAIRMAN WILLIAMS responded that before the committee is the original bill and it would be up to the committee members if they want to take up the committee substitute. Number 558 MARK NECESSARY, Senior Vice President, Tesoro, stated that Tesoro supports HB 63. He stated that HB 63 will help Alaskan refiners remain competitive and at this time jet fuel produced outside the state is entitled to the tax exemption. It will encourage jobs and investment in the state of Alaska. He stated that recently Tesoro announced the capital budget for 1997 to be $50 million, of which $16 million is allocated to expand the hydrocracker unit at the Kenai refinery which produces jet fuel. He stated that it is ironic that Tesoro purchases Alaska crude oil at a premium price then pays tax on a fuel that sells for considerably less than what is paid for the raw material. He stated that bunker fuel is a residual from the crude oil after the light ends are extracted in the refining process. He stated that the only market for residual fuel oil in Alaska are asphalt, bunker fuel, fuel for tankers and cruise ships, and re-injection into the Trans-Alaskan Pipeline. He stated that the intent from Tesoro's prospective is for the bunker fuel amendment to include all tankers. He stated that the product is currently subject to state fuel marine tax. He stated that the tax for bunker fuel is 5 cents per gallon. This tax represents the disproportional amount of cost for the bunker fuel. He stated that as a result of the current rate of taxation on this product, Alaska bunker fuel oil is overpriced and Alaska producers can't compete with suppliers from outside the state. He stated that even though many tankers and cruise ships call on Alaskan ports, minimal quantities of this extremely tax sensitive fuel oil are purchased in Alaska. He stated that Alaska bunkers contain less sulfur than the average bunker used in Alaska waters. The Alaska refiner transports the residual fuel oil to the west coast where it is combined with an inferior bunker fuel that contains a much higher level of sulfur, which is sold to the same vessels calling on Alaska ports. He stated that this tax should be eliminated to increase the marketability of a quality, value added Alaska petroleum product in a very competitive market. He stated that Tesoro would like to have the opportunity to develop the market for this product. Number 821 REPRESENTATIVE HUDSON asked what Tesoro's average annual tax on the bunker fuel is and what percentage of the bunker fuel does Tesoro burn to manufacture other products. Number 841 MR. NECESSARY stated that Representative Therriault reference to $5,000 being collected in 1996 probably pertains strictly to cruise ships. The Tesoro Kenai refinery used 130,000 barrels, this past year. Number 880 REPRESENTATIVE HUDSON asked if you paid $600,000 in taxes, one- third of that would be taxes that are being paid on a product that you are expending yourself. Number 906 REPRESENTATIVE COWDERY referred to his comments earlier regarding residual fuel being used for coking operations in developing coal fields and asked if the residual could be used for those purposes. Number 936 MR. NECESSARY replied that several years ago Tesoro had looked into that and if the market were to develop, that would be a useful market for that material. Number 956 REPRESENTATIVE COWDERY stated that the committee substitute should be addressed. Number 985 REPRESENTATIVE JERRY SANDERS asked what period of time would $50 million be spent on the expansion. Number 1005 MR. NECESSARY stated that it would be between now and December 31, 1997. Number 1013 REPRESENTATIVE SANDERS asked how many construction jobs this would bring to Alaska and if workers would be brought in from outside Alaska. Number 1025 MR. NECESSARY replied that the total estimate is about 250 construction jobs, 160 will be allocated to the expansion of the refinery and from that group it is expected to have 98 percent Alaskan hire. Number 1052 REPRESENTATIVE SANDERS asked if it would primarily increase the jet fuel or would it increase the bunker fuel as well. Number 1066 MR. NECESSARY stated that it will increase the amount of jet fuel by 1,700 barrels per day. Number 1074 REPRESENTATIVE SANDERS asked that wouldn't it increase the bunker fuel as well, since it is a by-product. Number 1081 MR. NECESSARY responded that it will not increase the amount of the heavy material coming through the refinery. He stated that the unit it would be processed through would be a hydrocracker unit, which cracks the molecule into smaller molecules, which produces jet fuel. Number 1097 REPRESENTATIVE SANDERS asked who the bunker fuel is sold to. Number 1107 MR. NECESSARY replied that it is sold to the Liquid and Natural Gas (LNG) Tankers that run between Nikiski and Japan and the rest is for their own tankers. Number 1133 REPRESENTATIVE SANDERS asked that in other words, you are selling this to yourself and paying a tax on it. He asked if the reason it is bought here is because they can't buy it in Japan. MR. NECESSARY replied that he could not answer that, but he would presume that is the reason. Number 1148 REPRESENTATIVE SANDERS stated that he would think with their operations on Sahlalin island it would just be a short period of time until they would be selling it to themselves in Japan and that Tesoro would lose that market too and asked if Tesoro would be the only one in Alaska that is paying the tax. MR. NECESSARY replied that is correct. Number 1169 REPRESENTATIVE SANDERS stated that he thought the committee substitute should be addressed. Number 1180 REPRESENTATIVE HUDSON asked if someone from revenue could address the dollar amounts, so we would know not just from the industry but also from the agencies. Number 1203 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, stated that the history of bunker fuel sales in 1994 and 1995 equaled $200,000 in revenue. In 1996 what has been reported as sale of bunker fuel has dropped off considerably. He stated it could be because consumption has dropped off or because it was netted with other kinds of fuel upon reporting. He stated that an option that the state took and the department supported was in 1994, a proposed alternative to the complete repeal of the tax. A special act was passed that stated a certain threshold on bunker fuel, which was 4 million gallons and as soon as this was sold the tax was dropped from 5 cents a gallon to 1 cent a gallon. This provided an incentive to sell bunker fuel and the state still received some of the revenue. He stated that an option would be to extend this option that expires in 1998. He stated that the 400 million gallons equates to $200,000 dollars in tax. Number 1365 REPRESENTATIVE HUDSON made a motion to adopt CSHB 63, B draft, before the committee. Number 1380 CHAIRMAN WILLIAMS asked if there were any objections. Number 1386 REPRESENTATIVE ELTON stated that he would object for clarification purposes. He stated that the draft before us now would only apply to bunker fuel that is sold to passenger watercraft. He asked if he was correct in sensing that there is some wish to expand that beyond passenger watercraft. Number 1439 REPRESENTATIVE COWDERY stated that it was his intentions to extend it so it would allow development of the Beluga Coal Field, because it is a low yield field and it is one of the largest fields on tide water in the nation, but in order to make it competitive there needs to be a residual of oil. Number 1480 REPRESENTATIVE HUDSON stated that he believed the committee substitute needs to be adopted before it could be amended. Number 1497 REPRESENTATIVE ELTON stated that he would maintain his objection. Number 1515 CHAIRMAN WILLIAMS called for a roll call vote. Representatives Cowdery, Kookesh, Hudson, Sanders, Masek and Williams voted in favor of the motion. Representative Elton voted against motion. Committee Substitute HB 63 was adopted before the committee. Number 1525 REPRESENTATIVE COWDERY asked the Department of Revenue where it would be appropriate to put the amendment in the bill. Number 1556 MR. BARTHOLOMEW stated that the department has not been involved in the drafting of the amendment so he would hesitate to comment until he has the intent in writing. REPRESENTATIVE COWDERY stated that maybe the language could be added in the next committee of referral. Number 1604 REPRESENTATIVE SANDERS stated that maybe the committee could agree on an conceptual amendment. CHAIRMAN WILLIAMS stated that a memo will be sent along with the bill. Number 1623 REPRESENTATIVE HUDSON stated that if we are going modify or amend the bill then we would have to ask for an amended fiscal note to carry along with it. He suggested that the committee pass out the bill and attach a letter of intent to the next committee of referral. Number 1653 REPRESENTATIVE SANDERS stated that if page 2, line 21 had the word passenger eliminated from it would eliminate the need for lines 24 through 26. Number 1684 REPRESENTATIVE ELTON stated that it would not address Representative Cowdery's concern of the use of this kind of fuel to create a coal slurry. He stated that the reason he objected to the bill was because he had a sense that the committee would want to go on further. He would prefer it if it just addressed the problem that was originally presented, this is a last minute change that will lead to further change. He stated that the committee is taking a bill that addresses a discreet problem and is trying to fix other things by reducing the revenue that comes to the state at a time when more programs are being taken out. He stated that it is a problem that Tesoro pays a tax on fuel that they are selling to themselves but beyond that causes problems. He stated that the committee is making a substantive change that is going to make him rethink his position on the bill. Number 1808 CHAIRMAN WILLIAMS stated that this was talked about when the bill was first brought to the committee and the language of the title of the bill was tightened up. He stated that this should take care of Representative Elton's concern. Number 1837 REPRESENTATIVE ELTON stated, "that it does help a lot. I guess the growth that I see in this bill is I can swallow this bill when it says passenger watercraft. I might even be able to swallow this bill if it says passenger watercraft and let's not tax somebody selling bunker fuel to themselves. Going beyond that would be allowed under the title." He stated that the coking idea for coal may be a great idea and he understands that there could be a potential problem competing with refineries, that in the future may be placed overseas at which he would then revisit the bill. He stated he is not comfortable with extending this, in light of a potential problem down the road when it means that we are taking $200,000 out of the general fund. Number 1882 REPRESENTATIVE COWDERY stated that he would have no problem moving the bill and working with the sponsor in the next committee of referral. Number 1911 REPRESENTATIVE BEVERLY MASEK made a motion to move CSHB 63(TRA), 0- LS0262\B, Chenoweth, 2/26/97 with the following fiscal notes and individual recommendations. Number 1930 CHAIRMAN WILLIAMS asked if there was an objection. Hearing none, CSHB 63(TRA) was moved out of the House Transportation Standing Committee.
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