Legislature(2005 - 2006)BELTZ 211
04/18/2005 02:00 PM Senate COMMUNITY & REGIONAL AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB179 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| * | SB 179 | ||
SB 179-MINERALS TAX/PAYMENTS TO MUNIS IN LIEU
2:04:35 PM
SENATOR THERRIAULT, Sponsor, said the intent is to offer
stability in unorganized areas with respect to generating jobs
and value for the state based on the mineral resources found in
the unorganized areas.
SENATOR THERRIAULT spoke to the sponsor statement:
Senate Bill 179 seeks to provide tax certainty and
make Alaska a more attractive territory for
investment. In addition, the mining property tax will
provide funding for schools in the unorganized borough
and help areas transitioning to local rule by
providing some financial stability.
SB 179 levies a property tax on mining facilities in
those areas of the State of Alaska that were not
organized as of January 1 of this year. The mill rate
is tied to the mandatory local contribution
requirement set out in the foundation formula. The
proceeds are accounted for separately and available
for appropriation to the public education fund.
In the area surrounding one of these mining properties
organizes a local government, an additional levy of
two mills is charged. The entire amount is payable to
the new local government. The only additional tax the
new local government may levy against the mine is the
first $1,000 of a sale or use of services. The local
government will be free to levy taxes at its own
discretion after the mine has been in production for
15 years.
The development of the Greens Creek, Red Dog, Fort
Knox, True North, and Pogo mines over the last decade
and a half has proven that mineral development can
bring substantial private sector investment and
employment to diverse geographic regions of Alaska,
from southeast Alaska to the Interior and on to the
northwest Arctic. Other projects such as Rock Creek,
Donlin Creek, and Pebble offer potential economic
development to still other parts of Alaska, including
eastern and southwestern Alaska.
From the perspective of making the initial decision
about whether to invest in Alaska, the
unpredictability of future tax liability makes
planning difficult. This unpredictability contributes
to the disincentive against investment in mining in
Alaska because unpredictable operating costs, such as
tax liability, combine with fluctuations in metals
prices to make projections of economic risk more
difficult at the development decision stage. Placing
limits on the extent of new taxes for metallic mining
operations will make economic planning more
predictable and thereby reduce the disincentive
against investment in Alaska.
2:08:13 PM
CHAIR GARY STEVENS asked if this might in any way be a deterrent
to borough formation in the unorganized areas.
SENATOR THERRIAULT said he wasn't sure, but when a mine
develops, economic activity increases and jobs are created.
Hopefully that would generate the desire to have some sort of
local control over the mine and also the communities surrounding
the mine. That's why the bill also proposes a 2 mill additional
levy on the mine if the area around the mine organizes. If the
mine has a life beyond 15 years, then the local government could
tax at whatever level it wanted. All properties in the borough
would be taxed at the same rate as the mine.
SENATOR WAGONER said he likes the bill because it brings
certainty to the full process of opening a mine.
CHAIR GARY STEVENS asked what the tax rates are in organized
boroughs.
SENATOR THERRIAULT replied in the Fairbanks North Star Borough
the general property tax is 16 mills, which is 16 mills on
homes, the mine, and the pipeline infrastructure. Certainly the
level of services in that area is comprehensive and argues for a
higher mill rate. In a more rural setting you wouldn't
necessarily expect all services to be offered and you would
consequently expect the mill rate to be lower.
He was open to discussion with regard to the 4 mills, but the
idea is to allow projects to move forward into production.
SENATOR THERRIAULT noted that his staff contacted the assessor's
office in Fairbanks to find out exactly what gets taxed and the
bill is structured to treat mines the same way. The idea is to
treat areas equally, but to also consider the level of services
that would be provided in more remote areas.
2:13:24 PM
SENATOR ELLIS asked whether the 4 mill tax represents the
opening bid with the state or does the sponsor represent that
projects won't go forward if it's higher than the bill says.
SENATOR THERRIAULT replied he couldn't make the statement that a
level beyond that proposed would mean no development would
occur. The Legislature is sitting as the assembly for the
unorganized area and the rate is certainly up to legislative
discussion. The proposal is to tax mines in the unorganized area
uniformly and encourage the investment in mining in the state.
The original concept was just 4 mills to cover the education
requirement. Subsequently he asked the drafters to increase the
cap to 6 mills if an area around a mine were to form a borough.
SENATOR ELLIS asked if there aren't impacts and costs to the
state beyond providing education.
SENATOR THERRIAULT replied there could be. If local government
isn't there to provide services that are needed, the state is,
by default, the provider. But currently there is no allowance in
statute for a millage rate to be charged. If a mine were to
develop in an unorganized area, nothing would accrue to the
state from property tax currently.
SENATOR ELLIS said he understands the need for certainty and
consistency, but he questioned whether the 4 mill rate would be
based on the least economic project and therefore whether this
would be good public policy.
SENATOR THERRIAULT replied it is important to keep the least
economically viable in mind.
SENATOR ELLIS remarked that in the mining industry, world
commodity prices are the biggest factor. He wasn't sure how much
responsibility the state had to take to make projects economic.
SENATOR THERRIAULT agreed that commodity prices and the up front
investment are the major factors determining whether a project
will go forward. But absent this proposal, no money would accrue
to any governmental entity in the state from mining development
in the unorganized area.
SENATOR STEDMAN asked if small mining claims with little or no
development would be taxed.
SENATOR THERRIAULT explained the property tax would be levied on
the mine infrastructure; the lease itself isn't taxable and the
minerals in the ground aren't taxed either. There is language in
the bill to protect small mining operations and as such, the
first $10 million dollars in infrastructure is exempt.
SENATOR WAGONER remarked that as written, nothing precludes the
state from reducing the millage rate for a number of years to
make the project viable.
CHAIR GARY STEVENS noted the bill says 4 mills.
SENATOR THERRIAULT agreed it would take legislative action to
change the rate.
2:24:58 PM
STEVE BORRELL, Alaska Miners Association, testified on behalf of
the association. He stated that through SB 179 the mining
industry is volunteering to pay a 4 mill property tax on large
mines operating in the unorganized borough. The tax rate would
remain for a period of 15 years from first production.
Depending on the type of land where mining occurs, the industry
already pays several taxes to the state. Those taxes include:
mining license tax; corporate income tax; mining claim rental on
state and federal claims; production royalty on state land
claims; and property tax to the municipality in organized areas.
In the unorganized area there is no municipal government with
taxing authority and it is in those areas of the state that the
new tax is proposed. The proposed 4 mill tax is the amount a
borough would be required to contribute to education. An
additional 2 mills would be levied if a borough were to be
established in the area. The 4 mill tax would be paid to the
state until a borough is established after which it would be
paid to the borough.
With regard to whether the tax would encourage or discourage
borough formation, the industry hopes the bill would be borough
neutral.
The tax would be levied against all mines with an assessed value
of $10 million or more, but smaller mines could elect to pay the
tax if they wanted the rate certainty for 15 years. As
previously stated, the decision to go forward with a project is
tied to a number of factors relating to certainty.
2:30:44 PM
JAMES FUGUE, Technical and Permitting Coordinator for the Donlin
Creek joint venture, stated that Placer Dome Inc. supports SB
179 for two reasons. First it provides a mechanism for the mine
to contribute to the local community by providing funds that
could be used for education and local government. Second it
helps provide long-term stability to assist in making a positive
decision on a project they expect to be in excess of $1 billion.
If developed, the mine would pay corporate income tax, mining
license tax, and royalty tax to Calista Corporation for mineral
extraction. SB 179 wouldn't affect those payments, but would
provide additional revenue to the state or a future borough.
Local communities would also benefit through the jobs created.
The company has a history of local hire and community
participation at Donlin Creek and that would continue if the
mine goes forward. The proposed property tax rate is set at the
rate that is currently set for funding education.
Preliminary capital estimates for the construction of the mine
at Donlin Creek are on the order of $1 billion. Under SB 179,
this could result in a revenue stream of $4 million per year,
which would cover about 90 percent of the state's cost for
education in the local area.
The project would construct and maintain its own infrastructure
and wouldn't draw on local services. The tax would be paid to
the state unless the community decided to form a local
government. If that were to happen, the taxes would be paid
directly to the local government, which would help provide
financial security to the new government.
2:33:38 PM
Referencing language about the tax payable upon formation of a
new borough, he suggested amendment to avoid future uncertainty
about the intent of the language. As written the language on
page 2, lines 22-23 says "...the tax rate in a municipality
incorporated after January 1, 2005 is the mill rate specified in
AS 14.17.410(b)(2) plus two mills." He suggested it be amended
to read "...is the mill rate required to meet the local
contribution required of that municipality under AS
14.17.410(b)(2) plus two mills"
In making capital investments, mining companies place emphasis
on political and economic stability at all government levels. In
the unorganized borough there are no rules and therefore no
entity to negotiate agreements regarding taxation at the local
level. This makes long term economic modeling and forecasting
difficult when investment decisions must be made. One billion
dollars is a significant investment for the company and a
positive decision on economic viability at Donlin Creek would be
easier to achieve if the maximum tax level were certain.
Placer Dome Inc. supports the bill because it serves the
interests of Alaskans while helping to provide the investment
climate that will help the company make a positive decision on
the Donlin Creek Project.
2:35:40 PM
CHAIR GARY STEVENS asked for clarification on the proposed
amendment.
MR. FUGUE referenced page 2, line 23.
SENATOR WAGONER asked Mr. Borrell to discuss the three taxes he
mentioned in terms of cost or percentage.
MR. BORRELL replied the mining license tax is variable at the
start and then rises to 7 percent of net proceeds from the
project. The state production royalty is also a net proceeds
royalty and it is 3 percent. That means the state receives 10
percent of the profit.
SENATOR WAGONER said corporate tax would also be due.
MR. BORRELL said that's correct.
CHAIR GARY STEVENS noted Mr. Hoffbeck from the Department of
Revenue was available for questions.
2:38:40 PM
KEVIN RITCHIE, Executive Director, Alaska Municipal League
(AML), testified that this is difficult because it looks at
impacts on boroughs that don't exist.
He suggested that the committee look at mines that are currently
operating in boroughs across the state. Information on those
mines would be available through the state assessor's office.
The sponsor's comment that the Legislature is the unorganized
borough assembly de facto is a good one. Although it's positive
that the mining industry came forward to talk about taxation in
the unorganized area, significant discussion is in order with
the state assessor to clearly understand how mines are treated
elsewhere and to look at tax structures. The average mill rate
property tax in the state is between 14 and 15 mills. If a
municipality were to form and provide services, you'd want to
make sure that a borough didn't end up subsidizing a mine as a
result of this bill. Referencing page 6 relating to exemptions
from municipal tax and mining property tax he suggested the
state assessor could and should provide comment.
The AML is supportive of new business coming into the state and
mining in general, but make sure the book is balanced and that a
mine wouldn't be a deterrent to borough formation as opposed to
just neutral.
CHAIR GARY STEVENS asked if he had comment on his major concern,
which is whether this might be seen as a detriment or
encouragement to borough formation.
MR. RITCHIE said depending on the circumstances and on a case-
by-case basis it could be a detriment. One part of the solution
is that everyone in the borough must be taxed at the same rate.
Another is that during borough formation the tax structure is
discussed. He noted the bill would exempt the mine from other
taxes such as sales tax, which is something else to question.
2:45:55 PM
CHAIR GARY STEVENS asked the sponsor if he had further comments.
SENATOR THERRIAULT referenced page 2, lines 21-22 and said the
original bill specified 4 mills. Because he didn't want to lock
the contributions from these projects at 4 mills and have a
future Legislature boost the required mill rate for education,
he had the drafter put in language that says the statutory
education requirement shall be the millage rate that is paid. If
the Legislature adjusts the education requirement from 4 mills
to 5 mills, the millage rate requirement would increase on a
mine as well.
On page 3, lines 7-9 talk about a sales tax. A local sales tax
levy is allowed and is capped at $1,000. Clearly, if a local
government is formed it can establish a sales tax.
Language on page 6, lines 18-19 makes it clear that roads,
storage facilities, terminals, docks and other port facilities
and airstrips that are open to public use are exempt. He tried
to draw sensible lines with regard to taxation and the level of
local taxing power that would be available if a government were
to form. Hopefully this will give a level of certainty that is
required for projects to move forward.
SENATOR WAGONER commented it makes a difference for a mining
company to know in advance what the property tax would be.
2:50:40 PM
CHAIR GARY STEVENS said he looks forward to another hearing and
held SB 179 in committee.
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