Legislature(2005 - 2006)BELTZ 211
05/02/2005 01:30 PM COMMUNITY & REGIONAL AFFAIRS
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* first hearing in first committee of referral
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SB 179-MINERALS TAX/PAYMENTS TO MUNIS IN LIEU 1:52:15 PM CHAIR GARY STEVENS announced SB 179 to be up for consideration. He asked Mr. Van Sant to come forward and discuss the issue of prohibiting communities from having a severance tax on minerals and mining and how that would be implemented. STEVE VAN SANT, State Assessor, Department of Commerce, Community & Economic Development (DCCED), introduced himself and explained that original bill exempted nearly every tax you could think of. The committee substitute (CS) made a number of changes that his office recommended one of which was the severance tax issue. It appeared as though a municipality could hold a mining operation hostage by threatening a severance tax. DCCED contends that resources belong to the people of the State of Alaska and therefore a severance tax should be reserved to the state rather than a local municipality. If the state decided to levy a severance tax, it could do so statewide or by category. Looking at other changes made in the CS, he said they are acceptable to the department at this time. The primary point was that one entity should not carry the total tax burden for a community or proposed borough. All residents of an area should share the burden. CHAIR GARY STEVENS asked how property tax is established. MR. VAN SANT explained that when speaking about property tax everything is taxable unless state law specifically exempts it. Obviously state property, federal property, city property, and borough property would be exempt from property tax unless a private entity uses the property for its own purpose. For example, the railroad pays a possessory-interest tax on land it leases from the state. Ownership on January 1 dictates taxability of a property. If a church owned a piece of property on January 1 and used it for religious purposes until January 5 and then sold the property, the exemption would carry through for the entire year. But if the church purchased a property on January 5, it would be taxable the entire year. 1:57:45 PM The Red Dog Mine itself is taxable. When he put the full value on the mine it amounted to about $130 million in property including the road, the port, the storage facilities. That was all property not owned by the Red Dog Mine, but they had an interest in it and were therefore subject to possessory-interest property tax. Subsequently, the Legislature specifically exempted that interest, but any other operation that came in would pay a local property tax. If they didn't have a local property tax the assessor would include it in the full value determination for educational funding. CHAIR GARY STEVENS recalled that the Alaska Municipal League (AML) testified that there is a perfect balance here if there is a new borough. If a property tax were assessed against the mine then residents would have to pay a similar property tax on their homes. He asked whether that would be true or would many homes be exempt. MR. VAN SANT explained that most property in those areas is exempt because it is state or federal land. Private homes on restricted deeds, Native allotments or ANCSA property would be exempt unless leased to third parties. Restricted deeds are exempt and ANCSA property would be exempt unless it's developed. The same thing applies and is done in Anchorage, Fairbanks and Kodiak. A question that typically arises relates to HUD homes. An attorney general opinion says that while the underlying fee is exempt the possessory interest that the purchaser has in the property is taxable. As a result, the Legislature passed a bill allowing a municipality to exempt those interests because collection may be problematic and the cost of collection more than it's worth. Nonetheless, that value is included in the full value determination for school funding. "Even if we have $100,000 or $150 million of those properties, we would include them in the full value so they are going to have to raise the 4 mills equivalency somehow on those." CHAIR GARY STEVENS observed that there is probably no definitive answer as to whether that is a control. AML says it is a good control over how much property tax a mine would be charged and you say it's not a control. 2:01:54 PM MR. VAN SANT replied it is a control to some extent. He suggested the City of Valdez provides a good example. It levies a 20 mill tax, which is quite high but that's the tax rate the state levies against oil and gas properties. The City of Valdez takes all the tax dollars for oil and gas within city boundaries, but every person living in Valdez pays 20 mills on their property as well. Certainly that's a control. People that do pay property tax are well cognizant of the fact that the tax comes from their pocket and if the city wants to levy a property tax against a mine it can't get around the fact that residents will pay the same rate. CHAIR GARY STEVENS asked if 4 mills is enough or a fair amount. MR. VAN SANT replied 4 mills is the minimum required contribution, "but if you're looking at doing your own schools - I don't know of anybody that goes 4 mills." Typically when a community funds its own schools the millage rate isn't just the minimum. He noted that the CS changes that rate if an area chooses to organize. 2:04:49 PM SENATOR GENE THERRIAULT, Sponsor, stated agreement that the severance tax should be reserved to the state as the supreme taxing authority. He continued to say: Certainly, those minerals are reserved to the state and that's one of the concerns that there has been. That if you allowed the mine to be the only entity that's taxed, then what they do is they use that jointly owned property - which my 32,000 people own part of and your 32,000 people own part of - and they pay their entire burden off of that jointly owned resource. We'd rather have them tax the enterprise, tax the activity that's going on as that jointly owned resource is developed and mined. He suggested that the CS is a good work product that addresses many of the concerns that have been raised and that Mr. Balash could answer any technical questions. CHAIR GARY STEVENS asked Mr. Balash to explain how the CS changes the original bill. 2:07:06 PM JOE BALASH, Staff to the Legislative Budget & Audit Committee and to Senator Therriault, explained that a different approach was taken on the committee substitute. They took language suggested by Mr. Van Sant and "jumped between Title 29 and Title 43 as appropriate." Section 1 simply adds a reference. Section 2 describes the way - through Title 29 - the tax would affect mines in the unorganized area. Section 3 reserves the severance tax to the state, but it grandfathers in those severance taxes that are currently in place or that come into being by January 1, 2006. It doesn't go back to January 1, 2005 because that would necessitate a retroactive effective date. Section 4 has a few changes. The mill-rate is still linked to the foundation formula. It is 4 mills when a mine is located in an unorganized borough or it is the mill rate levied by a newly incorporated municipality or the municipality into which the mine is annexed. The levy is the same as all other property in that municipality. If the Pogo Mine were annexed into the Fairbanks North Star Borough, it would be assessed 15 mills just like every other piece of property in the borough. If the Deltana Charter Commission were to be successful in incorporating a new borough with a 10 mill property tax, then that would be the mill rate. The tax would still be assessed and collected by the state but it would be payable to that municipality. In addition, there is a provision for the negotiation of a state PILT in place of the property tax. Likewise, the newly incorporated government or the annexing government could negotiate a PILT with the mine. The 15-year exemption on particular things that you could otherwise tax on the mine after production commences remains the same. The State Assessor will do the assessment and much of the language Mr. Van Sant recommended is included. 2:11:13 PM Referencing page 6, line 24, he noted that the CS does not incorporate Mr. Van Sant's recommendation to reduce the exemption on property valuation to $1 million. The original $10 million exemption remains unchanged. The Alaska Miners Association has weighed in and although he hasn't had the opportunity for a direct conversation, the provision was intended to shield small mining operations that have made substantial investments. 2:12:42 PM CHAIR GARY STEVENS referenced the $10 million exemption and asked if that includes just the value of the land or the value of the facilities built on the land. MR. BALASH replied it would include those facilities that aren't open to the public. CHAIR GARY STEVENS asked if it would be the physical structure that the mine installs. MR. BALASH said that's correct. At Fort Knox in the Fairbanks North Star Borough, the assessor taxes everything that has been added to the property. This includes the power poles and power lines on the property. Similarly, the road beyond the security gate leading to the mine is taxed while the part of the road leading up to the gate is not taxed. 2:14:25 PM MR. BALASH explained that the mechanism used to negotiate a PILT agreement with the state directs the Commissioner to follow the procedures in AS 43.82 - the Stranded Gas Act - and then submit it to the Legislature for approval. In no way does this contract away the state's right to levy, change or remove a tax. The Legislature would still have the full ability to modify the terms of the PILT agreement. CHAIR GARY STEVENS noted that a question was raised earlier about the issue in the constitution about not contracting away the right to tax. He asked if a legal opinion was received as to whether PILT agreements are included. MR. BALASH replied there is specific language regarding the state PILT. Although he didn't have anything in writing with regard to a municipal PILT the bill drafter posited the question to him. He suggested that the municipality's authority to put in place a PILT was implied, as it exists today. The proposed legislation gives a mechanism authorizing municipalities to go through a process and do the same thing, which would then be binding. "However, that contract wouldn't be absolute in its binding effect. The municipality could appeal to the Legislature for relief." The drafter thought that was a plausible remedy. He said he didn't ask for an opinion beyond that. 2:16:52 PM SENATOR THERRIAULT referenced the issue of property subject to taxation and emphasized that property that has limited public access should be taxable. With regard to the $10 million threshold, the determination would be the same. If the public had free access it wouldn't be taxed, but if a company exerts control as part of the operation then it's part of the calculation to determine whether or not the $10 million threshold is met. Large mines and small mines are treated the same with regard to valuation of the property itself. CHAIR GARY STEVENS asked for an explanation of when a tax would be levied as it relates to beginning production. MR. BALASH read page 3, line 23 then pointed to the definition section on page 6, line 29. The date on which the initial shipment of product is made is the year that the tax begins. No tax would be levied during construction. SENATOR THERRIAULT added there might be concern that companies would delay the initial shipment, but because the upfront investment is huge, companies will rush to get minerals to market so that they can service their debt. 2:21:15 PM CHAIR GARY STEVENS asked if he had any final comments. SENATOR THERRIAULT said the till is tied to the Stranded Gas Act so that that structure could be used. CHAIR GARY STEVENS asked Mr. Van Sant if he had any response or questions. 2:22:16 PM MR. VAN SANT acknowledged he did have several questions. First he referenced the change in wording for exemptions on page 6, line 20 and questioned the intent. He interprets the language as saying that if it's within a borough it's going to be exempt. "And I'm not sure that that was the intent," he said. MR. BALASH said he would have to review his notes. MR. VAN SANT referenced page 6, line 18 and asked if that is unlimited use by the public. MR. BALASH replied yes. The original draft had "limited public use". Senator Therriault wasn't comfortable with the phrase. He wanted it clear that the property would be open to public use. There were no further questions. 2:24:41 PM CHAIR GARY STEVENS announced he would hold SB 179 in committee.