Legislature(2013 - 2014)SENATE FINANCE 532
04/16/2014 09:00 AM FINANCE
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CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 204(FIN) "An Act relating to a product development tax credit for certain salmon and herring products; and providing for an effective date." 10:18:36 AM Vice-Chair Fairclough MOVED to ADOPT the proposed committee substitute for HB 204, Work Draft 28-LS0463\Y (Bullard, 4/15/14) as a working document. There being NO OBJECTION, it was so ordered. 10:19:15 AM ASTRID ROSE, STAFF REPRESENTATIVE ALAN AUSTERMAN, reported that the changes in the committee substitute were recommended by the legislative legal department. The department pointed out additions in the title as well the addition of section 9 which fixed uncodified law. 10:19:55 AM Vice-Chair Fairclough asked to hear more about the underlying bill. 10:20:08 AM REPRESENTATIVE ALAN AUSTERMAN, provided some history as to the reason the bill was before the committee. He relayed that salmon tax credits had been in existence for an extended time and that there had been significant changes and many investments made in the State of Alaska in the seafood industry as a result of the credits. A request was made regarding foregone harvests a few years back by a group of fishermen from the Togiak area in Southwest Alaska. There were large numbers of salmon going up the rivers unharvested because processing capability was not available. The fishermen came forward and inquired that if the herring fishery had a market they believed processors would have the additional incentive needed to encourage them to provide processing capacity for both herring and salmon concurrently. He continued that four years previously the state set aside about $300 thousand for the Alaska Seafood Marketing Institute (ASMI) to review how to market herring in a way it had not been marketed before. Herring had previously been processed for either bait or row with the remaining carcasses being either ground up or dumped. The state thought the carcasses could be valuable and had spent the past few years looking at the market which showed a very strong desire for another protein to enter the marketplace. The U.S. international food aid program was one entity that expressed interest. The bill would extend the tax credit and add herring to the seafood roster. Co-Chair Austerman reported an additional item contained in the bill pertaining to byproduct. He indicated that there was a strong desire to see the waste stream turned into a usable product. Currently, efforts were focused on producing a concentrated protein in the form of a dry powder. He pointed out that over time all of the fisheries in the State of Alaska would require 100 percent retention. At present, millions of pounds of product were being dumped in the ocean. The product was not economically viable because of either being too small or the wrong species. He informed the committee that Europe was moving in the direction of 100 percent retention within the following 10 years. He anticipated pressure being placed on Alaska to follow suit. He expressed his desire for Alaska to move forward with implementing 100 percent retention. He posed the question about what to do with byproduct resulting from commercial fishing. He suggested either product be brought to shore, ground, and thrown back into the ocean, or made into another product. 10:24:30 AM Representative Austerman continued to speak to the bill. He relayed that in the prior two years the Environmental Protection Agency (EPA) restricted processors from dumping anything into the ocean. Alternatively, processors had to take their byproduct to a bio-dry plant to make into chicken feed. He wanted the state to further pursue the maximum usage of its seafood. Vice-Chair Fairclough wondered about fishing tax credits. Specifically, she asked if the state was holding down the price of fish and the price consumers paid by continuing to offer tax credits. She understood the state's efforts were made to incentivize, but expressed concern that it was depressing the price of fish. Representative Austerman thought that the committee would hear more from the department, but observed that fish prices were being held at the current level due to farmed fish entering the global marketplace. The economics associated with farmed fish were much lower than with wild fish. He suggested that although it might be financially prudent for the State of Alaska to invest in the business of farmed fish, he believed it was important to protect Alaska's wild stocks. He was not opposed to Alaska farming fish and was in favor of expanding the base for fishing. He believed a closer examination that would take some time was necessary. 10:27:20 AM Vice-Chair Fairclough mentioned that over the last eight years in office she observed that credits had not been viewed as cash. The state offered specific industries incentives to promote Alaska's ability to compete. She wanted to know if the state was achieving its goals with its investments. She referred to the Carolina's and how the federal government subsidized tobacco farms and the associated health costs. She opined that the state was changing the market conditions and depressing costs resulting in a change in behavior. She was not sure if the change was for the better or for the worse. She understood that for those that made money on the issue the tax credit provided their families economic benefits. She wondered whether all of the state's tax credits achieved what the state wanted them to accomplish. She suggested that the Senate Finance Committee take a hard look at all of the tax credits on the books, how they were being utilized, and to what extent they benefit Alaskans. Co-Chair Meyer appreciated Senator Fairclough's comments. He was under the impression the state was going to attempt to limit some of the tax credits. He argued that just the opposite had happened. He pointed out that at some point the state had to be concerned about the revenue being less than the tax credits. 10:29:26 AM Representative Austerman agreed with Senator Meyer and added that there was a bill in the House (HB306) that would place all of the tax credits on a review schedule and a cost benefit ratio formula would be set up and used as an assessment tool. He relayed that the bill had been passed out of the House Finance Committee and was currently in House Rules. He asserted that if the bill did not make it through the House it should be revised and reintroduced. He restated that the state had tax credits in all of its industries. Senator Meyer remarked that he had hoped to see HB 306 come over to the Senate but that time was running short. 10:30:52 AM VINCE O'SHEA, VICE-PRESIDENT, PACIFIC SEAFOOD PROCESSORS ASSOCIATION, JUNEAU, indicated that five of the association's member companies operated 18 salmon processing plants in Alaska. He spoke in strong support of HB 204. He relayed that Pacific Seafood Processors Association (PSPA) had a letter on record and offered to answer any questions from committee members. Vice-Chair Fairclough asked Mr. O'Shea to speak to the fishery tax. She remarked that it went up in FY 14 to $27.4 million but was projected to go down in FY 15 to $26 million in the spring forecast. She further inquired whether it was the actual pounds of fish being brought in that was affecting the forecast or if it was something else. Mr. O'Shea reported that what processors were paying in a state landing tax was a combination of the volume of fish being purchased as well as the price of the fish. Both numbers were variable. He had a graph that showed the increased value processors were paying for Alaska salmon. Processors were the price takers rather than the price makers in the global market. He pointed out that the change in total revenue fluctuated depending on how much fish was in the quota. 10:33:43 AM MARK PALMER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, OCEAN BEAUTY SEAFOODS, SEATTLE (via teleconference), testified in support of HB 204. He affirmed the effectiveness of the bill and relayed that upon examining the price history of salmon over the previous ten years, prices had not been depressed. He reported seeing grounds price increases year- after-year to the point that the value of the salmon harvest had doubled from the time the original legislation had been introduced. He stressed that the tax credit was not a subsidy of existing markets. The bill had stimulated market diversification through product expansion. Processors had been over-dependent on too few products, canned and frozen, headed and gutted fish. By diversifying its product mix new product markets opened up around the world. The tax credits helped to incentivize processors to create new products and reduced investment risk. Some of Alaska's seasonal fisheries presented challenges due to the kind of investment required and the time constraints in which investments had to be made. The tax credits helped to reduce some of the risk in making big capital investments, helped to create jobs, and provided much more tax revenue for communities and the fishing fleet. The current legislation was a continuation of further investment in the shore-side communities in which Ocean Beauty Seafoods had a presence. 10:36:06 AM JOE PLESHA, TRIDENT SEAFOODS, SEATTLE (via teleconference), spoke in strong support of HB 204. He pointed out that EPA was considering amending the existing effluent limitation guidelines and requiring screening of all seafood waste in many communities in Alaska, the result of which would require the production of a fish meal or some other byproduct with fish waste. The bill was important for the Alaska salmon industry to remain competitive on a world market basis. 10:37:19 AM JOE JACOBSON, DIRECTOR, DIVISION OF ECONOMIC DEVELOPMENT, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, conveyed that the department was in support of the bill. He added that without having the ability to turn on a spigot to increase production, the only real way to increase the value of the state's wild fisheries resource was to increase the value of the underlying product through state programs. He reported improvement in quality, marketing via ASMI, and product diversification. Twenty years ago the industry was dependent upon canned salmon and headed and gutted product, largely exported in most cases. He pointed out that one of the reasons fish prices had gone up dramatically was because there was a larger variety of products appealing to different markets around the world. Mr. Jacobsen relayed that prior to taking over his current position he had been the international director for ASMI. In his position he received feedback from people across the world expressing their approval of the diversification and the quality of Alaska's fish product on the market. He continued that over the past 10 years the price to Alaska's fishermen had increased dramatically. Permit values had increased resulting in more community investment. He added that there was also larger resident participation in the state's fisheries. Mr. Jacobson remarked that the issuance of tax credits was one of three major components that supported fish prices across the state. The bill was targeted in terms of looking at new can-sized production. A tall can of Sockeye Salmon in the grocery store was currently priced over $11. Not only was the consumer getting over a pound of fish, too much for the average family, it was a significant amount of money. By incentivizing the reduction of the can size it allowed the state to maintain a canned market where the state might otherwise loose it. He furthered that with the upcoming EPA effluent limitation guidelines he anticipated significant expenses required into the future. One of the specific provisions in the bill before the committee was a transformation of a waste byproduct into a salable good. He referred to Iceland as an example of a country that had been able to take many things that would have been discarded in the past and transform them into salable goods, which in some cases exceeded the value of the flesh themselves. He restated the department's support of HB 204 indicating the help it provided to the fishing industry, the resident fleet putting more money in the hands of the state. He reported than the net revenues from the seafood industries will return monies back to the state. Revenues remained fairly stable. 10:40:59 AM Senator Dunleavy inquired if the department viewed the tax credit as permanent or transitional. Mr. Jacobson responded that it incentivized the further transformation of the industry but he believed the state had a significant way to go. He suggested that the quality had additional room for improvement in terms of capturing as much value as was possible. He acknowledged the strides the state had made in quality improvement but also believed there was room for growth. He opined that until the fishing industry reached a plateau the tax credit would continue to play a transformational roll. He relayed that a sunset date was included in the bill and that the credit should be treated as a transitional piece. 10:42:16 AM Senator Bishop noted that he was not an expert in the seafood industry but had a good working knowledge having been around it the majority of his life. He returned to Mr. Jacobson's comment on reducing can sizes from the 14.75 ounces down to 7.5 ounces. He pointed out that not every processor had the ability to freeze all of its fish. The canned component needed to remain competitive. He specified that everybody benefited from being able to utilize the whole pack. He supported getting 7.5 ounce cans to stay competitive. He praised Ocean Beauty Seafood's efforts in revitalizing the fishery in Kaltag with new technology; both jobs and economic development resulted from its efforts which benefited rural Alaska. Mr. Jacobson followed up by indicating that the intent of the tax credit was to ensure that the canned market remained competitive. He estimated that 95 percent of canned fish was packed in 7.5 ounce and 14.75 ounce cans. He stated that in some markets the 7.5 ounce cans were considered too large and furthered that because of the current value of Sockeye salmon even a 7.5 ounce can was expensive for the average person. He stated that Alaska could maintain its market share by reducing the can size. There was a variety of products with different can sizes including 3.5 ounce and 5 ounce cans. The bill did not incentivize producing the same can sizes that have already been produced including the 7.5 ounce and 14.75 ounce cans. He reported that the canned industry was an essential product alternative due to costs. 10:45:19 AM Co-Chair Meyer stated that he was having difficulty understanding why the private sector would not just make a can size adjustment on its own without the need for a tax credit. He added that it was business and the free market. Mr. Jacobson responded in agreement to Senator Meyer's comment. He referred to a variety of factors at play. He noted EPA requirements, the continued investments in fillet lines and other value-added processing. He also mentioned time and budget limitations. He alleged that the bill would speed the transformation and emphasized the areas in which the industry had identified as promising areas of expansion. Co-Chair Meyer surmised that EPA was involved in every industry including the mining, oil, and construction industries. Co-Chair Meyer CLOSED public testimony. HB 204 was HEARD and HELD in committee for further consideration.