Legislature(2015 - 2016)BUTROVICH 205

02/03/2016 03:30 PM RESOURCES

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Moved SCS CSHB 115(RES) Out of Committee
-- Public Testimony --
Heard & Held
-- Testimony <Invitation Only> --
        SB 137-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES                                                                    
4:17:27 PM                                                                                                                    
CHAIR GIESSEL announced consideration of SB 137.                                                                                
JERRY BURNETT, Deputy Commissioner,  Department of Revenue (DOR),                                                               
thanked  the  committee for  hearing  the  governor's mining  tax                                                               
bill.  He said  since  1913, Alaska  has had  a  mining tax.  The                                                               
original mining license  tax was .5 percent on  mining net income                                                               
over $5,000 collected  on both net income  from mining operations                                                               
and from  mining-related royalties.  So, an owner  collecting the                                                               
royalties would pay a mining tax,  as well as the operator of the                                                               
mine. It came primarily from  businesses engaged in coal and hard                                                               
rock mining;  gravel pits  and quarry rock  were exempt  from the                                                               
He said there were numerous  changes from 1915-1953, but in 1951,                                                               
the Territorial Legislature adopted a  3.5 year exemption for new                                                               
mining  operations. The  current  tax structure,  in place  since                                                               
1955 (pre-dating  statehood) is  as follows:  incomes of  zero to                                                               
$40,000 pay  no tax;  incomes from $40,000  to 50,000  pay $1,200                                                               
plus 3 percent over $40,000;  incomes from $50,000 to 100,000 pay                                                               
$1,500 plus  5 percent  over $50,000,  and incomes  over $100,000                                                               
pay $4,000 plus 7 percent over $100,000 net.                                                                                    
4:20:14 PM                                                                                                                    
ED FOGELS,  Deputy Commissioner, Department of  Natural Resources                                                               
(DNR), Juneau, Alaska,  said Alaska has six major  mines that are                                                               
currently  operating and  about  570 smaller  placer and  suction                                                               
dredge operations  that were  permitted in 2015.  The top  200 of                                                               
those register enough on the tax  scale and contribute as much to                                                               
the  economy as  one major  large mine.  There are  34,197 active                                                               
mining claims  on state land.  Of the six large  operating mines,                                                               
five  are hard  rock mines  and one  is a  coal mine  and are  as                                                               
1. The  Red Dog Mine  is an open  pit lead  and zinc mine  and is                                                               
operated   by  Teck   Alaska,   Incorporated,   on  NANA   Native                                                               
Corporation land; it is one of  the largest zinc producers in the                                                               
world and employs 610 people.                                                                                                   
2. The Fort Knox Mine is an  open pit gold mine near Fairbanks on                                                               
state and private lands and  is operated by Fairbanks Gold Mining                                                               
and  has  600  employees.  It  is the  largest  taxpayer  of  the                                                               
Fairbanks North Star Borough.                                                                                                   
3. The  Pogo Mine is  an underground  gold mine located  38 miles                                                               
northeast  of Delta  Junction  on state  land.  It's operated  by                                                               
Sumitomo Metal Mining and employs 320 people.                                                                                   
4.  The Usibelli  Coal Mine  is  operated by  Usibelli Coal  Mine                                                               
Incorporated,  is  owned  by  a local  family,  and  employs  140                                                               
5. The Kensington  Mine is an underground gold  mine located near                                                               
Juneau and is operated by Coeur Alaska on Forest Service land.                                                                  
6. The Greens Creek Mine,  also operating on Forest Service land,                                                               
is an underground silver, zinc,  lead and gold mine located close                                                               
to  Juneau and  is  operated  by Hecla  Greens  Creek Mining  and                                                               
employs 415 people.                                                                                                             
He said that the Nixon Fork  Mine has been in temporary cessation                                                               
since  2013,  but  it  has been  maintained  and  monitored,  and                                                               
hopefully will open again.                                                                                                      
4:22:53 PM                                                                                                                    
CHAIR GIESSEL asked why Nixon Fork is suspended at the moment.                                                                  
MR. FOGELS  answered the  reason is  that commodity  prices right                                                               
now are too low and the expense  of the operation is too great to                                                               
justify operating.  He thought the  company was looking  for more                                                               
CHAIR  GIESSEL  said one  could  construe  that economic  factors                                                               
affect the ability of a mine to continue operating.                                                                             
MR. FOGELS agreed.                                                                                                              
CHAIR GIESSEL asked what assessment  was done on the proposed tax                                                               
as far as its effect on a mine like Nixon Fork.                                                                                 
MR. BURNETT  answered that  the department looked  at the  tax on                                                               
net income  so as economic factors  go down the tax  will also go                                                               
down. In  fact, from the  time they  started looking at  this tax                                                               
proposal the estimated  revenue went down from $12  million to $6                                                               
million. They have  discussed this with the  mining companies and                                                               
found  that the  tax rate  is  much less  of a  concern to  them,                                                               
because  it is  on  net  income and  is  still  fairly low,  than                                                               
suspending the tax holiday.                                                                                                     
CHAIR GIESSEL  pointed out  that Nixon  Fork closed  for economic                                                               
reasons  and increasing  taxes  would  accelerate those  economic                                                               
reasons for other mines.                                                                                                        
SENATOR  STOLTZE asked  if  any  of the  operating  mines are  in                                                               
unincorporated areas.                                                                                                           
MR.  FOGELS  said   that  Pogo  and  Nixon  Fork   Mines  are  in                                                               
unincorporated areas.                                                                                                           
SENATOR  STOLTZE asked  if there  were any  local, production  or                                                               
severance taxes.                                                                                                                
MR. BURNETT  answered that  he didn't have  all the  details, but                                                               
the  Fort Knox  Mine is  the  largest taxpayer  in the  Fairbanks                                                               
North Star Borough and the  Greens Creek and Kensington Mines are                                                               
the one  and two largest  taxpayers in  Juneau. The Red  Dog Mine                                                               
pays a  Payments in Lieu of  Taxes (PILT) and a  severance tax to                                                               
the Northwest Arctic Borough and is the only taxpayer there.                                                                    
He said these  mines are an important source of  local income and                                                               
they  build a  tremendous  amount of  infrastructure. In  Juneau,                                                               
residents  enjoy hydropower  and  lower electric  rates, and  its                                                               
third largest  taxpayer is the  privately owned  electric utility                                                               
that  was actually  built to  service the  local mines.  Clearly,                                                               
large  mines are  a major  source of  local revenue  and a  major                                                               
contributor  to local  infrastructure in  those areas  where they                                                               
are located.                                                                                                                    
SENATOR  STOLTZEE commented  that  in previous  revenue bills  on                                                               
other industries, an analysis of  government take was part of the                                                               
administration's  presentation. He  asked if  there  would be  an                                                               
analysis of government take.                                                                                                    
4:28:04 PM                                                                                                                    
CHAIR GIESSEL  concurred and asked  Mr. Burnett for a  summary of                                                               
government take for each of the operating mines.                                                                                
MR. BURNETT replied  that he can't do that  for individual mines,                                                               
because that is confidential information,  but he could do it for                                                               
mines  as a  group.  In  2014, 13  taxpayers  were  in the  upper                                                               
bracket, which probably means multiple  ownership of those mines.                                                               
The total  income amongst  that group was  $571 million  and they                                                               
paid $37,853,000 in state mining  license tax. The other 490-plus                                                               
mine license  taxpayers that filed had  a total net income  of $1                                                               
4:30:00 PM                                                                                                                    
SENATOR STEDMAN  said Alaska  can't get  the mining  industry off                                                               
the  ground, because  it is  just too  remote and  too expensive,                                                               
also called green-field  costs, to do here. The  tax structure is                                                               
not what is  stopping it, because there is no  mining tax for all                                                               
practical purposes. However, for the  Niblack and the Bokan Mines                                                               
in Southeast, taking away the  three-year window in the beginning                                                               
just creates  another hurdle. Those  two mines could bring  a lot                                                               
of benefits to that region, so  he was a little bit gun-shy about                                                               
putting up more hurdles for these mines that are trying to open.                                                                
SENATOR WIELECHOWSKI said a study was  done a few years ago under                                                               
the Palin  Administration comparing Alaska's mining  tax to other                                                               
states' and countries'  around the world. It seemed  to have some                                                               
good ideas and didn't recommend  tax increases. However, it noted                                                               
that Alaska's tax structure is very  old, going back to 1955, and                                                               
there was some thought about  updating the structure. He asked to                                                               
get a copy of that study,  because he thought it could be helpful                                                               
in   making   other   changes  to   encourage   development   and                                                               
4:33:59 PM                                                                                                                    
MR. BURNETT said he was aware of  the study and would find out if                                                               
it is available.                                                                                                                
SENATOR  COGHILL said  they  may not  be able  to  get the  whole                                                               
picture of mines and their value,  but they need to know, for one                                                               
thing, if there is a royalty base.                                                                                              
4:34:52 PM                                                                                                                    
MR.  FOGELS responded  that  DNR's role  is not  to  tax, but  to                                                               
collect  the royalties  and property  rentals.  There are  34,197                                                               
mining claims and those generated  $6.07 million in 2014. All the                                                               
claims - upland  and offshore mining leases and  some coal leases                                                               
-  generated  $6.8  million in  2014,  while  production  royalty                                                               
generated $7.07 million, and coal leases generated $2.3 million.                                                                
SENATOR  COGHILL said  some  of his  constituents  tell him  that                                                               
miners  don't  pay  royalties,  but they  do.  It's  just  small,                                                               
because they are a smaller mining business.                                                                                     
MR. FOGELS  added of  the six  operating mines,  only two  are on                                                               
state land  that pay royalty:  Usibelli Coal Mine and  Pogo Mine.                                                               
The Fort  Knox Mine is  on Mental  Health Trust Land  and private                                                               
lands,  the Kensington  and  Greens Creek  Mines  are on  federal                                                               
land, Nixon Fork is on BLM land and Red Dog is on NANA land.                                                                    
4:38:02 PM                                                                                                                    
SENATOR COGHILL said  he wanted people to realize  that the state                                                               
is the landlord  to only a small portion of  mines. When it comes                                                               
to taxation,  in Alaska anything  green field  requires defending                                                               
its  permitting system  in court.  Those who  come to  explore up                                                               
here also  have to defend  themselves in  court for the  right do                                                               
what is quite  often permitted. This is a  universe of permitting                                                               
costs that at the end of the  day it is a "deafening taxation" of                                                               
a different  style, and it  needs to  be quantified as  the state                                                               
tries to get its resource industries engaged and working.                                                                       
SENATOR  STOLTZE wanted  a better  grasp of  the administration's                                                               
policy behind  the proposed  taxation. Is it  purely to  fill the                                                               
revenue shortfall, because it's pretty  small and may actually be                                                               
counterproductive. The idea is to grow  the pie not get sinew off                                                               
a diminished carcass.                                                                                                           
MR. BURNETT responded  that the policy behind  the legislation is                                                               
parts of  all the factors  Senator Stoltze mentioned. Part  of it                                                               
is  to fill  the state  treasury, but  if the  state proposes  to                                                               
spend  money  on  mine  infrastructure   and  facilities,  it  is                                                               
possibly politically more palatable if  people see that the state                                                               
is collecting  revenue from  the mining  industry (that  would be                                                               
reallocated back to it). "The industry  has to be seen that it is                                                               
paying its way."                                                                                                                
4:41:05 PM                                                                                                                    
SENATOR STOLTZE  commented that his  takeaway from  Mr. Burnett's                                                               
reply is that  the legislature has to  demonstrate credibility to                                                               
the  public  before embarking  on  fiscal  policy and  plans  and                                                               
taxation regimes.                                                                                                               
SENATOR  STEDMAN  asked  if the  mining  industry  does  separate                                                               
MR. BURNETT replied  that the license tax  is separate accounting                                                               
on the  mining operations in  Alaska. Corporate income  taxes, as                                                               
with the rest of the  state's corporate income tax structure, are                                                               
allocated based  on various factors.  For one, it's a  portion of                                                               
their U.S. income tax.                                                                                                          
SENATOR COGHILL  said tradeoffs always happen  with taxation, and                                                               
he is  not against the  mining industry putting money  into state                                                               
coffers  if  the real  value  can  be  seen. However,  the  state                                                               
already has the large mines contributing the cost of permitting.                                                                
MR. FOGELS answered  that was correct; the  large mine permitting                                                               
process has  evolved to where  companies enter into  an agreement                                                               
with   DNR  to   coordinate  permitting   that  is   100  percent                                                               
reimbursable   to   DNR,    the   Department   of   Environmental                                                               
Conservation (DEC),  Alaska Department of Fish  and Game (ADF&G),                                                               
Department  of Health  and Social  Services (DHSS)  or any  other                                                               
agency that  is actually  involved in  permitting. It  is totally                                                               
4:44:16 PM                                                                                                                    
SENATOR  COGHILL  said the  larger  mines  generally have  to  go                                                               
through a national environmental  policy (NEPA) process where the                                                               
smaller mines  probably wouldn't have  to, but the  smaller mines                                                               
would still have to go through the licensing tax.                                                                               
MR. FOGELS said that was right.                                                                                                 
4:44:57 PM                                                                                                                    
CHAIR GIESSEL  asked what the Red  Dog Mine has to  reimburse the                                                               
Alaska Industrial  Development and Export Authority  AIDEA for in                                                               
the  construction of  its road.  Is there  any still  outstanding                                                               
MR. BURNETT said they are still  paying, but he would have to get                                                               
the specific numbers for her.                                                                                                   
CHAIR  GIESSEL said  the social  impacts have  to be  considered,                                                               
though it is  an unquantifiable item, - like when  the Nixon Fork                                                               
Mine shut  down. She asked  if there was  a known number  of jobs                                                               
lost from that.                                                                                                                 
MR. FOGELS answered that 30 to 40 people worked that project.                                                                   
SENATOR  COGHIL, for  context, asked  the value  of the  3.5 year                                                               
exemption on  the mining tax  for new operations  and if it  is a                                                               
diminishing value.                                                                                                              
MR. BURNETT answered that currently  a large mine, in particular,                                                               
has a  large capital  construction budget over  a long  period of                                                               
time. So,  at the  beginning of operations,  the first  3.5 years                                                               
are not subject to tax, which  is quite valuable. The proposal to                                                               
remove this is  based on a set of assumptions  that the mine will                                                               
still be  economic and  that removing it  won't affect  any major                                                               
mining project during the period on the fiscal note.                                                                            
4:48:18 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  what   a  production  curve  for  a                                                               
standard mine  looks like,  because he  knows that  oil companies                                                               
produce huge  amounts of oil at  first to recoup their  costs and                                                               
then production declines pretty steadily.                                                                                       
MR. FOGELS  said typically the  production curve for a  mine goes                                                               
up quickly to a peak and then  depending on the nature of the ore                                                               
body it stays high, and then  as the ore body is depleted, unless                                                               
additional  reserves are  found,  production  might trickle  down                                                               
depending  on  the  grades.  Typically  the  highest  grades  are                                                               
produced  first to  try  and recoup  those  high upfront  capital                                                               
SENATOR  WIELECHOWSKI asked  for a  model of  how much  the state                                                               
would  have  made  on  other  mines  and  asked  if  he  had  any                                                               
predictors on future hard rock mines.                                                                                           
SENATOR  COSTELLO wanted  more information  about the  context of                                                               
this  tax proposal.  Did the  administration use  several guiding                                                               
principles, or was  it just a sentiment of "everyone  is going to                                                               
feel the pain?" How much of  the fiscal gap will this tax address                                                               
versus  what  amount  of foregone  revenue  from  projects  being                                                               
shelved actually contribute to the deficit?                                                                                     
MR. BURNETT responded  that there were a lot  of discussions. One                                                               
factor was  that they  didn't want  to leave  any portion  of the                                                               
economy out because of fairness issues.                                                                                         
4:51:25 PM                                                                                                                    
SENATOR STEDMAN said on the  positive side, the tax structure has                                                               
been in place  since 1955, so there is a  lot of stability, which                                                               
he thought  was a good  sign. But in  1955 the state  didn't have                                                               
automation  and computerization.  This  bill requires  electronic                                                               
filing,  which is  good, but  will  there be  savings within  the                                                               
department by switching?                                                                                                        
MR. BURNETT  answered that the  department did not intend  to add                                                               
or delete  any positions  as a  result of  passage of  this bill.                                                               
However,  because the  legislature  appropriated  $35 million  in                                                               
2011  to allow  for  a new  custom  off-the-shelf tax  management                                                               
system that  is now operating  for all tax types,  the department                                                               
has  been able  to delete  some Tax  Division positions  over the                                                               
past two years.                                                                                                                 
None of these bills will  change how the department does business                                                               
significantly  enough  to  affect  its position  count.  A  small                                                               
increment  is  needed for  changing  the  program and  forms  and                                                               
changing tax  rates, but after that  it's steady. That is  one of                                                               
the reasons they didn't make changes in tax structures.                                                                         
4:53:42 PM                                                                                                                    
SENATOR COSTELLO asked Mr. Burnett  to clarify the statement that                                                               
position  counts  were  expected  to  change,  specifically  that                                                               
instituting an income tax would require additional people.                                                                      
MR. BURNETT clarified that he  was referring to changing existing                                                               
taxes. Any new taxes will require additional staffing.                                                                          
CHAIR GIESSEL said  the lens they look at these  taxes through is                                                               
how a proposed tax affects  Alaska families, businesses and jobs.                                                               
They talked  briefly about  the Nixon  Fork Mine,  which is  in a                                                               
very rural  area with very few  jobs to begin with,  and the loss                                                               
of jobs when the mine closed.                                                                                                   
She  said this  committee is  interested  in growing  the pie.  A                                                               
Livengood  mine  (a  massive  gold  and  limestone  (for  cement)                                                               
deposit) that  is in pre-permitting would  diversify the economy,                                                               
and provide a commodity at a  much lower cost than having to ship                                                               
it in,  which is done now.  She asked what was  considered as far                                                               
as the  economic impact of removing  the 3.5 year tax  holiday on                                                               
the  Livengood  development,  which  is,  at  this  point,  at  a                                                               
standstill because of commodity prices.                                                                                         
MR.  BURNETT said  he didn't  know  the specifics,  but he  would                                                               
provide the committee  the information that is  available on that                                                               
4:56:27 PM                                                                                                                    
SENATOR  COGHILL  said they  need  to  look at  modeling  capital                                                               
investment and capital  gain to see if the state  is missing part                                                               
of that top.                                                                                                                    
4:57:46 PM                                                                                                                    
SENATOR MICCICHE said he was worried  about how the tax policy is                                                               
presented  across  the  board.   Alaska  had  been  blessed  with                                                               
enormous  revenues from  the  North Slope  that  has provided  an                                                               
economy  through the  government  structure. Some  agree that  is                                                               
appropriate  and some  disagree,  but it  is  something that  can                                                               
occur at  $107 a barrel oil  and not something that  can occur at                                                               
$30 a barrel.                                                                                                                   
He said  the state's tax policy  seems to be looking  to continue                                                               
that government  economy even though  the state doesn't  have the                                                               
revenue. He supported some of  the measures that have come before                                                               
the legislature  this year, but  he worries that they  are trying                                                               
to harvest too  much from the producers in the  state that really                                                               
have  the potential  to  provide jobs  at $30  a  barrel oil  and                                                               
provide a  sustainable job  market as the  oil price  recovers in                                                               
the future. He said Alaska is  a resource rich state with nothing                                                               
but potential and he hoped  they weren't dis-incentivizing future                                                               
projects with some shortsighted revenue outlooks today.                                                                         
CHAIR GIESSEL thanked him for those comments.                                                                                   
MR. BURNETT continued that the  mining tax proposal increases the                                                               
tax rate on  the highest bracket from 7 to  9 percent and removes                                                               
the  3.5 year  exemption for  new mines.  It requires  electronic                                                               
filing  and adds  an  application  and renewal  fee  for the  tax                                                               
license, which is a substitute for a business license.                                                                          
SENATOR MICCICHE  asked the department to  provide an approximate                                                               
bracketed government  take that  isn't related to  actual income.                                                               
The  other  taxes,   which  are  in  the   public  record,  could                                                               
supplement that approximation.                                                                                                  
MR. BURNETT said he would do his best to get that information.                                                                  
SENATOR WIELECHOWSKI  said that  this was the  first time  in his                                                               
tenure as a legislator that  mining taxes were being deliberated.                                                               
He also  asked for  details about how  Alaska stands  relative to                                                               
the mining industry in other states and countries.                                                                              
SENATOR  COSTELLO  also  want  to   know  how  long  the  average                                                               
permitting window is for mining in other states.                                                                                

Document Name Date/Time Subjects
HB0115-Version I.PDF SRES 2/3/2016 3:30:00 PM
HB 115
CSHB 115 (FIN)-Sponsor Statement.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB011-CSHB 115-RES-Legal Memo.pdf SRES 2/3/2016 3:30:00 PM
HB 11
HB 115
HB0115-Fiscal Note-DNR-01-29-2016.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-9th and 10th Amendment.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-Alaska Statehood Act.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-Articl on PERC Study.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-AS 38.05.125.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-DNR Land Entitlement Brief 2 19 15 (2).pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-Legislative Research-State Lands.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115- Supporting Document-Articles on Utah-Fed suit.pdf SRES 2/3/2016 3:30:00 PM
HB 115
SB0137-Version A.PDF SRES 2/3/2016 3:30:00 PM
SB 137
SB0137 Sectional Analysis.pdf SRES 2/3/2016 3:30:00 PM
SB 137
SB0137-Fiscal Note-DOR-01-19-2016.pdf SRES 2/3/2016 3:30:00 PM
SB 137
SB0137-Governor's Transmittal Letter.pdf SRES 2/3/2016 3:30:00 PM
SB 137
SB0137-Hearing Request-DOR.pdf SRES 2/3/2016 3:30:00 PM
SB 137
HB 115 Opposition Article - ADN Alaska House Brushes Off Constitutional Claims, 'Orders' Massive Federal Land Transfer.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB 115 Opposition Article - FDNM Federal Lands Bill Ill-Considered.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB 115 Opposition Article - JE A Political Stunt and Nothing More.pdf SRES 2/3/2016 3:30:00 PM
HB 115
SB0137-Presentation-DOR-DNR-DCCED-FINAL.pdf SRES 2/3/2016 3:30:00 PM
SB 137
HB0115-Supporting Document-Land Entitlement Brief 11 Feb 2016.pdf SRES 2/3/2016 3:30:00 PM
HB 115
HB0115-Supporting Document-1 21 16 SOA DNR to DOI re PLO priority list.pdf SRES 2/3/2016 3:30:00 PM
HB 115